Why housing is still the best investment for most Canadians
Owning a home remains the largest single investment for most Canadians. So it’s not surprising that fear over an economy turned upside down literally hits home for so many.
The Canada Mortgage and Housing Corporation (CMHC) recently warned the pandemic and resulting lockdown of the economy could drive the country’s average home prices down by between nine per cent and 18 per cent, as job loss and uncertainty force many Canadians to the sidelines. The federal housing agency expects the housing sector will not return to pre-pandemic levels until the end of 2022.
Most of the concern centres on oil-producing regions hit hard by the crash in crude prices. Housing analysts also point out vulnerability in big cities; especially the booming Vancouver and Toronto condo markets.
That’s potential bad news for speculators or those who just bought a home in a vulnerable region and want to sell in the next three years. For most long-term homeowners who can maintain a sufficient source of income, the best and safest investment remains the roof over their head.
According to the CMHC, average Canadian house values have increased by over five per cent annually over 25-year periods going back to the Second World War. That includes the 2008 global financial meltdown when predictions for a housing market collapse never materialized.
Many homeowners have already benefited from the pre-pandemic housing boom, and for new homeowners, any decline over the next three years can easily be absorbed once the market gets back on track.
For potential homeowners, the next three years could finally open an affordable window to the residential real estate market. One of the biggest pre-pandemic risks in the housing market was the threat of higher mortgage rates, but massive government spending and the resulting drag on economic growth mean that borrowing rates will likely remain low for a long time.
While a home should never be the only investment in a retirement portfolio, it’s unique from other investments in terms of risk. A short-term theoretical drop in the value of a home is not the same as a drop in the value of a stock or something like bitcoin. In most cases, homes are bought and sold far less frequently, which decreases the risk of making a price decline a real loss and allows time for it to recover.
What really sets a home apart from any other investment is its intrinsic value. A home is considered real estate. That means it is a real, tangible, asset and will always have a significant basic value. Other equity investments have intrinsic values, but they can be difficult to measure consistently in relation to their price. Bitcoin, for example, has no intrinsic value because it is backed by nothing. The only value in bitcoin, and many other equities that trade on public exchanges, is a belief by investors that it has the intrinsic value reflected in its trading price.
The intrinsic value of a home comes in part from the fact that it is the only investment you can actually live in. It’s an asset you can rest your head in it at the end of the day no matter what value the market places on it. In addition to the potential for it to go up in value over time, a home pays a sort of dividend equal to the cost of rent if you didn’t own a home. A home can also generate income by renting out all or part of it.
Home ownership also allows average investors to build equity by borrowing at a low interest rate in the form of a mortgage by using the property as collateral. Over time, that equity can be used to borrow at a low interest rate through a home equity line of credit (HELOC).
Perhaps the biggest and hardest measure of the intrinsic value of a home to quantify comes from its newfound role as sanctuary during a global pandemic. The value of a home in a time when social distancing could become the norm for years to come is immeasurable. Being cooped up with the people closest to your heart can be frustrating at times but can offer rewards well beyond its market value.
Although the economy has been turned upside down there will always be an economy as long as there is demand for something. Investment trends may come and go but the desire to own a home will always drive demand.
Source: BNN Bloomberg