The puzzle of home affordability


    Photo by Tierra Mallorca on Unsplash

    The world may be distracted by all sorts of geopolitical gimmicks right now (Afghanistan, the COVID resurgence, etc.), but here in Canada you might be surprised to learn that we’re going through something pretty interesting right now: a federal election.

    While the last American election in 2020 mainly focused on the government’s pandemic response, the Canadian one focuses on something entirely different: the housing market.

    This is not an exclusively Canadian problem, but up here in the frozen north the government responded to the free-falling economy during the pandemic, as many governments did: by lowering interest rates and printing money. This has had the effect of pumping momentum into a free falling economy and propping up the stock market, which is great. But it also lowered mortgage rates to rock bottom, which resulted in gasoline being poured on an already dangerously overheated real estate market.

    House prices have been rising across the country, and while this has been a godsend for people who already own a home, it has also had the effect of driving house prices to levels so prohibitive that they can no longer be afforded.

    In this environment, home affordability becomes the most important deciding factor in our choice, which in a few weeks’ time will be anyone else on the 20th.

    Again, this is a problem that is not unique to Canada. Home prices have soared everywhere due to stimulus measures by world governments, and these governments will have to (or at least try to) solve the problem one way or another.

    So I thought it would be interesting to see what our politicians are proposing to address the looming housing crisis, why I think it won’t work, and how I want to position myself to benefit from it.

    Sounds good? Let’s go!

    Can Governments Set High Home Prices?

    Well, I’m not pretending to be an expert on economic theory, but I know a thing or two about money, and whether it’s houses, apples, or laptops, the price of something is determined by two opposing forces: supply and demand. If a lot of people want something and there isn’t a lot to buy (like iPhones, for example), the price will be high. Conversely, if very few people want something and there are far too many of them (such as Atari 2600 ET The Extra Terrestrial cartridges) then the price will be at or near zero.

    So, to lower the price of something, you generally do one of two things: increase supply or decrease demand. If we were talking about apples (the fruit, not the company), and for whatever reason, each apple was way too expensive, you could either increase supply by, for example, encouraging more farmers to grow apple orchards, or by increasing demand for example For example, start an ad campaign that talks about how great oranges are and that oranges are the new apples.

    If you were really aggressive you could do both. This would result in fewer people buying apples and more apples in the supermarket. At the end of the day, these two forces would result in lower prices. Problem solved.

    However, living is a completely different animal than apples. For one thing, people generally don’t invest all of their savings in apples. That makes things a little more complicated to say the least.

    Imagine for a moment that for some reason you and most of your family and friends are investing all of your savings in apples. And then a politician comes along and promises to cut the price of apples by 50%. The younger generation who own zero apples might welcome such a move, but to you and the army of other apple owners it would look like a crooked government thug breaking down your door and stealing your retirement savings. They would protest. You would sue. And you definitely would not to vote for such a government.

    This is the puzzle the government finds itself in. Housing is becoming undeniably unaffordable. Yet too many people have already invested most of their savings in that one asset. Any attempt to actually lower the price of this asset would be political suicide.

    So what should a politician do? You can’t really set house prices.

    So what can governments do?

    If there is nothing we can do about home prices (or rather we don’t want to), the next thing to do is to make home affordable. Now wait, you might be thinking. How is that different? If something is cheaper, it is automatically cheaper, right?

    Absolutely. But remember, unlike apples, houses aren’t actually bought with money. Instead, they are bought with debt.

    So the rationale is, instead of lowering home prices and pissing off all these boomers, why don’t we make it easy to acquire debt easier? Existing home prices don’t collapse and new buyers can afford more of their existing salary.

    Everyone wins, right?

    …to the right?

    Why this approach is a bad idea

    You can probably already guess my main problem with this approach.

    When people can’t afford something, the answer is to make it cheaper, more plentiful, and not give them more opportunities to burden themselves with debt.

    In general, governments don’t set interest rates, central banks do. But aside from interest rates, there are a few ways the government can play around with affordability rules. For example, you can reduce the down payment required. You can also extend the payback period. which determines how long it takes to pay off the loan.

    Here is the problem. Neither of these approaches actually makes houses cheaper. If anything, they will make houses more expensive as more and more people fall for the siren song “buy now or never buy”. But what about the people who, under the old rules, couldn’t afford to buy? Doesn’t it help you?

    Yes, it does. It helps them get into more debt.

    Think about it. They haven’t raised anyone’s wages, so they have the same amount of money as before. But now, according to these new rules, they can suddenly afford a home of their own. Without changes on the supply side, this will only increase the price of home ownership. So people who are earning exactly the same amount as before can suddenly buy houses that are going up in price. How do you do that? More debt.

    The financial world likes to divide debt into two camps: Good Debt and Bad Debt. Good debt is generally understood to mean mortgages and student loans. Bad debts are credit cards and gambling debts. Here’s the dirty little secret.

    ALL debts are bad debts.

    Any debt, be it a credit card, line of credit, or mortgage, always boils down to turning an item that costs X into an item that costs X + interest.

    If you don’t have the money to buy something, the solution is not to buy it. And when someone says you can still buy it after signing an intricate pile of legal papers, someone is trying to get you to pay way more than the sticker price for the same item. And that’s not paranoia or conspiracy theory, that’s how the entire financial industry works.

    If governments want to make houses cheaper, then make houses cheaper by building more houses. Making houses more affordable means nothing more than putting people into debt.

    Own the banks, not the houses

    So what if governments around the world are doing the same thing, making homes more affordable without actually making them cheaper?

    Well if you really really are Yes, really want to buy a house, then it probably doesn’t matter what I say. You are going to buy a house.

    But you will pay. Maybe not today, maybe not tomorrow, but for the rest of your life you will pay a lot more than the house is actually worth.

    And my plan is to get that money.

    If you follow our investment workshop, you are already doing so because the big financial companies are already part of the index.

    If you’re retired and implementing our Yield Shield, do it even more as preferred stocks are heavily bank-oriented (currently 5% dividends are paid despite mortgage rates below 2%), as are dividend stock indices like CPD or ZPR (which we own) .

    No matter who wins our election, no matter what housing policy is implemented, houses will not get cheaper. That means that mortgage debt will go up. That means banks will make more money, which means our dividends will rise too.

    Every time people pay their mortgage, a fraction of it comes to us.

    That’s the beauty of being in debt instead of in debt. Which side would you rather be on?

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