Variations in Price Create Considerable Risk

Over the past 28 years, within Canadian cities, and between large Canadian cities, property prices have fluctuated greatly. Today, for instance, Vancouver's average home is about $500,000, while Toronto is $400,000 and Ottawa just shy of $300,000. It wasn't long ago that all three cities had virtually identical home prices.

In 1980 in Vancouver, prices shot up by about 100%, only to fall by 40% in the next year. Edmonton experienced a similar profile. Between 1985 and 1989 in Toronto, prices rose by nearly 180%, only to drop by 35% over the next 7 years. These large fluctuations in price were unheard of prior to the baby boom entering the housing market. The average price for a property in Ottawa and Vancouver were near identical from the time statistics were kept until that explosion in Vancouver prices in 1980. Ottawa, Montreal and Toronto had near identical house prices of $29,000 in 1969, and those remained near identical at $107,000 in 1985. But four years later, Toronto prices reached $280,000, Ottawa $140,000 and Montreal just $125,000.

Canada's housing market was very stable from the end of World War II until the spectre of inflation and the first oil crisis in 1972, neither which were on the radar of most economists just two years earlier in 1970. Prices advanced almost yearly after WWII but only in the mid single digits. Most Canadian cities continued to be very similarly priced. For the next few years after 1972, prices increased more rapidly, but remained similar across most markets. It was in Western Canada in 1980 that everything started to change. Purchase price risk had now been introduced into the Canadian housing market, particularly for first time buyers, people moving from one city to another and second home buyers.

The last eight years have been very good for the Canadian housing market, primarily as a result of the lowest mortgage rates since the 1960s, again something that no economists had on their radar screens when we were all scrambling to capture that Y2K bug in the late 1990s or when the teck bubble went burst in 2000.

With the exception of an environment of lowered mortgage rates, it is virtually impossible to predict the direction and magnitude of housing price changes. The reasons for this are that housing prices seem most dependent on shocks, both positive and negative, to the system, that did not exist in the prediction model. In the past 4 years in Canada, house prices in Alberta have shot up faster than anywhere else in the country, as a result of a booming oil-based economy driven by $140 barrel oil, something no-one thought possible in 2004.

So when is a good time to buy a house. That answer has traditionally depended on local market conditions and what you can afford. However, given the need to now manage the large fluctuations in Canadian house prices, particularly for anyone that is moving from one city to the next, house purchases should only be considered after a thorough financial review. That review must consider: your financial objectives, your overall financial profile including possible career transfers or retirement plans, and at what stage in life you are in.

Real estate agents tend to be experts on market conditions and mortgage lenders can provide assistance determining what you can afford.

But you can only rely on independent advice regarding objectives, financial profile and stage in life from an independent financial consultant. That consultant should also be focused on wealth creation and protection, as well as risk management, all of which have become much more important given the fluctuations of price in the Canadian housing market.