Spot The Speculator #44 – “The adage ‘better late than never’ always applies to home buying.”

“Looking back my biggest money mistake was waiting too long to buy a house. I also bought Nortel stock and lost money, but missing out on long-term housing price gains was far more costly. The irony is that at the time, in my 20s, I was an economist at the federal housing agency CMHC specializing in analyzing the housing market. You would think I would have taken quick advantage of home ownership. But in my years following graduation from the University of British Columbia, I was more interested in spending than saving and since buying a house requires a down payment, it seemed a large hurdle. Spending was easier since making the minimum payment to the credit card company was all that was required to keep the debt at bay. Eventually I saw the light, paid off my credit card and car loan and began to save for a down payment. Eventually I bought a semi-detached condominium in downtown Vancouver for $200,000 and the benefits were immediate.

Here are three reasons why buying a house is a good idea:

1. You build equity
The amount you owe declines with each mortgage payment.
The difference between what you paid and what you owe is your equity and it is one of the most valuable assets most family’s have. The sooner you start, the faster your equity grows.

2. It is an appreciating asset
Home prices decline when the economy turns down, but the long-term trend has been and will continue to be rising prices. The reason is supply and demand. As someone once remarked – “Buy land. They ain’t making any more of the stuff.” Land supply constraints for residential development exist in most markets.

3. Demographics trends are favourable.
Meanwhile, there is population growth it producing demand. Canada has 34 million people now. In 1961 it was about 18 million.

These three trends underpin the long-term upward trend in housing prices.
Another benefit when you consider buying a house is that it is a levered investment generating a rate of return much higher than simple price appreciation. That 5 or 10 per cent down payment yields an overall rate of return well above the return from stock or bond markets.
The costs of homeownership are substantial and ongoing. The monthly interest payments, property taxes, utilities, and repairs and maintenance add up to the largest expense for a household.
But if you are renting, you are paying these costs indirectly without the benefit of capital appreciation, principal repayment, and the non-financial benefits of homeownership such as control over your physical surroundings.
Also, paying off your mortgage is a form of forced savings and much better than paying off the landlord’s mortgage.
Over time housing prices appreciate and are a good hedge against inflation. In 1961, the average house price was about $12,000 and today it is around $360,000, a 2,900 per cent increase or a 7 per cent compound annual rate of return. Since it is a levered investment, the rate of return on the initial investment is closer to 10 per cent or 6 per cent inflation adjusted.
How does this compare to other investments? The Toronto Stock Exchange index rose about 1,900 per cent or 6.2 per cent compounded annually in the same period, including dividends the total annual return was about 8 to 10 per cent. The risk-free long-term Government of Canada bond yield averaged about 7.7 per cent or 4 per cent inflation adjusted

I am not suggesting the next 50 years will witness a similar large appreciation in house prices since the pace of population growth and development will probably be lower than in the past 50 years.
Indeed, some commentators point to record high price-to-income ratios as a sign of over-valuation and warn the housing market is near a tipping point and the price bubble will burst.
Yes, it will become increasingly difficult for first-time buyers to achieve homeownership since affordability will decline in the long term. Fundamental housing supply-demand forces will drive higher prices while incomes lag. But this should not discourage potential buyers from their goal, but they need to adapt to those circumstances and be smarter with their money than I was.
I feel fortunate to have become a homeowner many years ago when the price-to-income ratio was considerably lower. The adage it is better late than never always applies to home buying.”

– Helmut Pastrick, Chief Economist with Central 1 Credit Union, in “This housing expert waited too long to buy”, moneyville.ca, 9 Jun 2011

“They aren’t making any more land; housing only goes up; leverage is good; it’s never too late to get in.”
Almost unbelievable. – vreaa

 

22 responses to “Spot The Speculator #44 – “The adage ‘better late than never’ always applies to home buying.”

  1. I have tried hard to find out what Pastrick’s qualifications are and this guy has absolutely no online presence. Without evidence to the contrary, how can anyone with just an undergraduate degree call himself an “economist” with a straight face?

  2. I think vreaa we can safely state that Pastrick making these comments is, in fact, wholly believable.

  3. Ralph Kramden

    The all out most distorted piece of garbage I have ever read. Pastrick should be placed in a mental institution.

    What a crock of Keynsian garbage.

