Mea Culpa: Canadian Housing Did Not Grow 11 Percent, Instead 5.3 Percent
Last week I reported a story out of the Ottawa Citizen that housing in the country had risen over 25 years by 11 percent annually. A couple of readers pointed out the error in the math, Buford Twain and Stephen Bond, and we saw the mistake as well, albeit after we posted it to the site. Well, the national papers in Canada are printing a retraction that housing only appreciated 5.3 percent, and so are we.
We were wrong, they were wrong, hopefully this will set the record straight. Sorry for missing this one, folks, but I hope to do better in the future.
“Conventional wisdom used to be that real estate was a relatively safe, long-term investment that typically appreciates at a rate of five per cent annually. These statistics clearly tell a different tale,” declared Re/Max executive vice-president Michael Polzler.
Actually, they don’t.
Re/Max made a basic arithmetical error by computing a simple average, without taking account of the compounding effect that annual increases have as they are added on top of one another.
After media inquiries, Re/Max issued a clarification: “Nationally, the compounded annual rate of return is 5.3 per cent” – which confirms the conventional wisdom.
The biggest local annual compound growth rate that Re/Max tracked, in Barrie, Ont., was 6.4 per cent, while the smallest was in Regina at 3.6 per cent – which after property taxes and maintenance costs rounds to something close to zero, not counting mortgage interest and inflation. via the Canadian Press
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Comment by Doug on 20 June 2008:
There was more bad news about the Canadian housing market this week. The Canadian Mortgage and Housing Corporation (CMHC) have warned that the number of property sales could fall as much as 40% this year. The announcement came just days after the Housing Minister Monte Solberg’s refusal to attend a national housing meeting with provincial and territorial ministers and then inadvertently revealed that the Government believes there will be a 5% to 10% drop in prices this year “at best”. Meanwhile, mostly economists at banks and building societies – believe the falls in prices will be limited to low, single digits. But while the jury’s still out on whether there is going to be a crash or a modest decline, there does now seem to be a broad consensus among the experts’ that house prices will be lower at the end of the year. So, is it finally time for first-time buyers to crack open the champagne and celebrate? If you’re a homeowner, should you be crying tears into your pillow? Who are the real winners and losers when house prices fall? The most obvious winners are first-time buyers. Not only are prices becoming more affordable, but it’s a buyer’s market now, with properties taking 50% longer to sell than this time last year and asking prices dropping, on average, around 27% before a sale can be agreed.* First-time buyers are in a particularly strong position because they are chain-free buyers. So far, so good. But are all first-time buyers winners when house prices fall? Since the credit crunch, it has become much more difficult to get a mortgage, with lenders pulling deals left, right and centre. Even if you can find a cheap mortgage deal with a low rate, you may not be eligible for it. It all depends on the size of your deposit. Due to the increased risk of negative equity when prices fall, mortgage lenders are becoming increasingly wary of lending to borrowers with small deposits. While you can still get a mortgage with a 5% deposit, you’ll have to pay a higher rate. According to the Royal Bank of Canada (RBC), the average two-year fixed rate (taking into account the fees) is now almost 7%, compared to 6.3% last July. On the plus side, those that can save are benefiting from rising savings rates, as banks compete desperately to lure in your cash during this economic downturn. The most obvious losers, you might assume, are homeowners. After all, when prices fall, they lose money.