Monday, March 12, 2007

Is it time to regulate real estate?

One of the more prescient things I have done financially was to buy a house, a vacation property and more recently some rental properties. Consequently much of my net worth is now real estate.

Real estate prices are now thru the roof and expected to rise. It has gotten to the point where even in situations where both of a couple work, they cannot afford a house.

Of course banks are being very understanding, offering low interest rates and low or no down payment.

While my house is now worth the high six figures, this is fine except that I have to find a place to live. If my wife and I wish to downsize to a condo or move somewhere where Real Estate isn't ski high we might realize a modest tax-free profit. On the other hand, I lie awake at night thinking about how much capital gains tax I will have to pay on my vacation house.

What is more concerning is the amount of debt that is tied up in these highly valued homes. These homes are only worth something if you can find somebody who can pay what you want and I can see a time where people are just going to accept the fact that they will be renters for the rest of their lives. This is going to result in a glut of houses with an innevitable crash in prices. Those of us who have fully paid off their mortgages won't suffer too much except the loss of money we never really had. I worry about those with high mortgages who now owe more than their house can be sold for and the ripple effect on the economy. One thing is certain, it won't be the banks that suffer.

It seems that the real estate explosion is certainly being sustained by two factors; people who speculate or flip houses and the real estate industry who benefit from house transactions.

I read somewhere that back in the 70s when house prices rose in Ontario to the unprecedented high of $50K, the "socialist" government of Bill Davis put the brakes on this. It was quite simple, they put a wind-fall profit tax on flipping houses. If you sold your house in the first year, you paid 90% of the profit, 80% in the second year etc. This would put a brake on flipping properties which is a major factor driving price upwards.

Secondly Real Estate commissions have to be capped. The commission is essentially a built-in inflationary factor. Just to break even if you sell your house, you have to charge what you paid plus the commission which is usually now greater than 10K. When you think about it does the realtor really earn 10+K. Not on your life. Selling houses is easy now with listings on the Internet. Our last lot was found on the net, we bought it and the agent collected a commission basically for answering the phone. Our lawyer did more work and only got about $1000. Imagine somebody making more than a lawyer!

Why not cap commissions at $1000 or some sensible figure.

I should also mention, the Realtor does not necessarily have your best interests in mind when you sell your house. According the book Freakonomics, Realtors who sold their own house consistently sold them for more than their clients' equivalent houses.

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