Analysis

Why smart money is still investing in Canadian houses: Don Pittis

As young people struggle to gain a foothold in the housing market, houses are more than ever a good financial investment. Attempts to rein in the Canadian market are fighting some overwhelming economic forces.

Brexit and low or negative interest rates mean houses remain much more than a place to live

Markets expect Federal Reserve Board chair Janet Yellen won't raise rates until 2018 and may even cut rates this year, pushing asset prices yet higher. (Reuters)

Sorry, young house hunters. It turns out the overpriced home you were hoping to buy isn't just a place to live.

Now, maybe more than ever, houses are a financial investment.

And while that may not be good for young Canadians hoping to get into the market, there are no signs new government rules will change that in the short term.

In fact, a new flood of money into the global economy from central banks in an attempt to counteract the depressing effect ot the Brexit vote only makes putting cash into real estate a sounder financial investment.

'No bubble' derision

Comments last week on the CBC News story that Canadian mortgage professionals reported no housing bubble, even in Vancouver, were greeted with derision.

That partly depends on how you define a bubble.

But despite repeated promises by governments to intervene, there are increasing signs that the smart money from around the world and from right here at home thinks that in the current climate, real estate remains a good investment. And as long as that is so, house prices will stay strong.

Hesitant measures

Although there are tools the government could use to put the lid on property prices, they are far beyond the scope of any of the hesitant measures proposed so far.
Housing starts in the Vancouver area reached their highest levels in 25 years in February, and there are economic reasons why demand seems insatiable. (Reuters)

Even the most stringent changes in the law, such as B.C.s move to wrench regulation away from the industry and put it into the hands of an outside body, will do nothing to stop the strong global economic forces that are pushing prices ever higher in our most international cities.

Issue of fairness

Although loose practices in real estate agencies may contribute a little to higher prices, they are more a matter of fairness than a key cause of property demand.

I have passed on warnings from U.S. central bank chair Janet Yellen that interest rates were on the way up. The warning stands, but only as a conditional statement: If interest rates start to rise, watch out.

But suddenly this year the prospect for a surging U.S. economy that needs to be quelled with higher interest rates seems completely off the table. In the wake of the vote by the United Kingdom to pull out of the European Union, the expectation of higher rates seems even less likely than a month ago.
Mark Carney, governor of the Bank of England, said last week the economy will need more stimulus, which means more cheap money in the world. (Reuters)

"Traders, who have consistently been better at projecting the path of interest rates than the Fed itself, are now pricing in a greater probability that policy makers will cut rates in upcoming meetings than raise them," says a report from the Bloomberg business news service.

In fact, according to market traders, Yellen is now unlikely to raise rates until 2018.

Meanwhile across the pond, Bank of England governor Mark Carney specifically told us last week that he expects to inject more stimulus and prevent a credit crunch.

Deteriorating outlook

"In my view," said Carney on Thursday, "the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer."

European interest rates are already negative. British and U.S. rates are falling or stagnant. If those countries are creating new money, China and many others will inevitably join the party.

As noted previously, we are in this strange new world where interest rates are far less than inflation and money has become free. You may not have any, but those who do don't seem quite sure what to do with it all.

Everywhere in the world, people with money are trying to turn it into something real. That has made stocks rise despite weak profits. It has made real estate prices rise despite rents that are not keeping pace.

Unlike other assets like gold, houses have a real value. They offer protection from the weather. They offer comfort and prestige.
Finance Minister Bill Morneau has promised to look for ways to solve the house affordability problem. But he is fighting strong economic forces, including no end of cheap money. (Sean Kilpatrick/Canadian Press)

In a world where there is a glut of money that in financial terms has next to no value, it remains absolutely smart to take money you have (or money you can borrow for next to nothing) and use it to buy something that has a real value, even if that value is uncertain.

Pitchforks and torches?

Many people have warned that low rates are creating problems in our financial markets and even in our society — including real estate prices unrelated to incomes — and eventually something is going to break. Maybe a bubble will pop. So far that has not happened.

Perhaps the metaphorical peasants, in this case young Canadians who want houses, will one day rise with their metaphorical pitchforks and torches.

But until something significant changes in the global economy, or until the government takes some action to make housing a bad financial investment, money will likely continue to find its way into property, and prices will rise.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.