Ashley Redmond: I'm Ashley Redmond for Morningstar.ca and I am here with equity analyst Dan Werner.
Dan, thanks so much for joining me.
Dan Werner: Thanks Ashley.
Redmond: Every year, sometimes twice a year, Dan and I tackle a very sensitive topic for Canadian investors and we get a lot of feedback on these videos, everything ranging from rage to elation. So, this should be exciting. Today we are discussing the Canadian housing market.
Last time we spoke you were worried about frothy market conditions and you had the same concern in 2012. Are you still concerned about frothy market conditions?
Werner: When you think about housing, it’s an asset, and the pricing on that asset is really worth what someone is willing to pay for it. How do people pay for an asset like housing? Well, they either pay for it through what they have in savings or equity and/or they pay it with debt, and that debt is usually in the form of a mortgage.
If you look at how much mortgage costs were two years ago compared to now, they are relatively the same. In fact, when we go back and look at how much mortgage debt has increased, it’s increased by about 50% over the last six years in Canada, while the interest paid on mortgages has remained relatively stable. That seems to me that the affordability of housing has increased as rates have stayed low and actually kind of dropped from a couple of years ago.
So, am I concerned about housing prices? Yes, I am concerned about housing prices in the event that mortgage rates will rise as these closed mortgages renew four or five years out.
Redmond: So, what do you need to see as an analyst that’s going to make you positive on the Canadian housing market?
Werner: It’s all about affordability. Obviously one of the elements of affordability is net income. If I saw net income rising at the same rates as mortgages or housing prices, I would be more comfortable with that. Right now, we’re seeing net income rise about half the rate of what housing prices are. That is unsustainable for the long-term.
I think another thing that would give me some comfort would be if housing prices basically stabilized and rents [caught up, so the cost of renting a house would be similar to overall housing costs.]
Right now, the cost of housing relative to rents is the highest ratio in Canada amongst any country in the world. I mean, if there is some stabilization in terms of how much it would cost to rent a place versus the cost of buying, I would have some more comfort with that.
Redmond: One question we got from a viewer a few months ago and I wondered this myself—when you are looking at Canada as a whole do you break it up by regions? When you are looking at the housing market numbers in Toronto and Vancouver it’s actually not really comparable to a town like Miramichi in New Brunswick.
Werner: Clearly, and I understand the question. Usually I am looking at the urban areas like Vancouver or Toronto. When you look at the demographics of Canada it largely has a similar urbanization rate to the U.S., it's over 80%. But if you look at the top 10 [most populated] cities in Canada, they have about half the population of the country compared to the U.S., where the top 10 urban areas have about 25% of the country’s population.
So, given that level of population in those cities, yes, I am looking at the urban areas. Having said that, I also realize that there are areas or provinces that have had housing price growth that maybe justified. For example, in the prairies there is job creation [due to the energy sector] and the workers moving there need somewhere to live. So, with not enough housing being built and prices increasing [that make senses], they also have relatively higher income levels compared to the rest of the country.
I understand that the housing price increase in, say the prairies, maybe justified compared to other areas where income levels aren’t rising as fast as housing prices.
Redmond: Makes sense. Thanks Dan.
Werner: Thank you.
Redmond: To give us feedback on this video, tweet us on Twitter @MorningstarCDN.
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