Saturday, January 1, 2011

Why I think buying a house is a bad idea

Many of my friends are getting married and buying houses. While I am extraordinarily happy they're moving forward with their lives, I cannot bring myself to view home ownership as a good idea, especially in Vancouver.

As you may or may not know, Vancouver housing prices has doubled over the past decade. This is substantial, and may not end anytime soon. I feel that this price increase is not sustainable, and I am going to lay out why.

The increase in prices in Vancouver is due to a lack of build-able space, thanks to geographically constraints in the shape of beautiful mountains and ridges and water. One other reason is the influx of wealthy immigrants. These immigrants are usually financially well off in their home countries and can afford to bid up the prices on properties in the Fraser Valley. This has the effect of buoying the housing market, making everyone feel richer and masking the underlying problem of a lack of real industry and job creation. A second reason is asian industrial economies appetite for resources. This also allows BC to live better than the underlying economic fundamentals will allow.

Here is where we run into a problem: China cannot grow at the current pace indefinitely. One reason is Peak Oil. There is just no way current growth rates are sustainable. Secondly, with the ongoing financial paralysis and the subsequent economic uncertainty means that companies are not paying people very much. This leads to consumers not able to buy more, which means exporting countries like China cannot grow their exports. Now China is countering this with rising investments. However, investing only make sense if you can make use of the investment. A lot of what I've seen suggests that China is already awash in overcapacity. At some point the factories builders will not able to find companies still wanting to build factories. Road and bridge builders will run out of projects that generates a positive return. You can not prosper by wasting money, and building things that are not going to be used feels like waste.

When the inevitable slowdown happens, the gravy train will stop and the money will stop flowing and the wealthy Chinese officials and businessmen will feel less wealthy and less willing to spend money on expensive Vancouver real estate. This will mean more selling than buying, which leads to prices coming down. My friends who all gone out to buy houses will find that their houses are worth less than what they paid for. Some of them will default, some of them will not. Unfortunately the CHMC has guaranteed the loans so I'll be stuck paying for their decisions through my taxes if they go bad. Heads they win, tails I lose.

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