Knock-on Effect

Knock-on Effect: A secondary, often unintended effect.

While I don't typically write it down, I have often provided my thoughts about Vancouver's real estate market when I speak to others in person. Vancouver has had a run-up in real estate for 9 years now, one of the largest and longest real estate bubbles ever.

Oh, did I say "bubble"? Many people won't admit that it is a bubble, and yet there is little else to explain housing prices that have doubled – nay, tripled – in nearly 10 years. This false wealth by rising real estate values has caused a lot of snobbery and abusive spending, causing inflation in many ways.

And that is where knock-on effects come from. Most people don't realize what happens when you take a common resource like housing and let it grow to encompass a lot fo the economy. Everyone and their dog seem to be involved in the housing sector (known as FIRE - Finance, Insurance, and Real Estate). The problem with this is when the bubble bursts (and it will, just wait) it is going to be epic, and the secondary effects are going to be nasty.

I want to see the housing bubble pop in Vancouver, and with as much vigour as it when it inflated. I want to see 50+% drops in housing prices, because there is absolutely no way that an average family can afford an average home in Vancouver or the surrounding suburbs. What I don't want to see, but what will ultimately happen, is that the secondary effects will leave a lot of people out of work and scrounging for money. This is known as a reversion to the mean and it is A Good Thing ™.

Don't think it will happen? Look at many American cities when their housing bubble popped in 2009. No matter where you went, even pricey places like New York, nobody was saved. Anyone involved in housing was brought down, and brought down hard enough to decimate many people for a decade (possibly more). I have spoken to a number of people (usually who are home owners) who do not believe this will happen and, furthermore, think it would devastate the citizenry too much for it to happen. And yet, I always ask them, did they not think 100-200% price increases for a decade would similarly devastate an economy?

As a Vancouverite, you can see the effects of the devastation all around. This article written a few days ago in the Vancouver Sun talks about how families are leaving Vancouver in droves because of the high cost of living. One particular family in the story moved from Vancouver to Burnaby due to high prices, then from Burnaby to Port Moody, eagerly chasing lower costs. This all makes sense when the average detached house in Vancouver is worth well over $2,000,000 [updated – see comment], and similarly in Burnaby it is at or over the million dollar mark as well.

I can hear the real estate pumper cry out, "go to the suburbs, it's fine to live there", but in reality it isn't. In many cities the highway system is made to house a large amount of traffic, but in Vancouver it is quite the opposite. The mayors of each city have always kept a small-town feeling to their world-class name, so the roads are tight and slow, with traffic lights littered every couple blocks like a blight on the land. In this article, we were even ranked the number 2 spot in North America for the worst traffic congestion. I have done the drive from South Surrey to Burnaby and it is soul-sucking to say the least. Even if there are no accidents, it is still a 45-60 minute drive going at or over the speed limit.

My prediction for the Vancouver market is that the economy will go down, GDP will tank, taxes and usary fees will jump, the municipal and provincialdebts and deficits will skyrocket. Property taxes are loosely based on assessments, and housing sales lead to land transfer taxes, so the government makes a tonne of money through increased real estate prices. The FIRE economy that props up the housing sector adds money and sales taxes to the economy. The teriary industries (such as car dealerships, massage and luxury stores) all rely on people with more disposable income than brains. When the government coffers start drying up, the government just increases taxes in small ways through usary fees (like bridge and road tolls) and property taxes.

This is the true meaning of a knock-on effect. And this is why you should be making sure that you get out of debt, having a large amount of savings. You have been warned. Please be careful out there.

Update – July 9, 2013 7:46 PM PST

I changed the average price of a detached house in Vancouver from $1,000,000 to $2,000,000 as referenced in this article.

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