Aug. 14, 2022

The idea that house prices can only increase has crashed

I have always been told that buying land and a home is a guaranteed investment that can only increase in value. For the most part, that has proven true. However, it is now apparent that there is an upper limit and that market-driven increases in value are unsustainable. Overpriced housing is due for a correction.

Bankers and economists studiously ignore that while housing values may drop significantly, mortgages are unaffected. While the value of a home may decrease by 25% the decrease is from the owner’s equity. In the early stages of purchase, while the owner’s equity is small, the mortgage can exceed the decreased value of the property.

People who have built equity over years planning on cashing in their equity for retirement income will find their equity sharply diminished. No one escapes unscathed.

Years of government meddling in our economy have come home to roost. Artificially low Bank of Canada prime rates of 0.25%, intended to stimulate the economy had unintended effects on soaring market-driven home prices.

Low prime rates combined with heavy borrowing artificially increased the money supply creating inflation. The government is hung by its bad policy decisions and can only combat inflation by increasing interest rates. The public is caught with a diminished spending power of after-tax income and potential losses of home equity.

Bad policy makes for bad governance that can only occur when governments are not held to account for bad decisions.