Weekend Reading – Historic housing correction coming
Welcome to some new Weekend Reading material – why a historic housing correction is coming (or not).
Before sharing some of my favourite finds from the past week, including shoutouts to some bloggers crushing it with their investing journey, here are some of my recent articles just in case you missed them:
These are the six key phases you need to work through to achieve financial independence.
I believe financial independence really boils down to two major things over time – that’s it!
Image reference: The Behavior Gap – Carl Richards.
I recently posted my latest monthly dividend income update. Excluding our RRSPs and other assets, we’re now averaging $75 per day in tax-efficient and tax-free dividend income every single month – and growing for our semi-retirement dreams.
Finally, if you want to learn how many stocks are truly enough for your portfolio – read on.
Weekend Reading – Historic housing correction coming
I’ve written about my housing market thesis before on this site, a few times.
More recently this spring I mentioned the following:
- “Expect real estate prices (that have been inflated too high for too long) to come down this year, maybe down another 10% from where they are now.
- Expect the cost of owning a home to go up, with inflation running hotter and with borrowing costs going up as well. My friend Robert McLister, a respected mortgage analyst and expert, was recently quoted that for the first time since 2010, nationally-available uninsured 5-year fixed rates are all above 4%. McLister also recently referenced some TD research that estimates 5-year fixed rates have increased 140 basis points year to date, which equals about a 12% decline in affordability for the average homebuyer.
- Expect people to complain about the combination of higher inflation and higher interest rates since many people feel they didn’t see it coming.”
Of course, the latter point is hardly a prediction since we’re seeing that now.
Unfortunately for some, things are reverting to where they should be – leaving an “upside down world” that has been happening: a screaming bull market during a once-in-a-century pandemic no less, markets artificially inflated by uber-low inflation, further supported by non-existent cheap, borrowing costs; an economy pumped by juicy government stimulus (with money we/taxpayers don’t have), triggering use of leverage and an abundance of retail and real estate spending with cash most people absolutely don’t have.
Harsh, I know.
But true, I believe.
I want every reader to be mindful that some real estate correction can and should happen.
So, what does any historic housing correction coming mean?
Well, I’m pessimistic about real estate to a point in Canada near-term but not nearly as bearish as RBC.
According to this new RBC report that severely downgraded Canada’s housing market:
“We expect home resales will fall another 17% in Canada by early next year after dropping 19% in the second quarter and 13% between the first quarter of 2021 and first quarter of 2022. Cumulatively, this 42% plummet (from record-high levels) since early 2021 would exceed the peak-to-trough declines of all four previous national downturns (-33% in 1981-1982, -33% in 1989-1990, -38% in 2008-2009 and -20% in 2016-2018).”
“Buyers in high-priced markets are especially sensitive to interest rates and we believe will struggle the most in the period ahead. Our forecast has home resales in British Columbia and Ontario cumulatively sagging 45% and 38%, respectively, in 2022 and 2023, setting the stage for a home price index drop exceeding 14% from quarterly peak to trough in both provinces.”
That’s not good.
Especially not good if you’re relying on your home near-term to fund your retirement. (I have no intentions of doing that ever for the record. I thought that was a bad idea 10 years ago.)
So, what does a “historic housing correction coming” mean to me?
Well, first off, I don’t want any historic housing correction to occur, let’s say that. But some (more) correction might be helpful…
Then again, I’ve always seen our home (whether that was in Ottawa, just outside the city, or now back in the city where we now live for the last three years) as a place to live. I/we have to live somewhere. Whether my home is worth $600,000, $900,000 or $1.2 million – while I would like to say it matters it doesn’t to a degree.
Two, while any epic housing correction (that decreases the value of our home significantly) isn’t great, I have no intentions of moving/cashing in, other. This is akin to buy low, sell high. If I’m not selling our condo, what does it matter to my net worth?
Finally, three, I welcome a bit of a housing reset. I’ve never believed money should be cheap for everyone – without any long-term borrowing consequences. I’m not advocating I want to see any consumer broke, bankrupt, or forced to take a consumer proposal. Rather, I simply don’t believe most folks should have access to low, nearly-free credit; an unlimited bankroll. Like trust, credit must be earned and maintained. It is my hope with some higher inflation, higher interest rates, we entrench more financial discipline into everyone – creditors and borrowers alike.
