Earlier this week the Globe and Mail reported that the average price of a house in Toronto has risen to $613,933 and that the average price of a detached house has risen to $1,042,405. Those are a big numbers.
Low interest rates are a big part of this story. But there’s also a supply story at play here. The low-rise housing market in this city is heavily supply constrained and so we have an environment where people with more money simply outbid those with less money.
The high-rise side of the market, on the other hand, is creating lots of new supply. And in my opinion that’s why its price growth has been more moderate in recent years and why the pricing spread between low-rise and high-rise housing continues to widen.
Assuming these trends continue, one of the things I’ve thought about and written about in the past is whether we’ll eventually seeing a point where high-rise housing actually becomes a more affordable option for families. Because right now, if you’re in the market for a 3 bedroom home, a low-rise house is likely your most affordable option.
Here’s a quick comparison that I did up this morning between a detached house and a high-rise condo:
By way of his Case-Shiller Home Price Indices, he has argued that from 1890 to 2012 home price appreciation in the US (in real terms) has been basically zero. It has been flat:
As a result, he’s been very critical of the notion that homes should even be thought of as an investment. In this interview, he says the following:
“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000’s. And I don’t expect it to come back. Not with the same force. So people might just decide, "Yeah, I’ll diversify my portfolio. I’ll live in a rental.” That is a very sensible thing for many people to do.“
In many ways, the woes of Detroit are simply an extreme example of what’s happening in many advanced economies. The loss of manufacturing based jobs is creating a void that is not being filled - or is being filled differently - by new industries.
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Average Home Price - Brandon Donnelly
For the detached house, I assumed 1,800 square feet at a price of $1,042,405. That’s the average price mentioned above.
For the condo, I assumed a 1,500 square foot 3 bedroom home. I priced it at $650 per square foot (which would be above average for the city) and then added $40,000 for a parking spot. Here you have a slightly smaller condo, but it’s also priced slightly less.
I then compared operating/maintenance costs. For the condo, I assumed a maintenance fee of $0.59 per square foot (which I think is reasonable) and then added $100 per month for electricity. Typically electricity is billed outside of maintenance fees.
For the detached house, I tried to create a similar living situation. I assumed that the owner wouldn’t be cutting their own grass or shovelling their own snow. I assumed that money would be put away each month as a capital reserve for future house expenses (similar to the reserve fund in a condo). And I assumed a gym membership since most condos have a gym. I ignored property taxes and insurance.
The detached house still works out to be a less expensive to operate in this scenario, but not by much. Overall, the two appear quite comparable. Which is why I wouldn’t be surprised if we see a tipping point in the future where all of a sudden families start finally adopting the mythical 3 bedroom condo.
He also gives the example of Japan, which saw a massive run up in real estate prices and homeownership rates in the late 80s, only to then see them fall and stagnate for the next 20 years.
In the US, homeownership rates have gone from about 69% at the peak (2006) to roughly 65% as of 2013. The long term average is probably somewhere in between these two numbers.
But homeownership is a fundamental and heavily subsidized part of the American dream. Could America ever be a nation of renters?
, where high school graduates can make six figures working in the Canadian oil sands and the
- I think it’s pretty clear that the opportunities for unskilled workers is on the decline.
Therefore (and this is old news), we clearly need to figure out ways to retrain existing workers and ensure that the next generation is equipped with the skills and knowledge to compete in this new world. The problem though - and this is the second piece - is that I’m not sure the new economy will require the same raw number of people.
What I mean by this is that scaling up production of an automative plant is quite different than scaling up an internet platform like Twitter or Tumblr. You just don’t need as many people, which is why the returns to being smart have grown massively for those few. And this is part of the reason we’re seeing rising income inequality across the board.
Now, I don’t know what the answer is, but I think we’ve already shown that the transition to a new economy isn’t going to be a smooth one. To that end, I’ll leave you with one last thought which came from a former professor of mine at Rotman, Walid Hejazi.
His argument is that it’s actually unethical for governments to subsidize unproductive sectors of the economy, such as a manufacturing, in order to sustain jobs. The reason being that you then have high school students telling themselves that they don’t need to go to University because they can simply go work at the local plant and make decent money. But what they don’t realize is that there’s a very real expiry date to those opportunities and, when it comes, it’ll be much harder for them to be retrained.
