Editor's letter: Real estate mania

Don't fool yourself into believing that a house is an investment like a bond or annuity.

There’s always a fair bit of muddled thinking and downright silliness floating around any thriving market. But the current debate over the state of Canada’s real estate market offers an overabundance of both.

For months, pundits and self-described experts have debated whether soaring prices in cities like Toronto, Vancouver and Calgary indicate a bubble.

Finally, last week, Ottawa made its move to cool the house-hunting frenzy. The feds tightened the requirements on certain mortgages and slightly raised minimum standards for first-time buyers. The curious thing wasn’t the changes themselves, which will do little to alter the trajectory of house prices. What’s strange is that these changes were enacted at Bay Street’s request, even as the banks’ own analysts repeatedly insist there is nothing to worry about, and that rising home prices are a perfectly rational and sustainable response to low interest rates and a recovering economy. Finance Minister Jim Flaherty was similarly sanguine in December, saying he saw little evidence of a bubble in real estate.

Two months later, bankers and politicians would have us believe they routinely solve problems that don’t exist.

The banks could have imposed these conditions on their own if they wanted to. They are all free to set their own lending conditions. But taking a harder stand would run the risk of losing them clients. Better to have Ottawa play bad cop and save the banks from themselves.

Never mind that Canada’s mounting debt loads aren’t really being driven by first-time home buyers who can’t qualify for fixed-rate mortgages. Our burden is being driven, to a far larger degree, by surging credit card balances and home-equity lines of credit (rising at a 20% annual rate as recently as last summer). The banks don’t want Ottawa messing around with those highly profitable businesses, so the status quo holds.

All this gets at our deep confusion about house prices. We want them to rise, but we fear the rise at the same time. One writer for a certain national newspaper recently argued that the problem in real estate isn’t with ludicrous home prices, but with the level of debt being taken on – as though there is no connection between soaring prices and mounting mortgage balances and credit lines. That’s nonsense, of course, but people will make tortured arguments to support a bull market.

All of which brings us to this week’s cover story, ‘ Why buying a house is a bad investment,” by Joe Castaldo. Lots of people will no doubt be shocked (and probably offended) at the notion that homes are a bad investment, even at the best of times. But housing never used to be regarded as an “investment” at all. Previous generations bought houses when they wanted to settle down and raise a family, not as a way to get rich. Today, we’ve bought, en masse, into the idea that homes are an asset that can be relied upon to appreciate much faster than inflation. As a result, millions of Canadians are willing and eager to take on huge levels of debt for a home they hope to sell at a substantial profit a few years down the line. Others figure their home equity is just as good as a retirement fund.

In reality, a house is just a consumer good like any other – a pile of wood, metal and glass. The land itself has a value independent of what’s built on it, but that value can collapse and sometimes does. Just ask anybody who owns property in Detroit or suburban Las Vegas.

Still, there are plenty of good reasons to own a home. It keeps the rain off, and gives you a place to store your stuff. I own a home, and I don’t regret buying it. But don’t fool yourself into believing that a house is an investment like a bond or an annuity. Approach it the same way you do the purchase of a car, and you might just escape the consequences of all the muddled thinking that is swirling around us.