Dangers of the ‘wealth effect’

Here’s some interesting commentary on property tax assessments and the downside of the ‘wealth effect’ by Chris Olsen of CTV’s Olsen on your side. The ‘wealth effect’ is what happens when people feel richer due to higher assessments and are more willing to go into debt based on those paper profits without considering the potential downside.

Most regular Vancouver real estate blog lurkers will know all about our very poor affordability index compared to other Canadian cities and the related downward pressure put on prices, but its a great basic primer for those that haven’t considered such things. Excerpt from the link above:

The less affordable houses are — the harder they are to sell. That puts more pressure on housing prices to fall. RBC predicts the Vancouver housing market is near a turning point — where prices will begin to fall. The signs are all there. The number of sales is down. The number of houses on the market is up. So that’s the reverse of what we’ve been used to. Now there are more sellers than buyers. So RBC is saying that house prices are going to drop. By how much is the big unknown. Nobody knows. Hypothetically, let’s say they fell by a third, that would only bring prices down to where they were two or three years ago. We’d still have the most unaffordable houses in the country. Which brings us back to the original point. Given all these indications that house prices could fall – it’s dangerous to borrow against the value of your house when that value is expected to drop by an unknown amount. Remember — you’ll still have to pay back whatever you borrowed.

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Uncertain Buyer
Uncertain Buyer
13 years ago

"If prices really did peak in september than affordability was about at its worst last summer and places still sold like hotcakes."You're missing one crucial thing, inventory. There was a very low selection of available houses for sale. So people were snatching up whatever they could because they were afraid of missing out.

moronman
moronman
13 years ago

Moral: At summer places sell like hot cakes but in winter they sell like cold cakes, no matter what the price is.

moronman
moronman
13 years ago

Right now prices are cheaper than last summer; places should sell at least like hotcakes! Do they!

WoodenHorse
WoodenHorse
13 years ago

Think about it…if Sept was the "peak" that is by definition the best that it gets. Why would it surprise you that those were goodtimes?

WoodenHorse
WoodenHorse
13 years ago

Anon: What does that, and the price of tea in china, have to do with today?That was on the frenzied way up. We're not there anymore.The sad thing is that articles of this nature are not published more often. It's a shame people have to be reminded of that fact.

Anonymous
Anonymous
13 years ago

The less affordable houses are — the harder they are to sell.Not last summer. If prices really did peak in september than affordability was about at its worst last summer and places still sold like hotcakes.