When hearing the words 'real estate bubble,' people often look away with a worried expression. Money concerns often plague the average consumer daily. Yet, we rarely discuss money in an honest manner person to person. As a result, many individuals take to online forms to express concerns they have, for both their own financial stability, as well as the economy. In the last ten months, the internet has been flooded with speculation and concern regarding the Canadian economy. Namely, how real estate is the biggest contributor to the economy, and how it does not appear to be a sustainable source of revenue. Indeed, a real estate crash would not be ideal, and would cost Canadians greatly. Yet, it appears the speculation and recent caution buyers are taking when investing in real estate, has already started to impact our lives and our geography. In this assignment, I intend to investigate the concern that surrounds what has now been named, 'Canada's real estate bubble'.
A financial 'bubble' refers to an increase in the price of a product at an unnaturally fast rate.
It often reflects the relationship between supply and demand. When referring to a financial 'bubble' of any kind, it is implied that the increase in expenditures is not sustainable. Essentially, that will mean a drop in prices that will be inimical to investors.
What Is A 'Bubble?'
(Unknown author, Housing Bubble)
Here are two examples of how it might occur:
1) The demand preponderating the cost of supplies; a product being sold for more than its estimated worth, because increased demand will allow for such events to occur.
2) More demand than supplies; increased demand for a product that cannot be supported by the availability of supplies.
What Makes A 'Bubble?'
Why Is A 'Bubble' Bad?
A financial bubble is bad because it is not sustainable long-term, and can result in losses for all the individuals involved. The reason the Canadian real estate bubble is particularly worrisome, however, is because our economy is heavily reliant on real estate. If the market deteriorates, our economy will suffer.
The importance of real estate!
Consider the link to supply and demand that is often represented by financial bubbles, and the circumstances surrounding financial bubbles transpiring.
The first example I gave, showed that a financial bubble can occur because the demand is driving the prices way higher than their value. The second example, entailed how a financial bubble can arise by virtue of limited supplies, and excess demand. Both of these are unsustainable, because they are dependent on an unstable factor. Namely, customer demand. Customer demand is unstable because it is dictated by many things outside of the control of a particular industry. These things include, but are not limited to, interest rates, credit regulations, media hype, education levels, employment rates, as well as many others.
(Kimmons, James. “Supply and Demand in Real Estate.”)
How did our real estate bubble start?
A few factors contributed to our real estate bubble. The most prevalent, however, is the fact that the demand has grown dramatically, and the interest rates have dropped to dangerously low numbers.
A life in Canada offers many luxuries, such as, religious freedom, plenty of opportunities, and free healthcare. By virtue of these factors, Canada is a very desirable place to live. Over the past few years, the opportunity to immigrate to Canada has become more readily available to people in other countries. These people all need a place to live, and therefore, increase the demand.
Homeowners, aware of the increased demand, put their prices up in an attempt to make a profit. They can do this, and still make a sale. This is because everyone else was also raising their prices, and in the end, everyone needs a place to live.
Low interest rates
The interest rates in Canada are at dangerously low levels. A few years ago, they were the lowest they had ever been in Canada. In an attempt to stabilize the market, the Bank of Canada has slowly raised the interest rates. Yet, many skeptics argue that it is too late, as the banks can only control mortgage agreements that aren't fixed. In addition, even after raising the interest rates, it is apparent by the state of the market, that any improvements made were minimal.
Low interest rates (Continued)
The low interest rates qualify a wider range of people to become homeowners. It also qualifies people of low finical standing to purchase houses that were otherwise way out of their budget. This simultaneously increases demand, because now more people can 'afford' to purchase the crazy-expensive real estate available. At this point, it has been well established that a higher demand in real estate can result in higher prices.
Real estate prices go up!
Low interest rates
What will happen when our real estate bubble bursts?
If the Canadian real estate bubble bursts, we will see a dramatic decline in the health of the economy. This will happen both directly and indirectly, in what is called a 'ripple effect'.
Direct effects are events and situations that occur as a direct result of a previous occurrence. They are primarily related to the event and their effects are often seen immediately.
The direct effects of a real estate crash will be represented by massive debt in individuals and business with preexisting mortgages. Namely, mortgages that aren't fixed.
It will also be represented by the prices of real estate dropping and the value going down.
Many people will lose lots of money and may be in debt for the rest of their lives.
The economy will also suffer in direct ways, because of the imidate loss of revenue.
The real estate crash will leave many people with massive amounts of debt. As a result, they will not be able to spend money on other facets. Business will go bankrupt because fewer people can afford to purchase their merchandise.
When businesses close down, people will lose their jobs. The loss of jobs will contribute to the debt individuals will have.
It will also cost the government, because, during that time period, many people will be collecting unemployment insurance with very few people paying into it.
With the decline in the marketplace of other industries, the massive debt, and the need for further government support, the economy will also suffer in indirect ways.
(This is a perfect example of the ripple effect in action!)
How Is The Real Estate Bubble Related To Human Geography?
The real estate bubble is related to human geography because, its consequences will determine where people will live, how ideas will be spread, how our economy behaves, and who immigrates to Canada.
It will affect how ideas spread, because, as the 'ripple effect' demonstrates, other industries will be affected as well. This could halt technological developments, which would, in turn, will dictate how we communicate.
Before the bubble pops, it will affect where we live and who immigrates to Canada, because, the cost of real estate will serve as a push factor and make it harder for people to live in Canada. It will also simultaneously deter others from immigrating. After the bubble pops, the low prices might serve as a pull factor, as for the first time in over a decade, prices will be reasonable.
It will affect how our economy behaves, because, it will affect our financial stability, and, therefore, the economy will have to make adjustments accordingly.
A real estate crash would not be ideal, as many people would be harmed. Yet, I don't think it's quite as bad as they say. This is because, although it looks bad on paper, in reality, those who are wise with their finances will only suffer small losses.
In addition, if the government prepares for such an event to arise, the damage can be less severe.
The final outcome will reflect how good we are at collectively handling money, and hopefully, we can use it as a learning experience.
Reflection/What I've learned
Upon completing this assignment, I have learned lots about using this medium to present ideas, as well as lots about the economy and financial bubbles. I have made many connections with previous information and current information.
I'm astounded by how human geography is so dramatically affected by one industry.
As young people, I think it is very important for us to pay attention to things such as these, so we do not fall prey to the same traps that the previous generation did.
For this assignment, I was very pleased with the way in which I organized and supported my ideas. I think that really helped bring a clear and concise message forward.
Next time, however, I would like to work towards having less text and more images. I think this would be ideal because the majority of people are visual learners, and massive text boxes aren't the most engaging way to communicate.
Kimmons, James. “Supply and Demand in Real Estate.” Supply and Demand in Real Estate, 5 Aug. 2018.