It was about three and a half years ago that I wrote one of my most popular posts ever, called F— You, I’m Short Your House.
For those of you too lazy to click though, here’s the gist of it. House prices were insane in Toronto and Vancouver and Calgary and a few other markets as well. We were quite obviously in a bubble. Everything pointed to it including price-to-income ratios, price-to-rent ratios, the fact houses were performing much better than inflation, and temporarily low interest rates propping the whole thing up.
So I decided to put my money where my mouth was and used options to short the market. I shorted every Canadian bank (except CIBC for some reason) using long-dated put options. I entered into this trade when the banks were close to a 52-week low. It turns out I wasn’t the only one looking to do this.
After a few months of steady losses and real estate prices in both Toronto and Vancouver continuing their steady march upwards, I threw in the towel and took my loss.
It’s pretty obvious I was wrong with my bubble call. Both Toronto and Vancouver real estate prices are up approximately 50% since I wrote that piece, although growth has been much more muted in most other markets.
Speaking of other markets
I spent a little time looking into this the other day, and in the middle of my research I came to realize something. Most Canadian real estate markets haven’t done that well in the past few years.
Allow me to quote the best researcher I know, myself. From a Tweetstorm shortly before the New Year:
Average price to income ratio over the last 40 years has been 3.5. But keep in mind that mortgage rates sure weren't 2-3% back then.
— Nelson! (@financialuproar) December 29, 2016
The average price of houses in markets that aren’t Toronto and Vancouver is $361,000. The median family income for Canada (in 2014) is $79,000. Thus, the average house costs 4.6 times income. Yes, this is higher than the traditional average of 3.5 times income, but not excessively so once we factor in record low interest rates.
A similar story appears in many different real estate markets. Values are going down, not up. In fact, over the last two years, the average price of a house has declined in Calgary, Edmonton, Regina, Saskatoon, Thunder Bay, Fredericton, Halifax, and Quebec City. Winnipeg’s home prices are largely flat as well.
Sure, these places aren’t tanking by any means, but they’re also not going up. And some of them are actually pretty darn affordable.
Take Winnipeg as an example. It has an average house price of about $280,000. In 2014 median family income was $79,850 (this was nearly $4,000 higher than in Vancouver, btw). Let’s round that up to $80,000 because I like nice round numbers. I don’t think assuming the average Winnipegger got a $150 raise in the past two years is outrageous.
Thus, the average house in Winnipeg is just 3.5 times what a typical family makes. That puts houses pretty much inline with historical price-to-income ratios despite interest rates being half of what they were just 10 years ago.
In other words, real estate in Winnipeg is quite affordable. Maybe even more affordable than 10 years ago.
The only real problem is you’d have to live in Winnipeg. Yet people do. Willingly!
More examples? Don’t mind if I do
Let’s do similar ratios for some other selected cities:
|City||Avg Price||Avg Income||P/I Ratio|
Some of these cities are downright affordable, with most trading under historical price-to-income ratios. And if you’re making the average salary in Thunder Bay or St. John, paying down the mortgage early should really be a snap.
Let’s compare that to some unaffordable cities.
|City||Avg Price||Avg Income||P/I Ratio|
It’s pretty easy to spot the two outliers on that chart, and there are also a few more overvalued markets out there. Hamilton/Burlington has become expensive, and I probably wouldn’t buy a place in Montreal when $1,500 per month can rent you a pretty sweet pad. Do the kids still say pad?
The bottom line
The three largest metros in Canada get all the attention. Everybody wants to live in Toronto, Vancouver, and Montreal. But like I’ve mentioned before, it’s a hell of a lot cheaper to live in smaller places — especially if you do a job that pays the same everywhere.
The anti-buy a house crowd is getting a lot of attention these days. For the most part, these people are onto something. It is cheaper to rent than buy in most markets, especially the expensive ones. But at the same time it’s also quite affordable to buy a place in a lot of medium-sized cities across Canada.
We bought a house at less than two times our household income, which saddled us with a mortgage so reasonable we’ve paid off 33.6% of it in the first six months of having it (and more since). We’d like to be mortgage free by 2019.
There’s nothing wrong with buying a reasonably priced house in an affordable market. The whole country isn’t out of control like Toronto and Vancouver. Like the United States, Canada has a few cities with crazy-high prices and a bunch in the middle that are quite affordable. Stick to the middle of the country when buying a place and you’ll likely do fine.
Stumped for investing ideas? Aren't we all. Don't worry, I've got just the thing.
This recent Canadian IPO has everything I look for in a stock. It has huge growth potential; a succulent dividend; a sharp management team; and, perhaps most importantly of all, it comes at a very reasonable price tag because most investors don't even know it exists.