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Is a “Lacklustre” 2% Rise in Home Values Such a Bad Thing?

13 March 2013

TD Economics has released a report titled “Long-run rate of return for Canadian home prices,” which states that home prices should see a “lacklustre” return of only 2 per cent this year. And while that has some panicking, especially on the heels of the news that our economy is expected to slow in growth. But, is it really such a bad thing?

The report says that “home price gains should simply match the pace of inflation,” and that the real estate market still outperforms most other types of investments, with the only exception being the stock market. And, unlike many are probably thinking, it’s the real estate markets in Toronto and Vancouver that will continue to do better than the national average.

The report looks at all the factors that have caused the housing market to slow down – namely that slower economic growth, tighter mortgage rules, and the fact that interest rates are going to rise – and states these as reasons why we can expect such a low rise in home values.

“With the slowdown in the Canadian housing market well entrenched, many are worried about the future value of their homes,” stated the report.

But there’s no reason Canadians should still be worried about a crash. Over the past decade, home prices have increased by an average of 7 per cent each year. (Although the Canadian Real Estate Association pegs those growth figures at closer to 5.4 per cent a year covering the years from 1980 – 2012.)

And while 2 per cent may not seem like a lot when compared with that, home prices are still far too high, the report says. That’s especially true when you compare it with other fundamentals, such as price-to-income, price-to-rent, and monthly affordability measures.

The report also touches on the factors that will play into these figures, mostly the aging population as well as new immigrants to Canada.

“We assume that baby boomers will not sell their homes in droves, driving down average home prices,” says the report. And even if it does, the report says, that sell-off will happen over a period of so many years that it will have little effect on home prices.

And immigration will also pull down rising values, as the report states that it’s going to be harder for new immigrants to attain home ownership, meaning this group won’t be there to support the housing market either.

But is this really such a bad thing? Even if home values increase by only 2 per cent, doesn’t that make it easier for those still looking for a home to purchase one? And while a home is an investment, is it really fair to compare “rates of return” with those seen on other types of investments? What happened to just buying a home for yourself or your family? When did homes become such cash cows?

What do you think? Is a 2 per cent rise in home values really such a huge concern?

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