    • Do not use the Lord’s name in vain! 🙂

      There was an article on Spain’s housing bubble I read recently on how “asset Keynesianism” was the culprit. Compelling read, with parallels to Vancouver: bit.ly/ihsx4G

      • ehehe i laughed out loud and it’s 6:52 am – needed a break from watching riot footage.

  4. Ralph- it has nothing to do with Keynes.

    I will have to do a post on my blog to clear up the many misconceptions.

  5. OK he claims to have “graduated” from UBC.

  6. “What a crock of Keynsian garbage.”

    This idiocy has nothing to do with Keynes. btw – Several Keynsians, such as Krugman & Duncan Black (Atrios), called the US housing bubble whereas Greenspan not only missed it, he helped cause it.

    “2. It is an appreciating asset”

    Tell that to the homeowners who bought between 2005-2007 in the USA.

    “3. Demographics trends are favourable.”

    Boomers are going to retire soon. Less of the X and Y gen. numerically. And many boomers plan to sell to fund their retirement.

    “The adage it is better late than never always applies to home buying.”

    There is clearly a wrong time to buy as many Americans discovered. It is a a bad idea to buy is one is strongly leveraged in a mortgage and the market drops. The pain can range from economic catastrophy to being stuck in a house & not able to sell or refinance because you’re underwater.

  7. That particular article has been shredded to bits on a number of different websites. It’s pretty much par for the course for Moneyville (which is an arm of the Toronto Star and is sponsored by, IIRC, a bank).

  8. “Almost unbelievable. – vreaa”

    why “almost” – it’s unbelievable in your term! unforturnate, it has been happening and you have been blind for too long.

    • It is “almost unbelievable” that the ‘Chief Economist with Central 1 Credit Union’ can, in 2011, after everything that has happened 2006-2011, hold such a naive position.

  9. Pastrick has been quoted here before:
    “I don’t see a price bubble and I don’t see that we need the mortgage criteria tightened as is suggested in some quarters” – 19 Dec 2010

    [Central 1 Credit Union is the umbrella organization for credit unions in British Columbia and Ontario. Member financial institutions have nearly three million customers and hold about $70-billion in assets, the lion’s share of which are in British Columbia.]

    • BC credit unions really should be concerned with the fragility of high prices. They have undiversified regional exposure and have been aggressively lending through secured mortgages primarily funded through member deposits. Worried yet? How about when the deposits are found to be tightly tied to the loans?

      I see a whole lotta hammer coming from Ottawa heading towards Vancouver aimed at further quenching lending. The Big Six can handle it, just paring back their Vancouver loans. Credit unions… Where do they go?!? I’m serious, this looks concerning.

  10. if you’re honest with yourself you already now the answers to these questions:

    1. Are they making more land?
    2. Is Vancouver population growing at a rate of 15% every 15 years?
    3. Is our country permitting the highest per capita immigration in the world?
    4. Are large numbers of these immigrants moving to BC?
    5. Do more than 50% of investor immigrants settle in BC?
    6. Is lower mainland climate unique to Canada?

    so what do you expect the effect on detached housing prices to be? Lower or higher?

  11. granite countertop

    And this is why I don’t deal with the local credit unions.
    Especially Vancity likes to think of itself as high-minded, “bank of the people”. In practice it’s the bank of the upper middle class. This has some advantages over the traditional banks, which by definition are controlled by the real upper class, but they have their own problems.
    Critically, the local credit unions are owned by precisely the class of people who got rich off of real estate. The big banks, with their large commerical banking arms and relative distance in Toronto, can think more clearly about the situation. Local credit unions have no hope of seeing the bubble.
    I wouldn’t be surprized if a sharp downturn took all of them out.

  12. I went to view an apartment today which was being showed by the landlords. We got to talking and they revealed that they had 3 other units in the same area. The wife let me know that she and her husband were self employed and were banking on their condos as their retirement fund.

  13. Good stuff, VREAA. Helmut is totally out to lunch on this one. I wrote a lengthy rebuttal to this piece last week:

    http://www.theeconomicanalyst.com/content/helmut-pastrick-and-twilight-zone

  14. If Pastrick doesn’t know who said ‘Buy land. They ain’t making any more of it.’ then obviously he doesn’t know what he’s blabbing about and isn’t worth listening to.

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