Housing often comes down to renting vs. buying. While there are distinct advantages to renting (predictable cost, convenience, location) and buying (freedom, pride of ownership) the most common consideration is financial.
real estate agents and financiers are very quick to refer to home ownership as one of the most stable and significant "investments" of people’s lives. Undoubtedly in Canada this has been largely true, with home values steadily appreciating for decades without any significant market crashes. But like all investment markets, there are natural ups and downs, and nobody wants to get caught buying at the peak. If you’re presently looking for a house in Halifax, take a second to let that sink in.
The Halifax real estate market is red hot right now. And likely, overheating. While much of the country is experiencing softening or declining real estate prices, Halifax is bucking the trend and recording record increases in home prices and turnover time. And while many analysts and officials are warning of decreasing home prices in the coming years across the country (using terms such as "crash", "bubble", and "correction") the Halifax real estate industry continues to beat their own drum and predict strong demand and rapidly building home prices. Why is that?
Almost every article about Halifax real estate published within the last 6 months has mentioned the Irving shipbuilding contract in the same breath. In October Halifax was awarded a $25 billion 30 year contract to build the Navy’s next combat vessels. The idea is that this will inject billions into the Halifax economy over a stable period of time, employing thousands and giving the economy a large dose of adrenaline. Seemingly by all accounts, the good days are here!
The shipbuilding contract was an exciting announcement that carried significant regional pride. "Ships Start Here" banners were everywhere, media reported on it for several weeks straight, and people from all walks of life and industries were interviewed about how such a contract would change their lives. Indeed it felt like winning the contract would be akin to the region winning the lottery. So when Nova Scotia was awarded the contract, euphoria ensued. With the help of government officials and media outlets, regional confidence exploded to an all-time high.
The biggest expectation of winning the contract is the economic boost. News stories immediately focused on what that would mean for existing housing prices. Realtors predicted a flood of Irving employees taking over the North End and peninsula of Halifax.
People who were thinking about selling their houses suddenly decided to sit on them for a few years to let the Irving economic magic really kick in - reducing supply. People who were already looking for a house were told to act quickly, before the Irving stampede snapped them all up - increasing demand.
The reality is a classic economics case: Supply is lowered, and demand is increased. The result? Significantly increasing housing prices. Reports of the increasing prices adds more pressure on buyers to snatch something quickly while they can, even if it means paying above the asking price, and using record low interest rates to borrow near-record amounts. These increasing prices add more confidence to sellers to hang onto their homes or sell them at an even higher markup.
This self-fulfilling prophecy is based purely on speculation, and not on any sort of present economic reality.
Indeed the Irving shipyard has not done any significant hiring since the announcement in October, and no new money is flowing into the region as a result.
Significant hiring is not set to start at the Irving shipyard until 2013, and will take nearly a decade to actually ramp up to full production.
Even at full production, the Irving contract will only equate to a 1-2% boost to Nova Scotia’s GDP. Great news for sure, but certainly not a windfall. After all, much of the $25 billion will be spent on steel, computers, weapons systems, and other expenses that will have no impact on the province. Housing prices in Halifax have already increased over 3% this year alone. The math simply does not add up.
The economic realities that the province faces are largely the same as this time last year. Nova Scotia has some of the highest taxes in the country, the third oldest population, diminishing tourism, and largely dried-up energy royalties. The ship building contract is good news for the province and Halifax, but we need a lot more than that before such dramatically increased housing prices can possibly be justified. Otherwise the city is setting itself up for an uncomfortable correction in the future when the economic realities start to outweigh the psychology and feel-good buzz of the contract.
The Rental Market
While all of this has been going on, the Halifax apartment rental industry continues to remain unchanged, albeit adding capacity. Halifax has been experiencing a significant boom in apartment construction, with over 2,000 new units being added. This should keep prices in check, even as demand increases.
While you won’t build equity directly by renting, you also won’t need to worry about sudden property tax increases or buying a house at the peak of a bubble (or ongoing housing costs & surprises). You can instead take advantage of the consistent rent prices to budget a savings strategy that allows you to build up your own cash & investments. Sometimes the best purchase is the one you didn’t make.
Where To Go From Here
Whenever evaluating your housing options, it’s important to do so logically and without emotion. There is no perfect answer for everyone.
If you’re someone who needs your own place, then buying is still going to be your only option. If you’re planning on keeping your house for many years, then a possible 10 or 15% correction is not likely to have a significant long-term impact on you. Just make sure you can afford your mortgage payments, even if they go up to 7% interest in a few years.
If you’re casually considering getting a house, the answer is foggier. While the opinion of this article is that the current Halifax housing boom will run out of steam, the reality is that nobody can tell the future. If you don’t need a house, it’s likely smarter to continue renting and let the dust settle. If you expect to sell in the near future, or if mortgage/insurance/tax payments are above 30% of your after-tax income, stick with renting.
And if you’re a happy renter without any need for owning, sit back and grab a bowl of popcorn.