As a project manager, I tend to look at the downside risks more often than not – I look at both risks in the project and risks of the project. This might seem like semantics to many people but they are fundamentally different.
Like a potential historical housing correction coming, risks related to your personal housing situation and risks related to the housing market are also two very different things. Understanding those different risks, as they relate to your personal finance situation, will serve you VERY well when it comes to any housing market predictions.
More Weekend Reading – beyond the historic housing correction coming
Congrats to some of my fellow blogging friends, simply crushing it when it comes to working towards their dividend investing and financial independence goals. Kudos!!
My Prudent Life earned just over $1,000 in dividends from their TFSAs last month alone!
Dividends & ETFs maintains his conviction in his dividend income approach.
Passive Prairie FIRE continues with a sensible mix of stocks and ETFs to deliver more income.
Freedom 35 Blog highlighted his options trading summary – impressive work – making almost $6,000 in just one month.
Dividend Daddy is on fire…his “July 2022 dividend total is $6,051.79“. Just wow.
In my portfolio, I was happy to see one of my stocks release news about their special, upcoming dividend payment:
Canadian Natural Resources ($CNQ) says it will pay a special dividend of $1.50 per share on Aug. 31 to shareholders of record as of Aug. 23, double its current quarterly dividend of $0.75 per share.
While I have some oil and gas stocks in my portfolio, I do believe the industry must evolve. I own other energy assets accordingly (and happy to do so). The oil and gas industry faces some major decisions ahead.
Here is one such article on that.
“Building a clean energy business inside an oil and gas company presents an additional challenge in the form of resistance from the capital markets. Clean energy companies can be broadly divided into technology providers on the one hand, and asset-based businesses on the other. Fossil fuel investors understand all about exploration and development risk, sovereign risk, even interest rate risk, but little or nothing about how to scale a technology provider. As for asset-based clean energy businesses, they tend to be less risky than oil and gas developments; however, since they generally generate lower returns, they require a lower cost of capital. An oil company held by investors for its volatile but lucrative returns is not the right owner of utility assets.”
You have to wonder with our climate crisis staring at us in the face, how all of this might play out…
Chief Investing Disrupter Dale Roberts at Cut The Crap Investing offered a take on how many stocks might be enough as well, and some outlooks for our Canadian economy. What do you make of his take?!
Want to travel hack? Curious about how to value your travel hacked points amongst other travel rewards programs? Take a look at Barry Choi’s updated post on Calculating the Value of Your Reward Points here.
Have a great weekend, stay safe!
From Dale Roberts:
Thanks Mark for the share, and for your great post. Everyone is in a different situation.
When we downsize our home to retirement home, the income created by our excess profits will drawf the retirement income producing ability of dividend reports of the Canadian dividend gang that we have on our blogs and on Twitter.
That’s not a brag, I’m just offering a stat on how many will have an additional resource for creating retirement income.
Net worth can be the most important stat. It will be for many, even for those who don’t realize that fact today.
Real estate in Canada is so regional. While some centres saw massive price run ups other smaller centres have barely seen any appreciation.
What went on in GTA/GVA definitely is not sustainable as we are now seeing the pull back.
When it comes to our principal residence the price never really matters because we aren’t planning on selling. But we did look into current market prices on a free of our rentals. Still didn’t make sense to sell yet so we will hold on longer and keep them rented.
Sure does make for interesting conversations.
You still hold a number of rentals, right Maria? Any impacts on tenants with inflation and/or their desire to buy a home? What are you seeing or hearing from them? Renting is so downplayed at times – it can be a great lifestyle choice vs. home ownership I believe. It’s not just a financial decision.
Yes still have 9 rentals in our portfolio. We had 3 tenants move out this year, and all 3 bought their own homes, some in smaller centers though. In previous years we have had 4-5 tenants move out because they bought their own homes, so there is a slight slow down.
