August 24, 2010
The recent housing crash in the US has begged a lot of questions. Throughout the past half decade, purchasers and homeowners have assumed that the value of their home only has one way to go– up!
But, this may be a thing of the past. Is this an attribute of the housing market itself or just the result of underlying economic conditions? Time for a little history lesson!
Pre-WWII, housing was likened more to a car than an investment; a house was a consumer durable that would be used up by the inhabitant. After WWII, with the return of soldiers from overseas, the US experienced an expansive construction period. With the sudden influx of purchasers, home values increased. Proceeding to the 1970s, a period of high inflation ensued which increased the value of hard assets (as opposed to financial securities like bonds and stocks). During the late 1980s, mortgage rates began to decline which increased housing affordability. This further increased demand.
So, in the broad scheme I’m describing, that generally brings us up to the current day. But there aren’t any real large pushes to continue to upward trend. Mortgage rates have essentially hit all-time low with the Federal Reserve lowering their target rate to essentially zero. However, purchasing a home is now expected to give back more than just the value of your monthly mortgage payments plus inflation– it’s supposed to provide a return on your investment as well.
While this dream may be largely over, there are still some insisting that housing is a different kind of investment.
According to Bob Walters, chief economist of the online mortgage firm Quicken, in the New York Times:
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
So how does this relate to Canada? The Canadian market has experienced many of same economic shocks as the US market (i.e. inflationary pressure in the 1970s and increasingly low mortgage rates since the 1980s). Not to say that Canada and the US markets are completely in tandem, but they are certainly affected by similar macroeconomic issues.
So who knows! It could be that it’s just a decline based on over-speculation, or it could be that the housing market has had some economic aberrations over the past half-century that have given the impression that housing prices only have one direction to go: up!