Originally Posted by
Nakadah
You guys have taken quite an interest in my theory and perhaps it would have been better if I shared less, however, allow me to expand a little on what I said. There has been an increase in home valuations in Canada for some time which has let to the increase indebtedness of Canadians and an increase in the cost of living. Different cities in Canada have been affected differently as pointed earlier - i.e. Vancouver vs. Calgary vs. Toronto. I should believe that we all agree that having a home is a requirement in one's life and it is the foundation which is required for one to take their life further. In Calgary's case let's say that the average asking price of a house is ~$500k and the average before tax individual income is ~$50k. Due to the high valuations of homes the vast majority of one's income goes into covering home associated costs/expenses which include more than just mortgage - i.e. property tax, maintenance, repairs, etc. After all home and food expenses/costs do you have some discretionary income which you can spend in whatever way you like - i.e. cars, jewelry, vacations, hobbies, etc... The argument that I make is that because so much of one's income goes into covering home costs one is left with very little discretionary income and hence has no choice, but to drive a 12 year old corolla. I completely understand that not everyone cares about cars, but I believe that if given the choice people will chose to drive something that is newer and more comfortable. I chose the ratio of home values to car values because for many people their car is their second most expensive purchase. I certainly would not expect to see someone with a $40k watch driving a 20 year old Rav4. We can expand on this a little and make an argument that as a result of what is considered normal the speed at which money changes hands slows - i.e. velocity of money. The effects of this will manifest in lower foot traffic in stores/establishments which will manifest in a contraction in the aggregate economy. If you want more craziness you could link the velocity of money in an economy to the country's fiscal and monetary policies, but this is not for me.
If an average home is the foundation required for individuals to step on than a 7 figure home is an aspirational home which few have the opportunity to live in. If one is able to afford to live in such a home than I believe that they should be able to afford more in all other areas in their life -i.e. go to nicer restaurants, go to nicer vacations, be better dressed, and in this case drive an exotic. I know that Shakalaka has an Aston Martin, but my argument is that I would not be surprised to see a Huracan in his garage.
The exact ratio is not important and what your ratio is isn't relevant either, however 1 to 100 is a stark contrast which in my opinion should not exist. In here I attack the valuation of an average home and argue that it should not be $500k. As pointed earlier, in Toronto and Vancouver my theory paints an even starker contrast and people there in general have a lower quality of life than Albertans. Recent statistics showed that nearly 50% of Canadians have no savings and that a further 25% will have difficulties with covering an emergency cost of $500. At some point I read somewhere that ~12-14% of mortgages in Canada have been deferred during the pandemic, which supports the idea that Canadians have little in savings. 12-14% is the equivalent of 1 in 7.
To those that will argue that home values never go down I will ask them to look up recent examples in the USA, Spain or Ireland. This has also happened in Canada both in Calgary and in Toronto more than 30 years ago. You can make the argument that the lot on which a home is built does not depreciate, however the building itself does amortize and so does the infrastructure in the neighborhood. You don't want to drive on streets that are full of potholes, do you? Communities also change and what might have been a desirable community quickly could become the opposite - i.e. a garbage processing facility built in there. This also applies to cities, provinces and countries. History is no prediction for the future.
What I am saying does not apply to the margins, but rather ~1 st. dev. from the mean.