Leo's Notes:Random

Canadian Real Estate Market

In summary, prices in the Canadian real estate market has risen too much too fast and the market will correct itself by having the prices go back down. Government and the bank of Canada will try to keep the real estate prices... (how?)

The housing market, like any other market (such as the stock market), runs on debt with only a small percentage of real wealth; the rest is fictional. Similar to how the stock market runs on margins, the real estate runs on banks lending lots of easy money to people.

Real estate prices have gone up because of artificially and historically low interest rates (citation) resulting in more money being pumped into the market. With low interest rates, people have less incentive to save and more incentive to borrow more and more with the mentality that with a small percentage now, they think they own it, when in actuality the bank/lender actually owns it.

BC has a 15% foreign buyer's tax to reduce the incentive for foreign buyers (chinese) from buying in the hopes to reduce the heated prices in Vancouver. Ontario also implemented a similar tax. This tax has so far not helped the prices since builders/real estate companies now has an incentive to pay the fees. This only results in a higher overall price of all the real estate.

When interest rates rises, housing prices will drop as the market corrects itself after the long period of low interest rates. A drop in housing prices will result in many people having their wealth wiped out simply because all their wealth is tied to the debt associated with their home. The reduction of wealth will also exacerbate the economy.

To avoid this, the government and bank of Canada will do whatever it can to prevent a crash by reducing the interest rates or making it negative. However, this will result in higher and higher housing prices. Eventually, something will break (why? What are the consequences of perpetually artificially low interest rates?)