First, we would like to wish everyone a HAPPY NEW YEAR!
Second, we encourage everyone to read this article from a recent Globe and Mail. It is of particular importance to those saving for retirement. Just because your home may be your largest asset does not mean it is an investment. We may only be winning by DEFAULT. An investment needs to GENERATE income when in reality a residential home CONSUMES income forever.
A residential home IS NOT A REPLACEMENT for retirement savings!
Waiting to pay off your mortgage IS NOT a sound strategy as the most important part of the ‘miracle of compounding’ is TIME.
December 31, 2014
Why the predictor of the U.S. collapse hates Canada's housing market
By BRIAN MILNER
Robert Shiller likens housing to a car: Don't treat it as an investment
Robert Shiller, the celebrated economist who warned about the dangers of the U.S. housing bubble three years before it collapsed, regards housing as a lousy investment, particularly in Canada.
His pessimism stems less from the frothy residential prices in markets such as Toronto and Vancouver than from a northern spin on his extensive research into U.S. home prices and investment returns going back more than a century.
"It seems to me that people exaggerate, even historically, the long-run investment performance of real estate," says the Nobel laureate who co-developed the closely watched Case-Shiller index that tracks U.S. resale home prices.
"I have data going back to 1890 for the U.S., and the return per year is 33 basis points in real terms. Like nothing," Prof. Shiller said in an interview from his office at Yale University.
"I imagine, if anything, it would be even worse in Canada, because you have more land. So you're not as constrained. I certainly don't see any reason to think it's better in Canada."
Most people don't quite understand just what kind of asset they're getting when they buy property, he said.
"Usually the overwhelming value is in the house, the structure rather than the land," he said. "And the structure is constantly deteriorating, subject to weathering. It also has style changes that come and go with fashions. There are all kinds of problems that are associated with housing that make it not a congenial investment."
Prof. Shiller, who owns two houses, likens it to putting a lot of money into a car. "They both require a lot of maintenance. They wear out; they go out of style. But not many people think of cars as investments. Houses and cars are really in the same category."
As for whether we're facing the rising risk of a bursting housing bubble, which has sparked heated debate among house watchers inside and outside Canada, Prof. Shiller acknowledges the differences between the U.S. boom that blew up in 2007-08 and the Canadian situation, with its healthier banks and mortgage market.
But he has warned that high household debt levels make the Canadian market particularly vulnerable as ultra-low interest rates begin rising.
That echoes concerns expressed by the Bank of Canada, which has flagged a record debt-to-income ratio and housing that is overvalued by anywhere from 10 to 30 per cent as serious risks to the economy.
Prof. Shiller offers this clue on how to tell if we're about to be hit with serious bubble trouble: Pay attention to how the question is being framed in the media.
For a paper published two years ago by a Washington think-tank, "we looked at the turning point in the market at the time of the financial crisis. One thing we did was talk about what was being talked about in the news media. There was a sudden surge in attention to the concept of a housing bubble.
"There was a turning point at the peak of the market. You can see it in popular culture. It had gone so far that people started to make jokes about it [the bubble]."
Prof. Shiller is also concerned about the record highs in the U.S. stock market, although he is not expecting anything resembling the spectacular 2000 crash he warned about in his best-selling book Irrational Exuberance, which hit bookshelves at the peak of the market in March of that year.
He added a chapter on the ballooning housing bubble in the second edition in 2005. Now a third edition is coming out in February, with a look at another troubled asset class: bonds.
"It's an interesting market, and it's extremely abnormal right now."
The views expressed do not necessarily reflect the opinion of Argosy Securities Inc. This does not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. Please consult a professional before making an investment decision.