"Men often become what they believe themselves to be. If I believe I cannot do something, it makes me incapable of doing it. But when I believe I can, then I acquire the ability to do it even if I didn't have it in the beginning" - Mahatma Gandhi

Thursday, May 31, 2012

Post-Recession Urban Density and the Destruction of individual wealth

Ominous, isn't it?  I want to preface this by saying that these are in no way backed or referenced by, or to, scientific data or literature.  They are mearly thoughts from my own observations.

Urban Density: wonderful, isn't it?  Although you might end up with a few hundred of your closest friends living around you, a sense of vibrancy and culture is formed with the emergence of urban density.  That's the positive.

Pre-2008, there was a frenzy in housing markets.  Lots of people worked construction because there were lots of jobs and it paid well.  There were countless developments popping up with pre-sales that would sell out in a matter of hours (old Woodward building, for example).  Many of these people were 'investors' and looking to make a quick buck on the turnaround appreciation that would have evolved in the time it took to build.  Because, after all if it sells out that fast it must be high in demand, even in the future.  Not surprisingly, developers, builders and the municipalities love growth of that nature.  Heck, who wouldn't!  It lines the pockets of the companies, and the coffers of the municipalities with permit fees and taxes.

Then the turnaround: the Recession.  The Big 'R'.  The party was over.  All those deposits sitting on developements that had yet to be completed, some just left behind while the clients walked away.  Other developers decided to take big discounts on the original listing prices.  But how many of those initial 'investors' put enough money down to account for a potential drop in housing prices?

This is where the destruction of wealth comes in.  Those people that had enough for 5%, 10%, maybe more, to put down on a condo or townhouse are in for a ride and not because of their own fault.

There are a couple of ways to get out of recession - spend your way out or tighten up and lay off people.  By continuing to build you are keeping people employed which saves EI from paying out, and other social benefits or programs being overwhelmed with people, as well as producing funds for the municipalities to help with the debt they are carrying.

The big negative to continuing to build (in this case high density - condos/townhouses) is that at a point there is oversupply.  The supply and demand curves are one of the first things you learn in basic economics and at some point in life we are all subjected to that theory.  But, apparently lack of sales, decreasing prices, and longer listings on MLS is not an indication to municipalities that there is no need to hand out new build permits for more high density housing.  With oversupply comes suppressed housing prices, suppressed rental rates as there is more choice, and as a result you have people that are into negative equity territory as well as rental properties that can't turn a monthly rental to cover the mortgage.

It's a vicious cycle that is on the verge of a precipice of a big hole.  We live in a time where there are constant 'restructuring' events at companies and layoffs.  To add to that, the federal government just announced plans to put in place next year which will see EI recipients being limited in the time they have to find employment either in their sector or previous earning power.  What this will do is create pockets of high density urban housing with owners that cannot afford to sell their place, cannot afford to rent it, and may then not be able to meet their obligations should a perfect storm hit with unemployment/underemployment.  The burden of having more people on EI or in social programs, which spending instead of tightening up was intended to avoid, would then be a reality but this time there would be much more debt and poor credit than previously.

And how to the banks fair in all this?  Well, say a developer gets a building loan from Mr. Banker pre-2008 but that development lost money, the developer went into receivership (any Lanford developers come to mind?) and the bank then lost money.  So, same thing again post-recession the banks are lending to developers that have taken their building permits from the city and are going to build at lower costs than pre-2008, thereby reducing the sale price of homes.  But the prices don't account for oversupply so these places sit, depreciate, and the bank may again take a hit.

Everything has an equilibrium and whether we like it or not that even ground will be reached at some point.  Let's hope the landing isn't as hard as it's playing out to be.



**Again, this is not substantiated by anything other than my own thoughts**