(Second of three articles)
The cost of real estate, the housing marketÃ¢â‚¬â„¢s fortunes, mortgage rates and societyÃ¢â‚¬â„¢s home fetish would not matter, save for this: Eight-three cents of every dollar of wealth Canadian families hold now sits there. This has not happened before. ItÃ¢â‚¬â„¢s a giant national gamble.
The reasons for the real estate renaissance, especially since Nine Eleven, are many. Eschewing risk, investors took billions from unstable stock markets and plowed them into bricks and land. The interest rate collapse engineered by Alan Greenspan made investing in fixed-income stuff like bonds and GICs a mugÃ¢â‚¬â„¢s game, so billions more went into housing. And GreenspanÃ¢â‚¬â„¢s easy-money revolution made borrowing so cheap it spawned two nations of debt junkies.
Cheap money meant real estate prices could rise quickly and persistently because affordability was not really impacted. So they did. Prices went nuts. A mid-Toronto clunker worth $500K in 1995 was worth $1 million in 2005. The average price of a Vancouver single-family home touched $741,000 last month. An MP colleague of mine from Calgary remortgaged his investment properties recently and the bank told him theyÃ¢â‚¬â„¢d doubled in value in a year. He was astonished, thrilled.
So, letÃ¢â‚¬â„¢s bury the myth right now that government has not had a hand in creating the greatest investment crap game in history. Central bankers like Greenspan and the Bank of CanadaÃ¢â‚¬â„¢s David Dodge have been instrumental in inflating asset values by deflating the cost of money.
Government has also played a role in lowering the bar for homeownership. The 5% down mortgage was originally intended to help a few thousand struggling young families a year. Today it is used by millions to buy homes they should not be able to afford. The use of extreme leverage in real estate has now become mainstream, for better or for worse.
The feds have also allowed 40-year mortgage amortizations, which lower monthly payments, increase interest charges, and make debt more unrepayable in a reasonable period of time. When it takes four decades to retire a home loan, one can easily ask if this is not a form of life indenture. And then, of course, thereÃ¢â‚¬â„¢s the advent of the no-money-down mortgage, recently championed by Scotiabank, taking up the lead of smaller, more aggressive lenders.
Government has also smiled on home ownership by refusing to tax the profits it generates. Capital gains realized on the sale of a principle residence are tax-free, unlike the proceeds from every other form of investment. This has also served to divert billions of consumer dollars away from financial assets, including RRSPs, RESP and non-registered retirement and investment funds, and into housing.
In fact, government has played a huge role in getting us to where we are today: the national savings rate is zero, in part because mortgage debt has reached the highest level in Canadian history. Retirement savings assets have stagnated to the point where the traditional mid-winter Ã¢â‚¬Å“RRSP seasonÃ¢â‚¬Â has all but disappeared. Assets under management at major mutual funds companies, such as AIC, has been halved. And, as mentioned, eighty per cent of all family wealth is now in one asset alone Ã¢â‚¬â€œ the family home.
This is obviously not a problem if real estate values continue to go up forever, or at least the next 20 years so house-rich Boomers will not suffer. But so far in the history of mankind, no asset has performed that way. Even tulip bulbs.
This means, to me at least, that a responsible government does not wait for things to hit the fan. It also means, to me at least, that grumpy, money-losing, stressed-out, panicked and over-mortgaged homeowners are not the best kind of voters to have.
This is why I would argue for s strategy to deal with todayÃ¢â‚¬â„¢s unique, and uniquely dangerous, real estate mania. And soon, actually.