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Gambling our collective wealth on real estate

Real estate having become something of a sport – buying, selling, trend-watching (a new brief this week shows prices on the rise … again) – and the basis of excessive consumer borrowing, it’s no surprise that the sector is under a constant state of analysis. The big issue, of course, is the prospect of a housing bubble, as we all wonder when, not if, it’s going to burst.

For now, rising prices keep padding our net worth, while draining more from the wallets of those trying to get into the housing market.

This week, a new study from Statistics Canada shows the impact. Between 1999 and 2012, the average wealth (or net worth) of Canadian families rose from $319,800 to $554,100, or 73 per cent – all figures in 2012 constant dollars.

Half of the increase in the overall value of assets was due to real estate, while the other half was due to other types of assets, including employer pension plans.

For those who own real estate, particularly with little or no mortgage, the large increase in the value of housing created much of the gains in overall wealth. Not surprisingly, the biggest gains went to the top earners. Though housing-driven wealth gains were spread across all levels of earners, those in the bottom 20 per cent saw their share of total debt increase where others held steady.

Taken in isolation, the Stats Can report appears relatively optimistic, even with the growing inequality. But factor in the prospect of a market correction – even the conservative Bank of Canada sees the possibility of a downturn equal to homes being 10 to 30 per cent overvalued.

Logic says that with average home prices in hot markets like Vancouver and Toronto topping $1 million, something’s got to give. Historically, Canadians paid an average of three times their annual incomes to buy a home. In this millennium, that figure is five times our incomes. If that ratio reverts to the norm, we’re all going to get really big raises, or housing prices are going to fall significantly. Which outcome is more likely?

That kind of correction would make a big dent in the wealth gains chronicled by Statistics Canada.

Even casual observers of the market have to question if what’s going on is sustainable. Some economists and market watchers are waiting on a correction. Still, there are plenty of us who see housing as a safe investment, unlike, for instance, the stock market, which remains volatile. Both markets are a gamble, however, and both were and continue to be heavily manipulated by the financial sector, the very industry responsible for the systemic corruption at the root of our economic woes.

Speculation, of course, is another word for gambling. When you buy stocks, you’re betting they’ll go up in price (or down, if you’re shorting). Speculation also extends to the housing market. This applies not only to people who buy homes to flip them, or farmland in the hope of a future subdivision, but to many who’ve entered the housing market in recent years. If there is a take-away lesson to be learned when it comes to real estate, it’s don’t take any undue risks. And gambling, which is how we’ve been viewing the housing market, is risky to the core. If we keep betting on ever-increasing prices – with equity loans to match – and allowing too many people to over-leverage themselves, there’s going to be a great deal of pain if the market sees a correction or if interest rates start rising to historical levels. Don’t wager the farm on the boom times to last forever.

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