Tuesday, December 16, 2008

What's A House Really Worth?

Most real estate markets have some sort of cycle. In Alberta, house prices seem to be tied to world oil prices. Places like Vancouver used to have a seven-year cycle that was pretty reliable. Prices would bottom out and languish in the cellar for a year or more and then they would start to go up, slowly at first but then increasing steadily until the market got so overheated that the bubble burst and, in about a year or so, they'd get to the bottom again. The world being what it is, the bottom of one cycle would usually be a good bit higher than the bottom of the previous cycle. Life goes on.

I had many occassions to dwell on the true value of a home, meaning the usual mix of blue and white collar housing, entry level product in particular.

For many young Canadians, far too many, that first house is a make it or break it venture. If they catch the market at the right point and their jobs remain secure and their health remains good and neither of them gets sent to prison and any of a thousand other perils are avoided or fended off, they might just get "established" and on the road to a conventionally secure future.

But the first time homebuying market is fraught with perils such as unstable housing prices, interest rate fluctuations, speculators gaming the market, physical or emotional disability - any of which can transform that dream, starter home into a running nightmare that can readily strip away a decade's worth of opportunity and promise.

I know from seeing it too many times over and over and over again that the economic shitstorm that's coming our way will destroy too many otherwise good marriages. It will take down too many otherwise good, decent, hardworking and contributing members of society. Most of them will eventually bounce back, most but not all. Some simply fall between the cracks and, as often as not, they're the type of people who could never imagine that happening to them, at least not before it happens.

I'm no social scientist, just a layman with a bagful of experiences of other peoples' misfortunes. Those experiences have shattered a lot of popular misconceptions I once embraced and they've honed a rough understanding of what happens to good people and what we need to do to at least try to keep them from falling through the cracks.

What I have seen convinces me that we, as a society, as a people, need to dampen vagary and speculation in the housing market to the greatest extent possible. I read many years ago that some Scandinavian countries had decided that the key to providing citizens with decent, affordable and dependable housing required measures that deterred those who would treat the housing stock as a speculative commodity.

The basic idea is that housing stock is for people who need to purchase housing. That means applying tax disincentives that drive speculators, "flippers" out of the market entirely. Tax away speculative profit in the resale market (you can't drive builders and developers out of the market, that's self-defeating). Housing stocks, restricted to those buyers who actually want to live in those houses, will find a stable, moderate and true market value. Because housing becomes traded predominantly on the strength of its accommodation value, it becomes tied to a much more stable yardstick that is, in turn, tied to actual wages and affordability.

I realize this sounds socialist as hell and it probably is. I'm also sure that, to those who haven't experienced the real fallout of rapidly fluctuating, speculative housing booms and busts, this might sound abhorrent and inexplicable. It's only when you've seen the full measure of the social damage the existing system inflicts that market moderation even begins to make sense and then it becomes compelling.

I have no self-interest in this debate, no axe to grind. I am, thankfully, well past that. Yet I believe that we have so much to gain from removing housing from the gamut of speculative commodities and so very little to lose in consequence.

I'm reminded of the argument of an Ontario cabinet minister (premier possibly) on the banning of pitbulls. He pointed out the thousands of breeds of dogs available to fanciers and that the ban applied to just one of them. It made the objections sound pretty insignificant from that perspective.

Does anyone believe that, if we drove speculation out of the housing market, we'd suddenly find ourselves short of commodities available for speculation? That's utter nonsense.

Another blogger noted today that Stephen Harper has gone from acknowledging a "technical recession" to accepting the possibility of a full-blown depression in just a few weeks. In capitals throughout the Western world, leaders are suddenly talking seriously about "New Deal" style capital spending programmes. You don't go through these things without a sharp rethinking of society and social values. What better opportunity to begin putting our minds to this whole business of affordable, stable housing?

10 comments:

Anonymous said...

Would making housing a families right make a difference? A. Morris

The Mound of Sound said...

A.M., your question gets into a debate that's far beyond me. That question goes to issues such as state subsidies and so on that are astonishingly complex.

The Scandinavian approach that I've never been able to fault comes at the problem a bit differently. It does hold that housing is an essential necessity (and contributes to the health and prosperity of the community, etc.)but the main premise is that the state serves that objective, not through subsidies, but by using its powers to stabilize the market by preventing housing from being manipulated as a speculative commodity.

The idea is one family/one house. By viewing housing as a necessity, rather than a commodity, and making it unsuitable for speculation, you stabilize values far from the normal peaks and yet well distant from the normal troughs either. That means home buyers can better grasp the true value of their home and be confident that they'll have the protection of stability. It doesn't make home buying somehow risk free but it can significantly diminish the negative impacts of a speculative commodity market.

Does that make any sense?

sassy said...

Makes sense to me

The Mound of Sound said...

Thanks for the link. I read it through and it strikes me as defining a governmental obligation of the type more normally honoured in the breach than in compliance. There's actually quite a bit of wiggle room built into its provisions, enough to let any country off the hook that wanted off. I think it'll always be domestic politics that drives any government on this issue.

sassy said...

MoS - I agree that there is a lot of wiggle room.

I point I was trying to make is that decent housing should be a right. If I understood your post correctly, I believe that you agree(?)

The Mound of Sound said...

I'd like to accept that Sassy but I have some unresolved doubts. What do we mean by "decent housing",is this something our governments ought to fund, how and to what extent?

I'm mindful of the "council flats" in London in the late 60's and the raft of social problems that flowed from them and the issues the Americans experience from their "projects."

It's all too easy for the well-intentioned to wave a wand over poverty and homelessness and unknowingly hatch answers that may cause as much damage as good.

I'm really torn on this issue and the more I dwell on it the more apparent it becomes that it's a problem for experts - as socially complex and problematical as building a mega-bridge is to engineering.

sassy said...

Complex indeed but part of your post could possibily solve at least part of the problem.

Housing stocks, restricted to those buyers who actually want to live in those houses, will find a stable, moderate and true market value. Because housing becomes traded predominantly on the strength of its accommodation value, it becomes tied to a much more stable yardstick that is, in turn, tied to actual wages and affordability.

Council flats and projects don't seem to work on a long term basis. Perhaps encouraging people to invest (could even be in-kind contributions) would help. Oh dear, the more I think about it the more my head gets all busy - I'd better go build a bridge.:)

The Mound of Sound said...

You've identified the fundamental point I was trying to make. It follows logically from a social decision to remove housing from the gamut of speculative commodities by recognizing it as a necessity to better not just individuals but families and their communities. In that context prices would indeed become "stable and moderate" well back from the peaks of our normal housing bubbles but a good distance from the troughs also. It won't stop the inevitable overreaching, the irresponsible buyer who demands too much, too soon but that's a minor concern compared to offering the diligent, responsible majority the opportunity to make the biggest investment of their lives in a stable, secure and rational market.

Housing IS different. It's where we raise our families, where we grow old. It fulfills so many fundamental purposes in our lives that surely we can exempt it from the infinite ranks of all the other products we turn into speculative commodities. At least that's what I believe.

sassy said...

Housing IS different. It's where we raise our families, where we grow old. It fulfills so many fundamental purposes in our lives that surely we can exempt it from the infinite ranks of all the other products we turn into speculative commodities. At least that's what I believe.

and I agree.

Oemissions said...

Renting is next door to homelessness.
As renters, we pay somebody to look after their place while they tell us what we can and cannot do and when we have to get out.
No more speculation.
People used to put out 15 to 30% of income for housing. Now we put out about 70 percent.