Over the past decade Victoria home prices increased by 128 per cent. Not only have they outperformed equity markets, but also almost any other type of investment one could have made at the end of 2001. Real estate returns in this area represented a sizzling 8.5 per cent average annual compounded rate of return.
If, after a decade of living in his home, an owner sells today, hoping to bank some cash, he’ll have to move to a lower-cost area, downsize his home, or both.
Many of us can attribute our increasing net worth largely to this unrealized, historical increase in the value of our home. But, will this trend continue for the next decade? Not very likely.
Whenever assets, be they gold, equity markets, or real estate, increase dramatically in value, the risk of a significant correction in value also increases. Real estate prices in Greater Victoria specifically now epitomize such risk.
In Canada today, it is estimated that some 43 per cent of total household income is needed by an average family solely to finance their mortgage, property taxes, and utilities. In British Columbia this figure exceeds 70 per cent. In Vancouver, it’s a horrendous 92 per cent. For Greater Victoria, a specific number is not available, but since our home prices are second only to Vancouver’s, we know that our costs are much higher than the Canadian average. Such costs are clearly not sustainable.
Either wages must rise dramatically – a highly unlikely event – or house prices must soften, if not drop drastically – especially in B.C. In Greater Victoria three years ago, about 20 per cent of active listings sold in any one month. Today that number is close to 10 per cent. With interest rates at rock-bottom levels propping up house values, we know rates can only move upward, eventually further dampening market activity and home values. Because of the premium location we enjoy in Canada, we are more likely to endure moderate pricing squalls over the next decade, rather than the devastating monsoon that has occurred in the U.S., but I would keep an umbrella close by.
A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, the Smart Canadian Wealth-Builder, is available at Tanner’s Books.