Yukonomist: Buying a house in times of turbulence

Yukonomist Keith Halliday

Buying a house is the biggest single purchase most people will make. So it’s no surprise that the recent rise in interest rates has buyers nervous. The latest Yukon Statistics Bureau data on the Whitehorse housing market, from March of this year, suggests that prices actually fell recently. In the third quarter of 2021 the average house sold for $656,800. In the first quarter of this year the figure was three per cent lower at $637,300.

We have to take Whitehorse numbers with a grain of statistical salt due to the small number of transactions, but this phenomenon is mirrored in some of the big cities. For example, the latest data on house prices in Toronto, Ontario, show average house prices fell nine per cent between February and the end of May.

The big question is whether this is a blip or the start of a more serious correction in Whitehorse house prices. Much depends on whether the Bank of Canada successfully steers the economy to a so-called soft landing. Will the increases in interest rates steadily tame inflation and guide the economy back onto a more sustainable path? Or will the Bank raise interest rates so high that the economy tips into a major recession? This could see dropping house prices combined with households and big companies struggling to pay their debts.

While these scarier scenarios are certainly possible, the long-term outlook for Whitehorse house prices may be stronger than a lot of recent tavern chatter might suggest.

A wise investor once told me that if you are buying a good asset and plan to hold it for a long time, even a 10 per cent bounce in the price today doesn’t matter too much in the long run.

What did he mean by this? Suppose you bought a house in Year 1 for $400,000. In Year 10, suppose it is worth $800,000. That works out to a nice, steady appreciation of 7.2 per cent per year. It doesn’t really matter to you that it was worth $600,000 in year 4 and dipped to $550,000 in Year 5.

Even if there was a local housing mini-bubble in Year 1 and you ended up paying $440,000; an extra 10 per cent on top of the $400,000 in the original example. By the time you get to $800,000 in Year 10 you still have a good return. Instead of 7.2 per cent, your return is 6.2 per cent.

That’s a smaller return on your investment, but a relatively small difference in your life’s big picture. Especially if it was a house that suited your family’s lifestyle well.

There are a number of factors supporting long-term house prices in Whitehorse.

First, there is government spending. The transfer payment formula is expected to keep delivering more cash from Ottawa. The federal government’s fiscal position is strong despite all the pandemic spending. The Yukon government has recently been topping up federal money with borrowed money to juice spending even further. That may need to slow down but, even if that happens, the outlook for growing numbers of government jobs in Whitehorse over the next decade is quite strong.

Then there is the mining industry. Forecasters are looking at surging mineral demand caused by economic growth around the world as well as the transition to metal-hungry low-carbon technologies. The fortunes of a specific mining project may go up or down, but the outlook is promising for Yukon mining jobs overall.

Also, Canada is planning to accept 400,000 immigrants per year going forward. That’s more than one per cent of the national population. This means housing demand is likely to remain strong in the big cities, which will spill over into smaller centres like Whitehorse.

Finally there is Whitehorse’s new draft Official Community Plan (OCP). The recent news stories about the OCP had details that might make home buyers worry about a potential oversupply of housing in the future. Media stories included mentions of plans for 6,150 new housing units. The plan also foresees 11 story buildings in parts of downtown, which could mean a lot of condos and apartments.

However, it’s important to remember the OCP is essentially a land-use planning document. Those big numbers are spread over the next two decades to 2040. It is not a detailed action plan, agreed by the territorial, municipal and First Nations governments, to put a certain number of lots onto the market by annual deadlines.

It looks like there will be no fundamental change to the land development processes that got us into the housing shortage the city has been living through in recent years.

If the city was serious about addressing the housing crisis, it wouldn’t be shelving the development of all the lots available in Porter Creek D.

One city official was refreshingly frank: “For the Yukon government to advance any construction will take years and years of planning.”

This raises a possibility that will be as welcome to homeowners as it is unwelcome to people not with a foot on the property ladder: Whitehorse house prices may keep going up in the long run despite any wobbles this year.

We don’t know what is going to happen with house prices. As one economist joked, I can tell you the market is going to go up and then down, but not necessarily in that order.

But if you have the down payment, can afford the mortgage payments, and plan to buy a house and own it for a long time, it’s worth asking yourself whether these house price wobbles are the sign of a major upcoming economic event or just a short period where Whitehorse houses are “on sale.”

Keith Halliday is a Yukon economist, author of the Aurore of the Yukon youth adventure novels and co-host of the Klondike Gold Rush History podcast. He is a Ma Murray award-winner for best columnist.