Saturday, April 10, 2010

A Personal Journey

As I read the blog comments here, on VCI and other sites, I have noticed one thing that strikes me again and again. It is something I can identify with personally. That is the heavy toll that the housing bubble has taken on the psyche of the inhabitants of our city (and Province).

We are not alone, of course, the same is true when I speak to British or American or Chinese friends. The frenzy in housing is causing some major dislocation of attitude.

Lets think about it- in society we have learnt that morally correct behaviour is generally the best route to take. Don't drink and drive, don't go deep into debt, don't use drugs, don't abuse anyone etc etc.
However when there is a bubble this gets turned on it's head. Let me explain:
Owning a home is a very good proposition for most people who intend to live in one place for a long period of time. They get to pay down the mortgage and build equity, they miss out on the costs of moving, they have more security of abode.


The purchase has to be within one's budget and sustainable through difficult times eg job-loss, interest rate rises, or lack of ESL students to supplement income.
Many people decided buying was not sustainable, and they would wait until they saved up more down-payment or there was a correction in the price. They waited and prices shot up.

Meanwhile, others were less cautious and dived in, regardless of price or concern for the future and they have been winners. So we are left with the cautious being left behind and those that just jumped in with both feet, without doing any simple math, building equity.
Of course the buyers feel superior and those that waited feel bitter and cheated.

The irony is that public policy has been skewed completely towards the irresponsible behaviour.

Gains on primary RE residence is not taxed. As we have mentioned to death the CHMC has been insuring mortgages for those with very little skin in the game, even for absentee landlords ( which seems to defy it's mandate of helping Canadians own homes) we have the lowest interest rates ever, we have home improvement and 'green' tax rebates and subsidies, we have property tax deferral, we have zero return on savings etc etc.

The same thinking was going on in the US when they had their bubble - there were winners and losers- those who jumped in regardless of risk and were making big gains and those who were more cautious and missed out. At the peak, buyers not only had to bid high, they even had to write sellers a letter stating why their offer should be chosen eg we will keep feeding the birds, my children will attend your old Alma Mater - it was a complete circus.

Now that seems like a world away. Their bubble has burst and it nearly brought the world of finance down with it. Of course when it hits the fan, the responsible will be asked to pay again, this time in taxes to bail out the irresponsible and their lenders.

Already in the US they have many programs aimed at helping owners avert foreclosure, all paid for by the tax-payer- and of course all the lenders on Wall Street were infused with money so they could pay they Billions in bonuses, as if they had just made the best investment decisions on earth- and not bankrupted it.

We will probably get the same once our bubble bursts. Is it a bubble? I think so. And not just in Vancouver. Look at the whole country. OK we may have throngs of Chinese investors and lack of land in Vancouver but what about other cities which have neither. Even they have moved to high multiples of income.

At this rate Canadians will be spending every cent of after-tax income on housing and Governments will spend every cent of tax on healthcare (Ontario is already at 46 cents of each dollar and we are not far behind)

Anyway back to my main theme. A bubble is very destructive on the mental health of a city. It diverts people from productive activities, why bother trying to invent something that will produce innovation and employment, when you can make so much from 'flipping'.

It makes everyone anxious. For potential buyers as they see the market slipping further away and have to decide whether to bite the bullet (more like a grenade ) and push the debt up.

Owners are anxious too. They worry about keeping their wind-fall of profits if they bought several years ago. Should they sell and cash in or hold on for more gains? Recent owners have even more anxiety. They have very little equity to fall back on and have bought at high prices with low rates. Any change in these parameters, or a loss of employment and they will be under water.

So far from pumping RE, our policy-makers should have tried their best to cap it.