The first thing we found was that smaller & cheaper houses increased in value faster than bigger more expensive houses.

With respect to growth in value, in general, after adjusting for transaction fees, net average returns were still 30% per year. But how much of this was caused by “value added” activity? Well, it turned out there was way more than we expected. Over 50% of the properties we analyzed had been significantly renovated or completely rebuilt.

But what about houses that had not been renovated (“apples to apples” houses, whose value grew without significant renovations)? These houses showed average net returns of only 9.5% per year (compared to 30% per year for the entire group!).

This implied to us that many people were not buying the same house that was bought by the current owners. They were buying a house that had hundreds of thousands (and in some cases, millions) of dollars invested in it.

This has been an eye-opening exercise for us and our analysis has resulted in the following three conclusions:

1. Prices have been materially impacted by lower interest rates. What can we do about this? Not much, it turns out (at least not right away) – interest rates are a tricky beast because they impact all aspects of our economy, and the federal government is very hesitant to increase them.

2. The impact of “value-added” activity, which been left out of any mainstream media analysis, is significant. While this isn’t causing a bubble per say, it’s still contributing to price increases and general unaffordability. What can we do about this? Well, I suppose the city could implement a moratorium on major residential renovations (or maybe a higher tax on “flipped” house sales). This would increase the supply of smaller, older (cheaper) houses.

3. Foreign buyers and speculators are not major factors in these recent price hikes. Unfortunately, these are the issues our government has decided to focus on (perhaps because they are easier to deal with), while ignoring the real problems.

Unfortunately, these are the issues our government has decided to focus on (perhaps because they are easier to deal with), while ignoring the real issues. In the long-term, I believe housing prices will be tempered by other more general technological and societal advances.

For example, working remotely continues to grow in popularity with forward-thinking companies. Advances in transportation technology will reduce traffic and increase efficiency (think inter-connected driver-less ubers all moving in perfect sync). Eventually, many of the jobs that require a physical presence will not. Furthermore, developments in energy technology will allow people to live efficiently and comfortably “off the grid”.

Canada has plenty of space and over time society’s focus will shift from where we live to how we live.