I swear, I’m thinking about changing the name of this thing to RealEstateBlog! Whenever I post about real estate prices I get more responses than with respect to anything else. So, Garth Turner, look out!
Assiduous Reader prefhound sends me a clipping with the following assertions:
I conclude that a house is pretty much similar to a financial investment. Even today’s apparently “elevated” house prices seem reasonably similar to today’s “modest” long term future equity investment potential on an after-tax basis.
For example, at today’s house prices, buying a house for X dollars could generate a long run return of about 3% (tax free). I see this as coming from the sum of 4 components:
1. Cost of Property Tax – about 1% of X per year
2. Cost of Maintenance and Ongoing Renovations – about 3% per year. Some years are much lower and some much higher.
3. Long run Price Appreciation of property – about 3% per year if kept livable and up to standard. 3% = 2% inflation plus the long run salary growth due to 1% productivity gains.
4. Rent Savings of approximately 4% of the house value per year.Add up these items (4% in costs; 7% in gains and savings) and the result is about 3% long run return.
Further, with a little help from a few educated estimates:
With my previous estimates of rents and competitive investment returns after tax (all smoothed to the same return every year – which is an approximation), I then compared the house owning scenario to a renting scenario where the total cash flows were the same, but any excess/shortfall went into/came from investments.
Remarkably, the renting scenario came out with a current investment asset worth about 96% of the current house value. The renting scenario was roughly financially equivalent to owning.
In the renting scenario we were saving a lot of money for the first 15 years, but then drawing down from savings to pay rent in recent years when maintenance was lower.
… and, provocatively:
Another aspect of this discussion is that houses seem like strip bond investments in an asset mix. This is especially true if there is no mortgage making home equity more volatile.
Perhaps asset mix discussions should consider a paid off house as a bond and a fully mortgaged house as equity, so that the fraction equity = current mortgage / value ratio. This may be sensible while working and continuously saving, but when retirement cash flows require drawing on investments, income generating financial fixed income becomes increasingly important.
So, like Assiduous Reader adrian2, prefhound is holding to the ‘house price proportional to inflation plus productivity’ argument.
While pondering this, and wondering why I didn’t become a real-estate analyst, I came across a paper by Peter Harrison titled MEDIAN WAGES AND PRODUCTIVITY GROWTH IN CANADA AND THE UNITED STATES:
In 2008, Sharpe, Arsenault and Harrison attempted to explain why the median earnings of full-time, full-year workers in Canada rose only $53 dollars, from $41,348 (2005 dollars) in 1980 to $41,401 in 2005, while over the same period, total economy labour productivity gains were 37.4 per cent. They identified four key factors: measurement issues, rising earnings inequality, falling terms of trade of labour (the relationship between the prices workers receive for output and the cost of living), and falling labour share. That study in some sense raised more questions than it answered about the relationship between real wages and labour productivity. This research note expands on Sharpe, Arsenault, and Harrison (2008) in order to shed additional light on the relationship.
The guts of the matter is a very interesting table:
| Earnings and Productivity Growth Gap (Compound Annual Growth Rates) | Canada (per cent) |
United States (per cent) | ||
| Median real hourly wage | 0.01 | 0.33 | ||
| Labour productivity (Real output per hour) | 1.27 | 1.73 | ||
| Total Gap | 1.26 | 1.40 | ||
| Contribution to median real earnings and productivity gap | Absolute (points) | Relative (per cent) | Absolute (points) | Relative (per cent) |
| Inequality from median to average measure | 0.35 | 27.6 | 0.63 | 45.1 |
| Labour’s Terms of Trade: from CPI to GDP deflator | 0.42 | 33.3 | 0.31 | 22.5 |
| Supplementary Labour Income: from wage to total compensation | 0.35 | 27.3 | 0.16 | 11.7 |
| Labour Share of Nominal GDP | 0.25 | 19.8 | 0.23 | 16.7 |
| Other measurement issues | -0.10 | -7.9 | – | – |
| Total – All Factors | 1.26 | 100.0 | 1.34 | 95.9 |
This table is applicable to 1980-2005 which is to say from the tail-end of the inflationary period to the middle of the Great Moderation.
