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The Long View August 25, 2008

Posted by DustinRJay in Uncategorized.
Tags: , , ,

The following graph shows the average house prices from 1973 to current.  For most of the graphs on this blog it has shown Calgary real estate from an inflation adjusted perspective.  If one was to consider inflation however, it can be seen that buying real estate can be helpful as a hedge against inflation.

There are better times to buy than others, however I believe that for the average person that bought at the peak in 1983 or 1990 with a 25 year horizon that they are still probably very happy with their decision.

What do you think?

Data Source: CREB, Bob Truman – First Place Realty


1. RJT - August 26, 2008

Lots of people who bought at the peak in 1980 lost their homes, so it didn’t help them with inflation. As inflation went up (along with nominal house prices in the 80s), interest rates also rose, driving up mortgage rates. Those with little equity or were over-levered were toast. Carrying costs matter in an investment.

This most recent cycle will be much more vicious in my opinion because people were buying with little or no money down, and maxing out their monthly payments based on extremely low (historically) interest rates. If you max what you can afford at 4.75% interest on a $400,000 mortgage with no money down, rates only need to go to 6%, and your annual interest payments will rise by $5000. For those living on the edge, that is troublesome.

If you don’t look at your home as an investment, and you don’t care about ROE, then buying at the peak doesn’t matter. It’s like buying a BMW. You know it is not a “good” investment, but hey, you like driving a nice car and are willing to pay for it.

Calgary’s average price is 2.44x what it was in Jan 2000. Dallas’s avg price (case shiller) is only 1.22x. Bubble cities like Phoenix peaked at 2.27x and has now dropped to 1.53x, a decline of 33% from the peak. San Francisco peaked at 2.18x and is now at 1.63x, a decline from the peak of 25% (and likely still dropping).

I would argue that looking at the price action over the past 10 years, and especially since 2005 reflects a bubble market, and not a slow steady market like Dallas. We shall see if I’m right.

2. nonplused - August 26, 2008

Why would you buy a nice house using the BMW theory right now? You can rent a nice place on 4 acres in Springbank for $2700 a month. To buy it you need to pony up $1.4 million. By my math, the landlord is recieving 2.3% on thier percieved sale price.

The funny thing is some of these houses are still selling despite the flood of listings and the large number of empty houses.

In terms of the graph, looks like hyper inflation to me! Welcome to Canbabwe! Weee! A billion bucks for a loaf of bread some day soon!

3. Nemesis - August 27, 2008

Your posts have changed direction since you bought eh? Wow…

The only reason home owners would be remotely ‘happy’ is due to the last 2-4 years of crazed home-price growth. Subtract this most recent time period from the last 28 years and housing purchases in ~1982 look, at best, marginal and at worst like the worst financial decision any buyers of that period have made in their lives > Similar to how anyone who had purchased in that last 1-2 years will feel over the next 10 years. (Sorry)

4. Another Albertan - August 27, 2008

How about you take that graph and plot the reasonably-linear (eyeballed with the edge of a piece of paper) fit from 1973 to 2005? Where does that put us for 2009? Somewhere near $275k? And how about extending that line for another 10 to 15 years? Heck, take some liberties in the extrapolation between now and 2025…

Barring the desire to do this, would you consider posting the raw Excel data so that readers can run the numbers on their own?


5. radley77 - August 27, 2008

In 2004, real estate in Calgary was at it’s greatest affordability in 25 years according to a recent Merrill Lynch report. Arguably, this represents that housing was undervalued at this point. Since 2004 house prices increased dramatically, and last year they peaked at affordability levels slightly less than the peak in the market in 1990.

The 1990 peak in housing market unwinded with flat house prices for a long period as affordability slowly returned through a combination of income growth and lower interest rates.

Therefore, I think a straight line through the data from 1973 to 2005 would be too conservative, as housing in Alberta from 1998 to 2004 was more affordable than historical averages.

The report is here:


I think the best approach to coming up with a realistic value based on trends is to put a upper and lower bound on the lines and then place a middle of the road best guess value. I think this methodology honours the overvaluations and undervaluations in the market better.

6. RJT - August 28, 2008


If real estate was undervalued before… (as Merrill says it was in 2004), why can’t it become undervalued again?

Just something to think about. It means that over the past 25 years, RE has been undervalued for about 22 of them. To me this makes sense in a city with an undiversified industrial base, unlimited land to build on, and susceptible to over-building and the natural cycles of the commodity business.

My best guess is that it wasn’t undervalued before, but is over-valued now, because prices do not take into account the risk that things will not go swimmingly forever, they are only pricing in perfection.

7. radley77 - August 28, 2008

I agree that real estate will become undervalued again. However, in 1991, it took 9 years of flat prices before the overvaluation turned into an undervaluation.

