Speculation overshadowed by Risk Averse Economies: The Canadian Real Estate Market
The real estate boom in Canada has typically seen exponential growth with housing prices rising dramatically year by year. In the last decade or so, the cost of land, along with the cost of new home construction has risen approximately 15%-20% annually,
However very few in the housing industry have questioned the effect of the housing market on our economy as a whole, along with effect that this rise has on our countries financial well-being should the market collapse. This view is based on the fact that your household debt has steadily increased with consumer’s debt levels reaching over $592 billion dollars according to the Bank of Canada*, overshadowing what some real estate speculators have viewed as a crisis in the midst. The inability to accurately forecast when the housing market will crash is quite problematic for investors to say the least. Why do the industry insiders (real estate) say this? This is attributed to the fact that home builders typically determine the price of housing (new construction) and the fact that collusive and corrupt practices overshadow what some view as the competiveness of a free market not centred on a supplier based monopoly.
As with any monopolistic and uncompetitive market, the monopolist can maintain super-nominal profits in the long run by predetermining demand and often surplus (inventory)
As with any monopolistic and uncompetitive market, the monopolist can maintain super-nominal profits in the long run by predetermining demand and often surplus (inventory). The level of profit depends upon the degree of competition in the market, which for a pure monopoly is zero. This means that without a competitor (i.e. home builder in this case considered a new service provider), the profit and level of output results in over exorbitant profits not determined by supply or demand but predetermined by those who may determine those same prices, supply and overstate the demand respectively.
In a pure monopoly, with no close substitutes, the monopolist can derive and predetermine profit levels, based on the fact that no substitutes exist and the market is controlled by one or two large suppliers. An Independent Press of Canada’s investigation in the Canadian real estate market has uncovered unprecedented information regarding the collusive and corrupt practices typically hidden from the public’s eye. According to an industry insider who cannot be named, the new home builders (suppliers in this case) have created a conglomerate by banding together in order to create barriers in access and availability to new building permits. In order to undertake this objective, various home builders have infiltrated various city departments and placed ‘like-minded’ individuals who work in conjunction with one another, while lining their pockets with your city taxes. These ‘like-minded’ individuals have placed constraints on new SME’s to establish themselves in this monopolistic industry, while allowing some of the traditional builders to bypass those stringent regulations set forth to ensure compliance and conformity with the standards contained in the Ontario Building Code, respectively.
The effect that this may have on both the demand and supply sides of the real estate industry has resulted in the same large supplier dictating prices based on a monopoly and not on competitiveness of a free market. This is the reason why the price of new condo construction in Toronto has been somewhat stable; however the resell market has been adversely affected. Why purchase a lived in condo when the new condo builders are competing against your resale listing for example. Similarly, the market in Toronto has seen exponential growth in the last decade. Toronto’s condo market has become a buyer market. The supply of new condos exceeds demand which has given purchasers an advantage over sellers in price negotiations.
Toronto’s condo market has become a buyer market. The supply of new condos exceeds demand which has given purchasers an advantage over sellers in price negotiations.
The surplus of Toronto condos has resulted in many new construction projects becoming delayed while buyers refinance their existing mortgages and reconsider upgrading their existing purchases. RBC chief economist has sounded the alarm about overbuilding in Toronto's condo boom, saying the number of new units coming with the existing ones that have yet to be sold have resulted in a ‘high-risk’ market. Hyun-June Leonard Ro of Rogistics Supply Chain indicates “this is a significant problem if the industry is mismanaged and the monopoly becomes a competitive market which results in price fluctuations due to the surplus of supply”. Hyun-June Leonard Ro adds: “A monopoly in this sense is beneficial for investors as a whole, however based on a speculative perspective and not on sound financial decision-making”.
”A monopoly is this sense is beneficial for investors as a whole, however based on a speculative perspective and not on sound financial decision-making”
More importantly a monopoly can result in significant higher prices for the end-user (home buyer) when assessing the question of affordability.
Nonetheless, the effect on the economy from both the micro and macro standpoint is troublesome for investors should the real estate market crash. Since the housing market is the largest segment of our countries output and services (GDP). In short, this means if the housing market declines, the economy as a whole suffers with shocks to the economy including recession as we have seen in the late 1990’s. The potential adverse effects of household indebtedness, lowering of consumers purchase-power-parity and vulnerability to these same shocks on our economy are largely dictated by our Central Banks (lowering prime lending rates to stimulate home purchases, increase prime rate to slow home purchases). If mismanaged, the economy could crumble with very high inflation rates that we have seen in the 1990’s (US dollar at 1.58 vs. Canadian). As such, the real estate market in Canada largely dictates most of our financial industries (banks, mortgages, etc), so the balance of a properly managed economy (both from housing and financial standpoint) lies in those who can accurately and predictably forecast our economy as a whole.
Written by Ona Holiday
