We hear the term ‘housing bubble’ tossed around from time to time and for the most part, we ignore it. I’ve been noodling about it this past week and will give you my thoughts here but I welcome your thoughts on it too.
Housing prices have trended steadily upwards over my lifetime. They have been looked at as a traditionally safe investment. That increase has been a reliable generator of wealth in society. My father bought a new but modest house at Dufferin and the 401in 1950 for about $10,000. There was, I think, a 25 year mortgage and there was a celebration when the mortgage was burned in about 1975. Dad sold the house in the early 1980’s for $268,000 and he was stunned at that figure. Similar houses today, 30 years later are on the market and selling quickly for close to a million dollars. Just think how $10,000 turns into a million in 60 years. When Dad died in 1989 the wealth created by that house was passed on to my sister and me as is a common story, I’m sure.
This bubble has been forecast to burst at any time, and it well may, but the governments have a stake in it continuing. The governments at all levels caught on to this trend and realized it was a cash cow of somewhat hidden revenue. They instituted land transfer taxes and later taxed building supplies and real estate fees. The hot housing market generated much hidden income for the governments. They have an interest in keeping this ‘bubble’ growing so they can milk an ever bigger cow. However, the situation is getting truly unsound. Many people are priced out of the market and will have to make do with whatever their current situation is. They will not be able to move up or will have to sell and rent.
A housing crash like the one that occurred in the United States in the late 2000s would wipe out much of the wealth that ‘middle class’ people are counting on to be passed on at death. Many of the older generation are careful with their money in order to have something to pass on and wiping this wealth bubble out would harm old and young alike.
There is talk of bringing in a speculators tax in Ontario since many of the new condos constructed are bought and go unoccupied as buyers simply watch the values swiftly rise with no wear and tear from tenants. This means there are fewer units on the market for legitimate buyers and this causes a housing shortage. This forces residential homes out of the land poor city and makes the prices and taxes increase in outlying commuter towns.
As of last weekend I was sure the governments would not allow the bubble to burst for reasons mentioned above, but my buddy, who has the world record for buying and selling at the most awful times has just bought a new property and I fear that may be the nail in the coffin, or the pin in the balloon, of the housing bubble. Perhaps now is the time to cash in, pitch a tent somewhere and hide your cash in a mattress.
Yours in the Zone
© 2017 David Jones