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Tuesday, September 14, 2010

Oh, Compared to what? ...Canadian home prices, health care costs too high: OECD

Dear Heather & Editors,


several cc's



re:Sept 13 - CP - Canadian home prices, health care costs too high: OECD



Irrespective of the majority content of the above-noted article, the remarks and headline regarding Real Estate Prices are my prime subject and my point is based around the old nugget "compared to what".



Heather Scoffield, of the Canadian Press, contributed a timely article on the OECD Sept 2010 "Economic Survey Canada" AND your editors kindly included a link to the full report.



The headline and the first 3 paragraphs have quotes, comments and quick-summaries on the Real Estate Prices & Household debt aspects of the report while a high percentage of the remaining 30 paragraphs deal with the unsustainability of ~8%/yr increases in Healthcare.



The OECD's mention of Heathcare taboos - cost-sharing, deductibles, lack of competition, exclusion of drugs & homecare, lack of private-sector participation of service-delivery - is well-covered but two (of three) of the reports recommendations "squeeze other public spending or to raise taxes or user charges -pg 9" didn't make the final edit.



THE REAL ESTATE PART

Begin excerpt.....



Canadian home prices, health care costs too high: OECD

OTTAWA-Canada should protect its economy by pushing down overheated housing prices and imposing user fees for health care, the OECD says in a report released Monday.

The influential Paris-based Organization for Economic Co-operation and Development says low interest rates have resulted in “the first recession in Canada’s history to show an expansion in real household debt.”

Now, the report says, “housing looks overpriced” in Canada and “more measures should be taken if needed to cool the market down.”

..... End excerpt.



Other writers and editors have also picked up on the spectacularly-ominous and provocatively-sensational "looks overpriced -pg 3" comment in the "Assessment and recommendations" section of the OECD report, but:



1) lift the phrase out of it's Household Debt category of analysis,



and



2) fail to include the whole sentence ("Indeed, housing looks over-priced on the basis of both price-to-rent and price-to-income.") thus seeming to miss the significance of the OECD's word-choice - "looks".



1) CONTEXT



The OECD mentions their concerns over fast-rising Household Debt (now at 90% of Canada's GDP -pg3) and informs that "Most of the increase in household credit has been in mortgage debt ...strong revival in housing activity after a brief dip ... Record-low mortgage rates are another factor behind the housing revival -pg3"



So it's not housing that's overpriced per se, it's debt that's too high, and most of the debt is in mortgages on homes in market that is "in revival" - is that a bad thing?



So what are you recommending by the sentence "In any case, household credit growth needs to slow down, which may well moderate private spending and residential investment". Is the suggestion to curtail indebtedness by intervening in the marketplace to slow the rate of growth in home prices to the rate of inflation?, less than that rate? 5-10% per year less than inflation?



And how many fewer sales would you OECD (and commentators) suggest? 5% less than the boom-iest-boom year? 5% less than the average of the past 10 yrs? 20% fewer? and for how long?



It's nice prudent talk by the OECD (for others to carry out), but won't people still be buying homes and even if they buy 10% fewer/yr at 10% less that the all-time record price, it still means mortgages (and therefore household debt) will be created given that most mortgages will be 50-90% of value.



AND .... what about the spin-off effects, builders, construction workers, lawyers, Realtors, furniture, appliances, fences, city planners, tax assessors etc etc ... are you recommending these folks take a few more weeks unpaid vacation every year ... or go on pogey like "economically-disadvantaged workers" do in other parts of Canada?



Unfortunately the report does not show a multi-yr comparative chart on the Household debt at 90% of GDP that is at the root of their concerns (was it ever this "bad" before? when?) and offers no comparisons on Household debt-to-GDP in other similar economies (how bad IS 90%?)



Question on GDP to debt.

Why compare anything to GDP? 20-30% of the economy is 3 levels of government workers salaries and probably another 5-10% is make-work and a probably further 5-10% is welfare, subsidies and handouts?



But the OECD report does include 3 graphics using completely different criteria showing: "A") that since 2000 Debt-to-disposable income (ie not GDP) has gone from ~110% to ~140%, "B") that Debt-to-assets has gone from ~16% to about 19.5% since 2000 and "C") that on Debt-to disposable income (footnote says including unincorporated businesses) we're smack on the "average" of a chart comparing us to 20 other OECD nations. - is this bad? good?, is average not good? is it good to be average?



Question based on "A":

If 25-50% of Canadians in a given city/town do NOT own a home AND rents are government-regulated,

and if 10-30% of Homeowners don't have a mortgage,

and if most of the ZERO-mortgage folks AND most of the "don't-own" folks are encouraged by our cradle-to-grave, albeit high-tax-on-income government system to maintain as low a stated income as possible

-Is a ratio based on disposable income, a good indicator?



Question based on "B":

If all the household debt of all the Canadian population equals only ~19.5% of the value of all the homes in Canada .... are we in bad shape?





2) COMPREHENSION of the significance of the OECD's word-choice of "looks".

If we believe the sentence "Indeed, housing looks-overpriced on the basis of both price-to-rent and price-to-income." was casually tossed in with no thought or deliberation (from a team of contributors from a variety of backgrounds), then it's not worth discussing.



If we believe it was purposely parsed, then the operative word becomes "looks".



Consider, if our country sustains and supports the under-pricing of rents and, as above, also encourages the minimization of declared disposable income, with umpteen supports, grants and stipends for the disadvantaged (thus creating a disadvantaged-on-paper sub-group).... is it no wonder that price-to-rent and price-to-income comparisons "look" skewed?



Statscan uses 20% blocks of the population (called Quintiles) to breakdown Income for Families and for Individuals ...in most years the lowest 2 or 3 Quintiles (40%-60% of population) could not buy anything in Toronto/Vancouver with their incomes, yet these major centres are where the "high" prices exist!



What types of rent of are we considering? a 2 bedroom apartment in a 40-60 yr old building without air-conditioning and a laundry on the main floor? a 480 SF junior-1 bedroom in the snazziest of new condo buildings? a 7 or 8 room detached home in prime school/transit/prestige neighbourhoods?



Are the comparisons based on the rent of each type of dwelling to it's corresponding market value? or a blend of all the rents against the market-area MLS average price? or is it the ratio of the average rent of a two bedroom apartment vs the average price in an average of all the Census metropolitan areas (CMA) and Census Agglomerations (Ca) as devised by Statscan?



I mean really ... Compared to what does housing "look" over-priced!





Truly,





rce

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