When I first moved to Calgary to work in the oil and gas industry in early 2006, it was right around the top of the property boom, and affordable housing was next to impossible to find. Not wanting to shell out half my salary for an apartment, and spending months to fill it up with furniture, I decided to go the room rental route.
Little did we know at the time, but towards the end of 2006, the market was slowly but surely moving from sellers’ to one that favoured buyers. Ones in the know, i.e. people with family members that dabbled in real estate, already sold in late 2005 or early 2006. But the media and the rest of us general public have always been slow to catch on. And you wouldn’t know, from the construction buzz around the city, to the countless “For Help” signs hanging haplessly outside shop windows, to stories of McDonald’s and Starbucks paying upward of $14 an hour plus benefits to attract and retain employees.
My second landlord, a sweet spinster in her 60s, believed in the power of real estate as much as she believed in the miracle that is modern medicine. She credited her various real estate investments for her comfortable lifestyle, despite not having worked out of her home for more than decade. Her piece of advice to any young-uns that cross her path, is the adage that we should all invest in real estate sooner rather than later. I can’t blame her or others her generation for their spectacular confidence in the strength of the housing market. Their experience of ever-rising property prices facilitated that expectation. It certainly looked good at the time, with housing prices that doubled within a few years. Houses that were hardly 1,000 square feet would go for 400,000 to 500,000 dollars in certain parts of the city. The gains were ludicrous. And the whole town was drunk on the sudden discovery that, thanks to oil sands in their back yards, a lot of them were paper millionaires!
In early 2007, cracks were already apparent. One of my bosses bought a yet-to-be-built house on a new lot on a fixed price, while trying to sell her existing dwelling. Within the span of a couple of months between when her house was valued, and when it went on the market, the price had already dropped by 10,000. That’s the problem with houses. You have to live in one. So unless one can capitalize on the gains immediately, and move elsewhere, one only ends up upgrading to an even more over-valued house. Luckily, the housing boom in Canada, even western Canada, still paled in comparison to what went on in California, the UK, and Spain. Even the sharpest decline was contained within teen digits. But for the people that bought into the perpetual rise of property value, is the current market decline a temporary setback, or something that will linger indefinitely?
1. Baby-boomers in the US and Europe more or less carried the property markets for the last few decades. Their continuous demand for housing, whether they be condos, starter-homes, or suburban mansions, drove the market. As this population ages and trade down, we might se an increase in demand of condos, retirement homes or assisted living complexes, but a drop in market demands for larger homes.
2. Those of us who belong to Gen X or Gen Ys are just not large enough of cohorts to fill the shoes. There’s the issue of massive student debts, due to the boom and the increasing necessity of acquiring a college education. Then there’s the shortage of Gen X to move into excess dwellings available on the market. According to Carney, “only 44 million people were born into Generation X. There are currently 19 million empty homes in the US. That means that if Gen X pairs up through marriages, cohabitation or roommating, they can live in the empty homes without ever buying a new one.”
3. There is compelling evidence that once a bubble bursts, it hardly ever reflates. The Tulip bubble never came back again, nor did the tech bubble. So unless the property market can demonstrates and rationalizes rising valuation, it will not climb back to the mid-2000 level. The public and the media will probably move on to some other new asset class.
4. Inflation or deflation, the property market doesn’t stand a chance. Should inflation take place from the massive printing job various governments around the world participate in, it can potentially eat up gains made in real estate. Should deflation becomes the reality, then according to Charles Hugh Smith, “debt grows ever more burdensome as money becomes more valuable and wages and income drop. As a result, assets dependent on debt ( that is, real estate) drop in value. In deflation, real estate become a “capital trap” which loses value as cash gains in value. As incomes plummet, so do rents, i.e. the income stream which real estate earns, further impairing its value.”
5. Low interest lending is gone. Interest rates will climb higher again, particularly in the US. The artificial low interest rates can only last as long as the rest of the world had the cash and desire to lend it. And the spectacular failure that came out of the Democrats’ goodwill to support low-income home ownership will have people questioning the wisdom of policies that justified low interest rates, perhaps even interest deductibility on mortgages that fanned speculation and unaffordable mortgages. As a side note, Canada does not allow interest deduction, yet home ownership is higher than in the US. Just saying.
picture source: semideus
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