1. First time home buyers get more indebted.
The costlier the
home, the bigger their mortgage is going to be. First time buyers are usually
younger generation which are already debt burdened with student loans, so
higher real estate prices aren’t what they need.
2. Closing costs become exponentially bigger.
You pay more to
your real estate agents. Real estate agents usually charge about 5% commission. In 2002
you would of pay $15,000 in commission for average Toronto house, while in 2012
you would have to pay $27,000.
3. Existing home owners go further into debt.
Home owners start behaving irrationally through wealth
effect (rising equity in their home) by engaging in extra consumer spending via
the practice of mortgage equity withdrawal. While it is true some say this is
positive for economy, which it sort of is in the short term, this is a not sustainable
growth path as you can’t base countries economy on inflated house prices.
4. Over building occurs.
Rising housing prices is mainly a
function of two things. First is supply and demand. Second is the expectation
of future price gains. When the population starts believing in ever rising real
estate prices, it becomes a self-fulfilling prophecy. Investors start jumping
in to the market, in hopes of making a fortune. The fake demand leads to more units being build. This over
building leads to boom and bust cycles in construction industry and is a big
mis-allocation of capital. On a macro level flipping houses is not a way to
prosperity.
5. Vulnerability to interest rates.
Rising house prices leave many vulnerable to interest rate
hikes. The Bank of Canada estimates that about 10% of Canadian homeowners would not
be able to afford higher interest rates.
6. Wealth inequality.
The rich get richer, while the poor get poorer. Rising home prices
are good for you if you own a place, but no so good when you rent. For a decade
rising housing prices in Canada have outpaced incomes which means that with
every passing year renters have to put higher percentage of their income for
the down payment as home prices become exponentially more expensive. Even with
low interest rates many are still priced out of the market and continue to
transfer their money to the top of the pyramid by renting.
7. Geographical immobility.
High real estate prices are a
barrier for people moving from one part of the country to another, especially
when you are moving to a more expensive city or town.
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