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Housing Bubble Risks - Part 1

Archived in Risk, Real Estate |

Aside from the self-centred, personal weath factors, there seem to be a number of associated risks to an economy as a whole when housing prices suddenly rise very quickly. I’ve been watching a few of these trends and I’m going to take a few posts to make some notes on what I’ve noticed in Alberta’s REAL ESTATE housing bubble.

Labor Shortage

I am stuck on this and have decided to think of it as a chicken-or-egg problem. Did a labour shortage increase the commodification of labour and thus lead to an increase in REAL ESTATE values, or has an increase demand due to percieved trends in REAL ESTATE values created a new home building “rush” that has put pressure on the existing available labour supply? Other questions we need to consider are the force of a perceived strong economy due to high oil prices that pull semi-skilled labour from the lower margin home-building markets into higher paying commercial, industrial, and even salaried infrastructure jobs. More need for labour drives a vicious cycle, of course, creating more need for accomodations, lending to higher renting costs, leading a balancing of the cost of ownership and renting to an obvious tipping point. In other words, the demand for labour brings more labour and that labour requires a place to live thus creating a need for even more labour.

Sloppy REAL ESTATE

Buyer beware? Home buyers suddenly are between a rock and a hard place. A buyer may be competing with a larger number of interested buyers, each willing to outbid and under-condition the deal. Five years ago negotiation would have meant a purchase deal passing a dozen conditions: this could include things as simple as move-out dates, appliances, and touch-ups to more important aspects like vital repairs and passing home inspections. But with the pressure of values increasing weekly (if not daily) buyers don’t neccessarily have the option of duking out cautious agreements anymore. Sellers are pawning off mould infested homes, sloppy landscaping with drainage issues, poor craftmanship, and out-structures without permits.

Unfair Completion Building

This is a personal example from the anecdotes of a colleague currently involved in a (now legal) dispute over a town house. Nine months ago agreements were signed between the builder and the buyer for final purchase price and estimated completion dates. Two months ago a final completion date was mailed to the buyer from the builder. Due to incompetencies by the builder, proper surveys and permits were not acquired for final transfer of ownership through the legal mortgage processes. Thus, the buyer is effectively unable to buy the house, despite having invested a significant downpayment into the property to date. The builder now enforces a so-called compromise: the buyer WILL move into the house, but not as an owner or mortgage holder, as a rent-paying tenent. The rent acrued will not accumilate toward the eventual mortagage. If the buyer fails to comply, the builder will consider the townhome abandoned and re-sell to a new buyer (at a higher cost, no doubt) with all monies lost by the current buyer. The buyer (disclosed as an acquantance of this writer) is now left with the options of (a) fight an unfair condition, (b) agree to an unfair condition, or (c) abandon a considerable investment.

I will explain more risks of an economic housing bubble, from my perspective, in my next installment.

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