Relative affordability, as compared to average household income and GDP, is often a metric that people use to determine how expensive the cost of housing is in each real estate market. There are businesses and metrics devoted to tracking this and bemoaning the rising cost of housing. Of course, affordability matters to the people who are trying to purchase a house, but the jury is out on whether affordability influences the real estate market at all.
The argument goes that if people, on average, can't afford to buy a house, then the price of housing must come down to meet what people are able to purchase, or something must change with lending (such as longer amortizations, lower down payments, or lower interest rates) to make the payments affordable again.
This is the wrong question to ask. In many countries around the world, companies and corporations predominantly control the housing stock. Pension funds are buying up real estate all over North America. So here is where the problem lies with that argument. People don't need to buy real estate. We have gotten used to the dream of homeownership that has been handed down from our parents. However, times are changing. Relative affordability isn't the metric we should be using to track the cost of housing. Rather, does it make sense from an investment perspective? If it does, asset prices are going to continue to rise, and those that are renting are going to get left farther and farther behind.
Relative affordability matters when it comes to rent prices, but not asset prices. The price of housing is relative to supply and demand, inflation and monetary supply, net migration, lending environments, and the economic factors (industry, etc.) in each area. Household balance sheets, supply/demand, and government control determine the average rent amounts.
Wages haven't kept up with the cost of assets over the long term. Now, they aren't keeping up with inflation either. What does this mean? It means that times are changing, and people are going to become more and more dissatisfied when their dollars don't go as far as they used to. The government will attempt to rein in asset prices, blame investors, and legislate themselves out of these issues, but the reality is that they are fighting a demon that they created. The government needs inflation to continue to manage their debt. When housing is measured in a currency that is getting devalued, prices will continue to rise. It won't be a straight path, and there will be pain along the way; however, hard assets like real estate, precious metals, and bitcoin will continue to be winners in the long run.
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Real Estate Investor and Entrepreneur
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
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