We are hearing some wild things in the rental market, though. It is definitely increasing, and there are people really trying to take advantage of that. Sky high rents for low-quality properties – not a good mix. We have always preferred having our rents more affordable to keep tenants in the long term – the longer they stay, the easier for us (if they are a good tenant and a good tenant is worth hanging on to).
And I agree with you, Mark. Renting can be a great lifestyle choice, especially if you can save/invest more than if you were to own a home. Sometimes people don’t “save/invest the difference,” though, and don’t come out much further ahead when renting.
OK, interesting, re: slowdown.
I’ve heard of some “sky high rents for low-quality properties” happening in Ottawa. Terrible really.
I would think avoiding too much turnover AND having folks you can count on, that enjoy their home, is better but alas I stopped being a landlord many years ago so maybe things have changed!
Thanks for your comment, Maria and hope you’re having a good summer!
For us homeowners what happens in the market does not much matter. For people trying to get into the housing market it’s very challenging. The housing market in Canada has it’s up’s and down’s, but calling it historic is maybe overstating it. When we look back at the history of our housing market, we see that anything can happen. As long as our laws allow foreign money to be deposited here into real estate with no boundaries, prices will continue to increase over time. This leaves sellers in the big cities with a lot of cash to buy in smaller markets. And this filters down and increases housing prices everywhere. We will just have to wait and see where this one goes.
That’s largely my thinking – owning 95% of our home (5% mortgage to go!) it doesn’t matter too much but for newcomers, it will remain very, very challenging.
I don’t agree with the RBC report – I think it’s too overblown but the proof is always after the fact.
As long as interest rates go up a bit more, I will be happy since money shouldn’t be cheap all the time.
Thanks for your comment.
Great post Mark!
yes I agree with you that a correction must happen and it’s already happening , just like you I really don’t care what’s the value of my home is because we’re going to live in it regardless of the price tag , also a correction must happen because a lot of skilled and unskilled labour are leaving big cities and looking for more affordable places to live , here in Vancouver you can feel the lack of workforce in almost anywhere you go from a government office to a grocery store and a coffee shop , I just feel bad for people who over bought what they could afford just to own a place , it shouldn’t be this way but sadly with cheap money and greed the situation went out of control.
I also feel for folks in over their head….they just don’t know what they don’t know.
Cheap money doesn’t really help everyone, does it? 🙂
Thanks for the shout out 📢 Mark! 🙏😃
Always appreciated! I’m following your path to financial freedom 💸 with dividends stocks & ETF! 📈💼 You are an inspiration since many years! Keep up the good work my fellow investor friend!
Most welcome and thanks for the follow 🙂
I’d say we’re on the same page with the outlook on real estate, our personal residences, and sensible interest rates. I’m sure we’ll have a slow down and correction in most if not all markets. Larger corrections in the places with the higher run ups and with extremely high valuations for the country and even globally.
I agree the oil industry will need to evolve further, as does the thinking of our governments with reasonable time frames and comprehensive realistic plans and targets for a transition, along with being truthful on the costs of doing this. We don’t have this now.
The real estate market will cycle and play out but I’m geniunely concerned with climate change/our climate crisis. It’s going to get very bad for some….a major transition must begin now to take effect even in 20-30 years.
Government leadership is lacking but we know that. Not many good options for that on the table sadly.
Housing is required by all, and when it becomes unaffordable this effects all. For example.
At the hospital my wife works at, on her floor there are many unfilled RN lines. Same goes throughout the hospital, same goes throughout the province. Number one reason my wife has difficulty hiring RNs, they tell her they cannot afford to live here in Victoria. Rental costs are too high, and purchasing costs are crazy. This has been a problem for some time (years). Poor planning across the board from cheap rates, to not enough rental buildings and small homes being built.
Our health care across Canada has been under considerable strain for 10 – 15 years (more maybe ??). Lack of qualified staff at the LPN / RN level. When politicians talk about allowing private surgeries, if you have Dr’s available to run private clinics this tell me the problem isn’t at the Dr level. Who looks after you post op, nurses. We don’t have enough RNs or LPNs. Back in the 90s BC laid off 1900 nurses and closed off seats at the schools. Roll the clock forward to today, and you see how policy effects change long term.
