The financial and human sides to soaring house prices

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house pricesA hot topic of conversation these days is real estate. Specifically, the exorbitantly high prices of houses in Oakville and other communities in the GTA.

According to the April 4 numbers released by the Oakville, Milton and District Real Estate Board, Oakville’s median residential sale price for the month of March increased by 44.77 per cent as compared to the same time last year.

There are two important aspects to real estate. The first is financial. Real estate is a particular kind of investment and has all the normal investment characteristics similar to other asset classes like stocks and bonds.

Price is determined by supply and demand. If more people want to buy houses than the supply of people selling them, then the excess demand will push prices up. It is that simple.

Increased demand for homes has been impacted by immigration, plus an interest by foreign speculators to buy houses in this part of Canada.

The current economic environment has also fueled rising house prices for several reasons.

The economy has been good, and when people feel financially comfortable they are willing to make significant investments, including buying their first house, or trading up to one that is more expensive.

Interest rates are low, and never in our country’s history have we been more comfortable borrowing money than now. Personal debt, including mortgages and lines of credit, is at an all-time high.

This perfect scenario of financial confidence and low interest rates has been the magic formula for rising house prices.

House prices have escalated to the point that many buyers and sellers refer to them as silly.

The financial implications of significant escalation in house prices has encouraged more homeowners to consider cashing out. The options after selling include buying a less expensive house in town or moving to a community that offers more affordable housing. Some will just rent.

The other aspect to real estate is the human side. For many this will be more significant than the current get-rich-quick excitement that has captured the real estate market.

The motivation for most when they bought their house was to fulfil the Canadian dream of home ownership. Home-sweet-home was a place to live, not a speculation in real estate.

The next generation of homebuyers will find the excessive cost of home ownership beyond their reach. They too, will rent or “drive until they qualify”, the phrase real estate agents use to refer to people moving progressively farther from the city, to communities they can afford.

That may be a long drive considering effects of high housing costs are being felt throughout the Greater Golden Horseshoe, and the Canada Mortgage and Housing Corporation estimates the house price spillover going as far as Sudbury and Ottawa.

If they have to move to other provinces to afford a home, their parents in Oakville may sell their house, to augment their retirement funds, and follow the children and grandchildren to keep the family close.

The cost in housing is also one of the elements fueling the boomerang generation, the nickname for adult children who return to live with their parents after graduation.

There have been mixed reactions to the 16-point housing plan Premier Kathleen Wynne introduced last week to help cool the housing market. Whichever side of that conversation you are on, one thing is sure, the economics of real estate values and how people live their lives are very much intertwined. More people will make important life decisions based on the value of housing.