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Is a house a good investment? The short answer is yes, assuming that maintenance costs are reasonable and financing costs are affordable.
That's not the end of the story, however. For Winnipeg housing is a very special case.
Winnipeg houses and condos are generally more affordable than rental accommodation.
What's more, the conditions that have caused a shortage of rental housing and a healthy supply of owner-occupied homes show no likelihood of abating anytime soon.
Winnipeg has a tight rental market, the result of controls on rent increases.
According to Canada Mortgage and Housing Corporation, vacancy rates in what it calls "privately initiated" [translation: non-public] apartment structures of three units or more in Winnipeg declined from 2% to 1.1% between Oct. 2000 and Oct.
2004. Rent for a two-bedroom apartment averaged $664 as of Oct. 2004.
Ownership costs are relatively low in Winnipeg. For a $160,000 house in Winnipeg, assuming that the owner obtained a conventional mortgage with a 25% downpayment and had a 5.25% mortgage with 30-year amortization, monthly payments on the $120,000 loan would be $662.65.
Lenders tend to use a rule that limits annual ownership costs - principal, interest, property taxes and heating costs - to three times annual payments on the sum borrowed.
Allow $2,000 a year for heating, $3,000 for property taxes, and the annual ownership bill amounts to $12,947. The qualifying income for this house would be $38,840. It should come as no surprise that Winnipeg is one of the most affordable places in Canada to buy.
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According to the Royal Bank's housing affordability index, buying a standard detached Winnipeg bungalow takes just 33.5% of family income. A condo can be had for just 18.8% of family income in Winnipeg. By comparison, a detached bungalow takes 64.4% of family income in Vancouver and a condo 32.7%.
So homeownership is cheaper in Winnipeg than in any other metropolitan area. And it looks like the situation won't change for many years to come. The Manitoba Chambers of Commerce has explained the problem.
"The inability of rental properties to produce a return on their investment has led to a decline in their value with the result that assessments for apartments have sunk relative to owner-occupied houses. The inability to raise rent to meet the cost of inflation has led to a 'renovation deficit.'"
Taking a long view, the situation is not likely to change. Interest rates fluctuate, but demographics define the market. Data from the Conference Board of Canada, a public policy research group based in Ottawa, predict that Winnipeg's population within the census metropolitan area (that's Winnipeg plus bedroom communities like West St. Paul and Headingly) will grow from 706,900 in 2005 to 730,000 estimated for 2010. That 3% gain in population, plus an assumed decrease in household size as baby boomers' children move out to form their own families, will require more housing.
The Manitoba Chambers of Commerce predicts there will be 10,460 more families to house, even assuming no growth in population.
The lack of rental housing and the relatively adequate supply of a couple of years worth of potential building lots at current rates of construction imply that house prices will remain reasonable.
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Even if we assume that amortizations take place over 25 years and that rents are permitted to rise at, say, twice the inflation rate, there is an embedded advantage to buying in preference to renting.
A house or condo should rise in price at least in line with inflation. Moreover, a house or condo that is a principal residence can be sold with no tax on its capital gain.
Interest rates have a good chance of going into a long slide. In the bond market, the yield curve - a line that connects bond returns for periods of a few months out to 30 years - is very flat. That flatness indicates an expectation among bond investors that further interest rate declines are to come. Bond investors have been buying long bonds to be in a position to reap this gain.
And the yield curve is a very accurate forecasting device for financial conditions in 9 to 15 months.
In the housing market, declining interest rates imply that it is going to be even cheaper to finance a house in the next year. The demand for both entry-level and move-up housing should increase, potentially driving up house and condo prices.
What landlords suffer, home buyers gain. If there's any place in Canada where it pays to buy a home, Winnipeg is it.
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