Mises Wire

Home | Wire | The Housing Boom Returns

The Housing Boom Returns

  • Constructing the skyscrapers
0 Views

Tags U.S. EconomyCapital and Interest Theory

10/31/2014

For the last decade (or more), Canadians have been ebullient about their home-grown housing boom. Home prices in Toronto have grown by leaps and bounds over the past decade. New homeowners have rushed in to take advantage of what seems like a surefire path to riches.

Unfortunately while your home might be an asset if you own it outright, for the vast majority increasing housing prices have meant higher mortgage or rent payments. Associated home-ownership fees have also risen steeply. Property taxes are a percentage of assessed value, so they have also risen over the boom. Utility expenses have gone up, as have general maintenance costs. In short, it’s not cheap owning a home.

Apparently Canadians now spend more income on housing then almost anywhere else on the planet. The average Canadian can expect to roughly 43 cents of every dollar earned to housing expenses (rent, utilities, etc.). Americans aren’t far behind at 42 cents, and us North Americans are only “beaten” out by the Swedes and the Dutch (45 and 51 cents of each krona and euro).

For Canadians, according to a BlackRock survey, this leaves just 13% of their income available to be saved, and 10% to be invested. These are the lowest rates in the world.

Many think that this savings rate is low because, 1) housing is a form of savings, and as long as that market remains robust their will be no problem, or 2) high housing prices have squeezed the amount of savings available (i.e., savings is a residual or sorts).

The problem with these interpretations is that it treats the expenditure categories as separate of one another. Actually savings are low and housing prices high for the same reason – they are both interest-rate sensitive and an extended period of record low interest rates at the hands of the Bank of Canada has caused both results. Since most houses are bought on credit and over an extended period of time, low interest rates have fostered the housing boom. And since interest is a component of what you earn on savings, lower interest rates discourage savings (and encourage spending, which also contributes to the housing boom).

Canada’s housing boom isn’t a positive development, and Canadians are now getting a glimpse of why not. Like any inflationary process, the immediate effects seem positive as people feel wealthier given their early purchase of an asset that later goes up in value. As all prices start to rise the effect is reversed, and inflation slowly (or quickly in some cases) impoverishes the country. Add to these rising prices the fact that we’ll have lower growth rates due to an extended period without savings and you can probably foresee that this isn’t just a problem in the present but one that will persist for some time.

(Cross posted at Mises Canada.)

David Howden is Chair of the Department of Business and Economics and professor of economics at St. Louis University's Madrid Campus, and Academic Vice President of the Ludwig von Mises Institute of Canada.

Add Comment

Shield icon wire