The cost of shorting the market by renting is rent*(12 months). If you are living downtown that equates to a price tag of ~ $18,000/year or more. This is money that one will never see any sort of return on investment. It’s expensive, and there are no guarantees that in one year house prices will be lower. If it takes 9 years before it becomes undervalued, the rent paid during that period would be $175,000 and house prices could be exactly the same. Also, one will be paying rent at 9 year inflated rates, whereas the person that purchased would have built up some equity and monthly costs will not be affected by inflation to the same extent.

If one takes a long term view, then they can make a budget accordingly and if they have better investment options where they can get an aftertax rate of return of 7%-8% over long periods of time then they would come out in 25 years with roughly the same amount of money as the person that purchased the house if they invest the difference between renting and buying. If, for example, they own a business and can get better rates of return than that then I think renting is a better option.

I don’t think that by buying a house is going to make me rich or anything; I see it as a forced “savings” account that is pretty much guaranteed to beat what I could reasonably hope to achieve by investing the difference in the stock market during the same period.

I believe that housing was undervalued in 2004 as the report says, it adequately explains the shortage in housing as the vacancy rates dropped to 0.5% as people arbitraged geographic economic differences and the boom in Alberta population. This is something a contrarian should understand… as the adage goes: buy low, sell high.

I agree there are downside risks to buying, but until those risks such as a commodity crash \ foreclosure boom \ overbuilding glut physically materialize, marketplace psychology should dictate that prices will be too high for a contrarian to stomach.

I have made a conscious decision that should those kind of risks appear, and/or the bottom comes naturally via stagnation, that it will pose as an opportunity to a value investor and would be something that I’d pursue investing at that point.

In the meantime, I perceive the greatest opportunity for myself being with the strategy of buy, hold and prosper.

P.S.: I hope to be posting a rough excel budget soon!

8. Anonymous - August 28, 2008

I am no expert but wouldn’t the cost of shorting the market be the [cost of buying per month (all costs)] minus [the cost of renting per month] (times 12 months)?

This means the ‘cost’ of renting is likely into the tens of thousands in FAVOUR of the renter, not the buyer. At least for properties I see on the market?

(With the final cost/benefit of that shorting being determined by some equation that measures the relative movement of home price growth for each buyer realtive to carrying costs plus/minus the cost of shorting the market?)

Further and perhaps more importantly, using all time highs for job growth, employment, wage growth and the sale price of local commodities (etc) might not be the best benchmark point to use for further home price growth and to jusify current prices. All it does is confirm that prices are indeed inflated, to the same degree all those other benchmarks are.

Before you bought you would easily see this as the case but it seems now you are blinded to this fact and think all of those high benchmark points will lend support to home price growth beating inflation well into the future? Yikes! Equilibrium is always always always restored.

9. radley77 - August 28, 2008

I think the cost of purchasing the ‘option’ to short the market over the short term is equal to the cost of rent less your operating costs like utility/condo fees that would be the same if you rented or bought. If you 100% plan on buying in the short term, then you pay rent one month, then you basically start with your first payment of your mortgage. If the market was flat in that month, then you have spent the cost of rent, but still have to pay full purchase price the next month, and then you have a cash flow stream that is essentially the same as if you had bought the month before.

10. Harry P. Ness - August 30, 2008

Radley, did you take into account the interest payments you’ll be making over the term of the mortgage? I mean, doesn’t it all depend on how much an individual can put as a down-payment? Also, it depends on how big the mortgage is.

In some cases, the interest someone is paying is more than they’d be paying in rent…you don’t get interest back…so its like throwing your money away to the bank (which is like renting). How long would it take to actually start paying down more of your principal, vs. renting and watching the prices drop 50-100K more over a year?

In the end, it just makes sense that with a falling market you want to RENT, lose your $18,000, and buy 50-100K cheaper. Because during that year of renting you’d be saving more, and spending less on purchasing a home. It’s like a double gain.

11. section31 - September 17, 2008

350,000 Condo @ 5.5% = $1,604 Interest/month
Condo Fees: 250/month
Maintanance: 100/month (new carpet, fixture, plumbing etc…)

So I can rent for say 1800/month?
I can spend $1954/month

* You can’t count appreciation of the condo since its part of the principle and is excluded from the calculation. If you did, you would also have to give the renter the same option to “invest” and a index spyder would just destroy any home in an equity race.

12. alex - May 24, 2009

Hi neighbours;
I can’t read the graph, does anybody know the average increase in
residential market value over the last 30 years???
Any opinions on the rent to own option? From both potential seller any buyer view, is it a win win?

13. Anonymous - April 19, 2010

I’m guessing it’s a 8% rate of return over 25 years. Almost the same as stocks.

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