Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Monday, November 21, 2011

Canada Income Inequality: How A Growing Earnings Gap Is Raising Home Prices For All Of Us

CALGARY and TORONTO — When it comes to the eye-popping housing boom that has seen house prices in Canada more than double in just 10 years, there are a few common explanations. Despite sluggish wages, bulls and bears alike generally cite some combination of easy credit, tight supply and, until recently, a relatively strong economy for opening the floodgates to an unprecedented housing binge, ratcheting up house values — and mortgage debt.

But there is evidence to suggest that income inequality — a trend that has been widening the gulf between Canada’s very rich and everyone else for the last three decades — may also be part of the equation.

For many of us, incomes have become so detached from house prices that any relationship between the two may seem unfathomable. This is particularly true in Vancouver, where the city's optimism about a once-sleepy outpost finally realizing its cosmopolitan dreams came face to face with the recession, prompting a festering suspicion that something had to give.

By mid-2009, with debris from the United States housing bust lodged firmly in the gears of the world economy and debt levels surpassing record highs, observers were beginning to question the stability of the most expensive housing market in the country, which dipped only briefly before resuming its steady climb.

It was amidst this anxiety-ridden atmosphere that a little-known Vancouver real estate blogger tapped out a controversial post titled "Invisible Hand of Income (Inequality)." Noting that average income figures "don't really tell you what is happening at the upper end of the distribution," the self-described Van Housing Bull argued that wealthy buyers could support the market — regardless of what the bears may have been prophesying.

"The bottom line is that the reason why prices are so 'high' is because there is, amongst the buying public, a huge and large income inequality," the unidentified bull concluded. "For what else could be driving the market to clear at these prices, given the hyper-connected infoglut [sic] of a world we live in?"

Commenters were incredulous, deriding the assertions as baseless. The post also conveniently fails to mention ballooning mortgage debt, arguably the most important catalyst in the market’s stunning ascent. But if you consider the central thesis on its own merit — that very high incomes are contributing to very high housing prices — it actually seems rather obvious.

The precise relationship between the growing income gap and rising house prices has yet to be studied in Canada. But some of what researchers have uncovered south of the border sounds pretty familiar.

In a paper he authored for the National Bureau of Economic Research in 2006, Duke University economist and public policy expert Jacob Vigdor found that income disparities in the United States have had a negative effect on housing affordability in tight markets, driving up the cost of everything from luxury homes to rents.

“When the rich get richer, they bid up the price of things that everybody else wants, too,” he told HuffPost.

A particularly insidious thing about a growing income gap, according to Cornell University economist Robert Frank, is the effect it can have on the psyche of buyers whose expectations don’t jibe with their finances. In low-interest, lax lending environments, it’s a scenario that can wreak havoc on the household balance sheet, as easy money makes resisting a sense of entitlement a much more difficult proposition.

“So you’re keeping up with the Joneses,” offers David Macdonald, a research associate at the Canadian Centre for Policy Alternatives. “The problem is the Joneses have a lot more money than you do. They have a lot more money, and you have a lot more debt — that’s the trade-off.”

As Macdonald noted in a report last year, since 2000, housing prices adjusted for income have moved increasingly “out of their historical range” of three to four times annual median incomes, to ratios of between 4.7 and 11.3. This, combined with swelling mortgage debt, which last year surpassed $1 trillion, has prompted him and others to warn that Canada’s housing market is poised for a painful bust.

But whether the growth in housing prices constitutes a boom or bubble, income inequality — a growing imbalance that has been quietly reshaping the economic landscape for decades — may be partially responsible. Housing costs in recent years have moved well beyond what many Canadians can reasonably expect to afford, gnawing away at expectations and plunging households deep into the red. The growing gap is just another factor that might help to explain why.

More at Mind The Gap: Why You Should Care About Income Inequality.. What $350,000 Will Buy You In House Markets Across Canada.. 1 In 5 Vancouver Homes Now Sell For More Than $1 Million.. Full Coverage..

'WE HAVE A BUILT-IN PROBLEM'

It's tough to pinpoint how much additional capital has been flowing into housing due to growing income inequality. But it’s clear that some Canadians have a lot more to throw around than they used to.

From 1980 to 2005, annual market incomes for the highest earnings group grew by more than 16 per cent, despite shrinking by a fifth for those at the bottom and barely budging for the middle. According to a recent Conference Board of Canada report, this disparity has amounted to a “significant increase in income inequality” in Canada, where the gap, though much less pronounced than in the United States, is growing at a faster clip.

As in the United States, the income gains were predominantly concentrated at the very top. Over the past 25 years, the highest one per cent of earners have been taking a progressively bigger slice of the pie — a trend that has persisted even after taxes and transfers, which, as Laval University economist Stephen Gordon recently observed, “have become less effective at reducing inequality.”

Increased earnings also mean more access to credit – a significant factor in determining one’s buying power.

“The higher income [buyers] would certainly have much greater capacity to borrow money at a very cheap rate right now, and that certainly could be part of the story,” says David Madani at Toronto research firm Capital Economics.

All of which could have something to do with the confluence of cement trucks and backhoes that jammed a newly built cul-de-sac in Calgary’s Aspen Woods, an affluent community in the south-west suburbs, on a recent afternoon.

Standing outside a newly constructed $4.2-million mansion (or McMansion, depending on who you ask), Royal LePage realtor Jim Sparrow speculates that a hurdle to selling the 6,000-square-foot property could be that, despite the three-car garage, “There’s not enough room for toys” like boats and ATVs.

“But once you get some trees and grass in, somebody will buy it,” he says.

The pace of building in Aspen Woods has slowed since the downturn. In the prestigious "heights" region, for instance, all but one of the estate-sized lots, which promise the "utmost security and exclusivity," sit empty. But multimillion-dollar homes, complete with granite kitchens and twinkling chandeliers, are still popping up.

It’s a common scene in the city, where Sparrow says the annual number of $1-million-plus home sales since 2001 has risen from just 15 to more than 400 – an increase of more than 2,600 per cent.

And Calgary is not unique.

According to Canadian Real Estate Association chief economist Gregory Klump, in Toronto, $1-million-plus homes as a percentage of total sales have increased from 0.5 per cent in January 2000 to 4.5 per cent, a change that he describes as “pretty significant.” Meanwhile, in Vancouver, fully one-fifth of all home sales from January to September sold for more than $1 million.

“It’s the higher end of the market that’s really been skewing up average prices,” he says.

Origin
Source: Huff 

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