Ha! So where’s your productivity gains now, fellas? Admittedly, this analysis refers to the entire labour pool and I suspect that only the upper 60% of the labour pool really counts, but still, that’s a real eye opener. Like I always say, the means of production should controlled by the proletariat, held in trust by me.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 12bp, FixedResets off 6bp and DeemedRetractibles gaining 2bp. Volatility was minimal. Volume was absurdly low.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4547 % | 2,684.8 |
| FixedFloater | 4.20 % | 3.46 % | 24,686 | 18.41 | 1 | -0.8772 % | 4,127.3 |
| Floater | 2.88 % | 3.01 % | 63,398 | 19.68 | 4 | 0.4547 % | 2,776.3 |
| OpRet | 4.05 % | 2.04 % | 95,317 | 0.08 | 1 | 0.0000 % | 2,729.2 |
| SplitShare | 4.29 % | 3.65 % | 99,414 | 3.88 | 5 | 0.0875 % | 3,155.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,495.6 |
| Perpetual-Premium | 5.48 % | 3.97 % | 75,081 | 0.08 | 20 | 0.1900 % | 2,445.5 |
| Perpetual-Discount | 5.29 % | 5.18 % | 101,126 | 15.11 | 16 | 0.1169 % | 2,589.3 |
| FixedReset | 4.25 % | 3.75 % | 186,603 | 8.46 | 75 | -0.0612 % | 2,553.7 |
| Deemed-Retractible | 5.01 % | 2.44 % | 105,994 | 0.40 | 42 | 0.0200 % | 2,561.8 |
| FloatingReset | 2.56 % | 0.00 % | 65,402 | 0.08 | 6 | -0.1173 % | 2,536.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRP.PR.B | FixedReset | -1.37 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-29 Maturity Price : 19.50 Evaluated at bid price : 19.50 Bid-YTW : 3.77 % |
| MFC.PR.F | FixedReset | -1.34 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.15 Bid-YTW : 4.67 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| IFC.PR.C | FixedReset | 104,293 | RBC crossed 100,000 at 25.54. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.53 Bid-YTW : 3.11 % |
| FTS.PR.M | FixedReset | 98,435 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.28 Bid-YTW : 3.90 % |
| BMO.PR.W | FixedReset | 78,793 | Scotia crossed 40,000 at 25.10. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-29 Maturity Price : 23.19 Evaluated at bid price : 25.12 Bid-YTW : 3.72 % |
| RY.PR.H | FixedReset | 61,000 | TD crossed 49,900 at 25.30. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-29 Maturity Price : 23.27 Evaluated at bid price : 25.31 Bid-YTW : 3.72 % |
| ENB.PF.G | FixedReset | 30,775 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-29 Maturity Price : 23.11 Evaluated at bid price : 25.00 Bid-YTW : 4.22 % |
| TD.PF.B | FixedReset | 16,467 | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.17 Bid-YTW : 3.59 % |
| There were 12 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| MFC.PR.L | FixedReset | Quote: 24.70 – 25.10 Spot Rate : 0.4000 Average : 0.2782 YTW SCENARIO |
| TRP.PR.B | FixedReset | Quote: 19.50 – 19.86 Spot Rate : 0.3600 Average : 0.2407 YTW SCENARIO |
| GWO.PR.I | Deemed-Retractible | Quote: 22.28 – 22.64 Spot Rate : 0.3600 Average : 0.2663 YTW SCENARIO |
| ENB.PR.J | FixedReset | Quote: 25.00 – 25.25 Spot Rate : 0.2500 Average : 0.1633 YTW SCENARIO |
| PWF.PR.P | FixedReset | Quote: 22.92 – 23.21 Spot Rate : 0.2900 Average : 0.2057 YTW SCENARIO |
| FTS.PR.J | Perpetual-Discount | Quote: 23.51 – 23.79 Spot Rate : 0.2800 Average : 0.2089 YTW SCENARIO |
I remember quite vividly the real estate collapse from 1989-1992/3. Prices were going crazy in 1988/89. People were flipping homes in days. You would do a deal, and waiting outside, someone would give you $20k that minute to sign the property over. it was insane.
then, one cold November night in 1989, it just stopped. people were still going to see houses, but nobody would bid on anything. it was a long cold winter. after that, you couldn’t sell anything. even by 1992, it was impossible to sell much. prices dropped by 1/3 in toronto on average. it took a long time to settle down and normalize.
this real estate market bottomed in the mid-late 90’s, and has been going straight up since. it’s been about 20 years. we’ll see what happens.
I remember quite vividly the real estate collapse from 1989-1992/3
During the frenzy – well, until 1989, anyway – I was slaving away in Operations at Merrill Lynch Canada, living in a rooming house in Parkdale, and counting it as a good month if I paid the rent on time. I didn’t spend too much time thinking about the real-estate market!
But I did have a buddy at MLC … a clerk, like me, but a bit more senior … who owned three houses. Three. On a clerk’s salary, all mortgaged to the hilt of course.
She lost everything.
it’s been about 20 years.
Yeah, that’s about how long it takes people to forget…