Who are the stakeholders in the big picture?Let’s face it, we are not building homes for families; we are building homes for everyone but families! Construction provides jobs for workers. Every step in the process of bringing construction materials to the builders generates employment, provides taxes for government, and profits for business owners. Realtors get a piece of the pie, too, When viewed from this perspective, more construction is good for the economy – until we have a recession!
All this ‘good for the economy’ building creates a glut of housing on the market because the product exceeds the ability of the market – local residents – to purchase the production. As soon as the market begins to slow, prices cease to increase (which is often referred to as growth, but which is really the devaluing of currency) and the economy is affected. There is less construction, thus fewer jobs in a basic industry, less purchasing power, fewer sales, more layoffs, etc. Is the solution to this problem really more construction?
What keeps the price of properties relatively stable?
In spite of repeated recesssions arising from a glut on the market, the price of house does not suffer the full impact of over production. Virtually all real estate is protected from drastic drops by finance. Developers and builders require the support of the financial community to fund projects, whether they are huge complexes and condos or single family housing. Rarely is a home built on a cash basis. It even sounds ridiculous to suggest such a thing should be considered. “Use other people’s money!” Financing is an insurance policy to protect the value of property from falling below the debt held against it.
What drives up the price of real estate?
Regardless of what is happening in the economy, real estate prices increase across time. People of influence can create a demand for housing in all kinds of ways including speculation of some new opportunity, immigration, reduction of services in small communities which drives people to the city, and the list goes on. Real estate fees, sales taxes, and legal fees all contribute to the cost of real estate but not to its value. These costs are notoriously detrimental because they reoccur every time a property is sold, and every time these costs are added to the mortgage which means years of interest is added to the total cost of the property.
Financing is more pernicious than most people are aware. Aside from the fact that interest rates on a mortgage can and do change regularly, financial institutions are permitted to charge fees for giving the mortgage in the first place. Also, financial institutions charge interest even when the initial mortgage no longer exists. They deem to have the right to collect all the interest they would have received even if a mortgage is paid in full by another institution. A borrower must pay a penalty for paying higher payments on anniversary dates to ensure the lending financial institution gets ‘all’ its profit.
Financial institutions do not risk anything when giving a purchaser a mortgage on a property. They do not give their own money (from profits), they do not use money that people have deposited with them (it’s against the law). Financial institutions create the money for the mortgage out of nothing by having the purchaser sign an agreement to make payments on a regular bases until the total of the mortgage and its compounding interest is paid in full and an offer to turn over to the institution their property if they default on payments. Financial institutions repeat the process every time a property is sold and the purchaser finances the purchase.
It is the function of ‘financing’ property that causes the price of properties to increase exponentially. Each property sells at the highest price the market can bear. The market will bear an over-valued property when the purchaser is willing to take on the escalated debt. But the market will only bear a near-value price if financial institutions cannot inflate their own profits through over-financing the property. If financial institutions were controlled by governments, as they should be, they would be limited to lending only the amount of the original price plus the cost of improvements.
The benefit to the purchaser would be that the price of the property would be tied to its true value. Older properties would be affordable based upon their original price. Young families could start with an older home with reasonable down payments and low monthly payments. Live like the dream promises: Live within your means, save for a rainy day or the future, and if finances allow, move to a bigger, newer, more modern home when it is reasonable to do so and based upon the personal resources available.
Privately owned homes are better for families, particularly for the children. People will not be constantly uprooted as they move from one rental unit to another. Families are better for the community. They care about what happens to their neighbourhoods.
Liz Galenzoski, Financial Agent for BC Refederation Party.