Housing policies need to be revised, and the changes will take time. Sadly I see fear being the driver for change at present, and that is never good.
Good job on your dividend increases, won’t be long before you start seeing 4 figure dividend income increases each month.
Complicated stuff indeed, David. My parents were both nurses. I know the healthcare tale all too well 🙂
It’s going to get very interesting – our healthcare system. So many strains. The writing has been on the wall for years. It’s not going to get better anytime soon I don’t think.
On a related note, planning for healthcare costs in older age will be an issue for many Canadians. I hope to have enough dividend income to support that when the time comes!!
Take good care and thanks for your detailed comment. Bless your better half for the work she does/nursing.
A massive correction merely puts the clock back just 1 year in the real estate world, without context the media can scare a lot pf hype into clicks/views. I still get a newsletter from a large Real Estate firm in Nanaimo here on Vancouver Island from when I move here 9 years ago. Here is what he just shared for the month ending this July 2022. “Cowichan Valley ~Average price: $840,762 (up 25% from 12 months to date, this year over last).”
Yes, a big correction is needed to your point – things can’t keep going up 25% per year….nutty.
Thanks for the share my friend.
Nice one not sure why everybody Sings about SU and ENB when we have stocks like CNQ in energy sectorthe run up has been amazing since January plus CPP love this stock one of their big holdings.
CNQ is a beast and likely to provide more dividends even next year. I can’t see oil prices going down too much at least for another year or so. – although they might dip here and there but gone are the days of spending under $1.50/L I think. We’ll see!!
It’s been a minute since I’ve left a comment. Ha!
When we had bloggers question why we wouldn’t invest instead of paying our mortgage off in 5 years, this is why I said we did it. We couldn’t justify not paying it off. It made more sense to have a roof over our heads than risk it all investing; we still packed a good amount of money towards our retirement. All our registered investments are where they should be, and we can accept the highs and the lows.
It also reached the point where we didn’t bother increasing the value of our house when calculating our net worth. We no longer take much interest in it.
The calculation is $100k over what we paid for it, but it won’t make a difference if we move where houses are cheaper than what we have now. I’ll continue calculating our house value for the rest of the year and remove it for the 2023 budget year.
We paid $265,000 for our house in 2009 at 4.1% interest, and now smaller homes on our street (were recently selling for over one million dollars. House sales are at a standstill in our Ontario city for obvious reasons, and I’m not sure how this will play out.
We’ve been in this house since 2009, and I’ve renovated everything myself thus far. I’m working on the master bathroom, and I’ve spared no expense. As long as our son is well taken care of after we are gone, we are confident in living our best life as we see fit.
It also doesn’t help that my dad passed away when he was 47, and now we have friends and their parents passing away. They didn’t have a hope in hell to use any retirement money they saved.
Since the pandemic and finding out our son is Autistic, we decided that we would retire in this house. He’s currently in vision therapy, which will cost us $7000 a year for the next two years, but we’d do anything for him.
My wife and I can see price differences everywhere, from utilities, petrol, and fast food to grocery shopping like everyone else. I filled my RAM today at Costco and two sizeable red petrol cans for $200. My employer is 8 minutes up the road so I can’t imagine what petrol is doing to some budgets.
Lastly, I know we pay for our financial advisor, but not everyone is savvy with investments, and I’m the first to admit I’m not. I should get into something and start small, as I’m sure you did. Any books or websites you suggest reading?
Life is very precious Mr. CBB for sure….
I know you a bit, I have no doubt there isn’t one thing you wouldn’t do for your son 🙂
I would read The Value of Simple by John Robertson to get your feet wet a bit. Simple but well organized. Let me know your thoughts.
Concepts you know but also a list of DIY investing ETFs and funds. I would personally fire any financial advisor since you can easily own a world or stocks in just one ETF these days. Not sure that’s added value. For asset decumulation, that’s different – a fee only advisor can help. 🙂
I have other books to share as well, just email me away my friend!