The Less-Conspicuous Driving Force Behind Soaring Home Prices

Published February 22, 2017 by Real Estate Leads


3D rendered illustration of rising real estate pricesA very interesting article in the today by journalist Geoff Dembicki entitled ‘The Real Reason You Can’t Afford A Home’ highlights a specific aspect of the new global economic realities that is manifesting itself in many people no longer being able to afford a home in hot spots like Vancouver and Toronto. There’s much in the way of real estate trends and news these days, but it’s hard to argue this isn’t easily at the forefront of them.

To introduce it in a more-simplistic overview, it’s that the amount of global capital becoming available for investing is rising much more rapidly than actual economic growth. Here now in 2017, there’s so much capital available that investors don’t know what to do with it all.

The response has been to pour a large portion of it into real estate, and not just here in Canada but in popular metropolitan city areas all around the world. It’s considered a ‘safe’ investment given the current climate, and prices are becoming sky-high as a result as the impetus for the investment shifts to a much more speculative one.

The 2 Distinct Spheres

To understand this in a more brief and easily digestible piece, we need to look at why there is both ‘real’ and ‘financial’ economies, and how distinct they are from each other as it relates here. The “real economy” – as Dembicki puts it – is what most of us are familiar with, all the goods and services produced across the world — the global GDP — and the infrastructure that makes this activity possible.

The “financial economy” is something different altogether. This is where investment happens. Securities, mutual funds and bonds, along with the balance sheets of banks and other financial institutions. With all this talk about a ‘bubble’ for real estate in Vancouver and Toronto, it’s the financial economy that’s blowing the air into it.

The article states – very correctly – that digital technology and globalization are the 2 primary contributors to the rise of this investment boom and all that comes along with it, good and bad. Digital technology has allowed investors to create more sophisticated and profitable ways of investing, while globalization led to massive amounts of new wealth in countries that never had much of it before.

The volume of this newfound ready-to-go capital is enormous, and it’s entirely natural that investors have begun looking for new opportunities. The simple fact is real estate is the one of the best avenues for investing now, and so here we are with super-inflated markets in our big cities.

A Persistent Market

It’s true that corrections always tend to occur with big-stage global economic trends, and this will likely be no exception. The ‘invisible hand’ always shows up, but the reality is that this trend of ‘unaffordable’ homes is likely here to stay for a good long while. And it should be said that there are plenty of very ‘liveable’ cities in Canada outside of Vancouver, Toronto, and Calgary!