Real Estate, Canada, and the Economy oh my!

Real Estate, Canada, and the Economy oh my!
By Alex Merced



In this article what I’d like to discuss is the problems with the logic put forth as the justification for all the government intervention in the economy primarily in real estate. So first let’s discuss the reason why the government thinks it’s prudent to prop up housing prices.



Small Business is the driver of job growth, most small businesses expand based on loans backed by assets such as houses, so by propping up house prices it helps businesses borrow and expand to create jobs.

As usual, mainstream economists and politicians babble out half truths based on bizarre assumptions. Yes, it’s true small business drive economic growth (analogy: who’s going to grow more, an adult or child, similar logic), and yes it’s true small business usually need personal guarantees and collateral to get loans as they establish credit for their company.

So now that we see on what we agree, let’s talk about the weird assumptions. First off, housing aren’t the only assets that can be used as collateral, this emphasis on housing has caused some business owners to not have a diverse portfolio of assets with which to secure a loan for their business. If their wasn’t so much incentives to invest in housing some of their investment capital would go into other assets such as securities, commodities and other things that can be borrowed against and hedges the business owner in case of a dip any particular asset class.

Also, it’s weird to assume banks won’t realize that if prices are propped up and that they'll just be completely ignorant to the fact the prices are unsustainable and the collateral obviously insufficient for the kind of loans people took out before prices collapsed. If anything, having this knowledge and not being able to determine it’s true market value due to intervention would make banks even more hesitant and worried to make the loan fearing the eventual depreciation of the assets.

If prices were allowed to fall, eventually other prices in the economy would drop and the lower amount of money you can borrow against real estate at current prices would still have a similar purchasing power over time.



INTERESTING FACT: Canada allows for short term mortgages with recourse, and doesn’t have many of the incentives to invest in housing as the US yet has higher home ownership rates than the US.

While it’d be hard to say definitely why, I would theorize that due to all the investment incentives artificially placed on the US market drove speculators to have an unhealthy advantage in buying lots of property. So while many investors accumulated large swaths of the American real estate supply, this had pushed up the price so much deterring the ability for other non-speculators to participate. Once again, Canada shows how it surpasses the US with less intervention. Another similar scenario is in the early 1900 when both countries had no central bank and the US had frequent bank panics yet Canada did not, the major different being the US imposed severe branching restrictions on its banks while Canada did not. So while many focus on Canada’s universal healthcare to claim it as a “socialist” country, it’s much more free market than the US in terms of banking and real estate and has had more sustainable and stable economy for it.