An Economic Forecast

I know nothing of economics, and have never presumed to make any such forecasts before. But then again, why not? The experts are always wrong anyway.

Let's see how well I do...

The price of housing in Canada, and no doubt also in the US, must go down. If things cannot go on forever, they won’t. If housing costs so much that people cannot afford it, they stop buying houses, and the price must go down. Currently, the ratio of housing cost to average income is at a historic high.

A mere fall in housing prices response to higher interest rates is not going to change this by itself, because the mortgage costs remain the same, and so the housing is no more affordable. But pushing housing prices down will have a snowball effect.

That costs have gone so much higher in proportion to income suggests that there is a lot of speculation in the market. Why not mortgage to the max, if mortgages are cheap, while housing prices keep climbing? The instant it becomes clear that housing prices will not inevitably rise, and mortgages are not such a great deal, there should be an exodus of much speculative money from the market, forcing prices further down. And each drop has a snowballing effect on speculation.

A lesser and sadder factor is that some people will no longer be able to afford the houses they are in. The rise in mortgage rates is liable to hurt here. In Canada, even fixed rate mortgages last only five years. Some proportion will find they can no longer cover it. Granted that they still will need a place to live, and will still be in the market for some kind of housing, there will be a lot of distress sales, when people cannot afford to hold out for the best price. 

Canadian, and American, demographics is tilting older. That means proportionately fewer new buyers, and more retirees looking to downsize, or dying and leaving their houses empty and up for sale.

Perhaps we are not building enough new houses; CMHC says so. But this is an odd problem, and can only be due to government overregulation. Canada obviously has no shortage of land on which to build. It of all countries has no shortage of building materials. The actions of government are sadly unpredictable, but there is a 50/50 chance things will get better here instead of worse.

So I say home prices in Canada generally should go down for the next few years. And the fall should be rather dramatic.

In other economic news, Kevin O’Leary notes that the figures were are seeing are unprecedented: inflation coupled with recession, coupled with low unemployment figures. These are three things that are not supposed to happen together.

The obvious explanation is that we are in a highly artificial situation, caused by the pandemic and the lockdowns. There seems a good chance things will snap back once these distortions are removed.

Albeit governments, notably the Canadian government, actually seem to be doing their best to prevent a return to normal.

 

Solving Homelessness

 

This is exactly the point I was making in the recent Ontario provincial election.

My idea was to quickly convert the many declining or derelict motels.

Solving the Housing Crisis

 

Further remarks from the Beaches-East York All-Candidates Meeting on May 12

When I first came to Toronto in the early 80’s, there was a housing crisis.

Forty years later, there is a housing crisis. But far worse.

It is time to try more than band-aid solutions.

I am a fan of co-operative housing. I used to live in the Oak Street Co-op, and in a student co-op when I went to Queen’s. I helped organize an abortive East End co-op. But public housing and social housing have never been enough to produce affordable housing, and are never going to be enough. The poor cannot forever hope and wait.

Tinkering with mortgage rates and down payments and savings plans does not work. Making it easier to buy a home only drives up prices. 

Imposing rent controls does not work. It reduces supply.

The problem is on the supply side.

The real problem is the Sargasso Sea of red tape which prevents either private or public builders from efficiently putting up the units that people need, want, and can afford. Such urban planning brought us the sprawling soulless suburbs that kill community, eat up green space, and force everyone to drive a car. 

We live in Beaches-East York to escape this. The Beach is so nice because it grew organically before urban planning.

Some regulation is needed, but the tendency of bureaucracy unchecked is always to overregulate to the point of strangulation. The great political philosopher Ibn Khaldun, back in the 14th century, explained that this is how civilizations die: overregulation. We are seeing it acted out in our time. 

Civilizations die of strangulation, from the top down.

Municipalities are the creatures of the provinces; the province can cut away some of this red tape and speed construction. In future, for every new zoning regulation, it should be a requirement that at least two old ones be scrapped.

One business owner on Queen Street complained to us that he could not allow dogs on his outdoor patio. Health regulations. But in the Beach, everyone owns a dog. His customers wanted their dogs. Why not let the consumer decide? 

I love dogs; if you don’t, another establishment will surely cater to you.

Owners may fear that fewer restrictions on development might harm the value of their property. But if land is opened to the highest and best use, all real estate becomes more valuable.

I’d love to see Toronto full of distinctive walkable neighbourhoods like the Beach.

But there is also the immediate crisis of homelessness. 

I have another suggestion.

There are aging motels in smaller towns falling into disuse. Many are being torn down. The days of motels are ending, with less tourism by car, and more AirBnBs. They are available, if we move quickly, for immediate low-cost conversion as shelter for the homeless, especially the mentally ill.

Lego for Adults

 

At first glance, this looks really cool. A partial solution for the high cost of housing?

Life in the Bubble

The current housing market defies logic.

As I see it, the baby boomers should have been retiring for the past ten years, and downsizing. The generations that follow them are smaller. So the demand for housing should be easing.

The need to live in large cities, where the housing shortage is extreme, should also have been declining, with the increasing feasibility of telecommuting. And the attractions of convenience that might attract people to the cities have also been declining: with the Internet, you can get all the entertainment you want anywhere; with Amazon, you can purchase anything you want, and have it delivered anywhere. The cities should be emptying out.

The cost of housing is also rising much faster than incomes. This should be pushing people out of the market, at least for larger homes.

Given all these considerations, housing costs should be declining. Instead, they are skyrocketing.

It seems to me it has to mean we are in a speculative bubble. And it is, sooner or later, going to pop, with devastating results.

We even already saw it happen, in 2008.

People are buying property on speculation. When housing prices dip, as they will, a lot of folks are going to stop paying their mortgages, and a lot of money is going to disappear.

The current COVID-19 crisis has almost shut down China’s economy. It may get worse. That is sure to have consequences for the world economy. This might be the shock that starts the run on housing.