A rude awakening

A few decades ago George Santayana, a philosopher, wrote, “Those who forget the past are doomed to repeat it.”

He stressed that scientific analysis should be the method of reasoning. Unfortunately, this admonition is ignored by participants in the housing sector.

The appearance of the sudden frenzy for real state once again signaled a new bubble in that sector. Regrettably, it is being asserted “that this time it is different.” The abundance of a new crop of wealthy individuals, often foreigners with ill-gotten gains, and an aging population looking for life retirement properties, will sustain house prices. Those observers should think again.

Stories of bidding wars for houses; investors rushing in to buy houses that they do not need but hope to rent; the fantastic, excessive building of disposable condominiums; and in many cases, paying more than the asking price all sound too familiar.

This phenomenon has spread so that the national real estate index is at its highest in 20 years. Even after adjusting for inflation, house prices in most of Canada are overvalued.

The currently absurdly-low interest rates have encouraged buyers to rush in, disregarding the inevitable rise in interest rates. Already mortgages rates are one full point above their low level a few months ago. Houses that seem affordable in the environment will soon no longer be so.

For high-end houses, prices are up nearly 20 per cent so far this year, pushed up by investors/speculators. Houses in many places such as Toronto appear to be not places for accommodating tenants, but rather a place for some to stash their cash.

Condominiums in Toronto are being purchased or leased before construction is completed. It has been reported that builders are in such a rush that they are using shoddy materials that, in 10 years, will collapse. By then, of course, the builders and construction companies will be nowhere to be seen.

Recently Yale economist and real state expert Robert Shiller stated in an interview that, “The people who want to buy real state say it has turned around. I’m a little on the pessimistic side. There’s too much history of long declines in asset prices after big financial catastrophes.”

There is no reason (he said) why house prices should take off. Shiller has charted U.S. houses prices from 1890 to 1990 and found out that when adjusted for inflation, house prices did not actually go up at all over the entire 100 years.

Shiller went on to say that in the long run housing remains “a lousy investment.”

Less than five years after the last housing bubble burst, a new one is underway. Real state buyers are in for a rude awakening.



Bruce Whitestone