By JOHN RAPLEY
Saturday, September 15, 2018
John Rapley is a Canadian academic, journalist and author based in London. His most recent book is Twilight of the Money Gods: Economics as a Religion and How It All Went Wrong.
Over lattes and cold brews in a downtown café, I listened to an interesting conversation.
Two old friends. At first glance, they couldn't seem more different. One the child of immigrants, devoutly religious, the other a native-born Canadian who called himself an atheist. However, both had enjoyed similarly successful careers in retail management. Yet, when the first attributed his prosperity to God's blessings, the second scoffed gently. "I bless myself," he said, laughing.
"I bought my first house 20 years ago, and now I have four. Best investment you could ever make."
I told him, "You're more alike than you think. Buying real estate is as much an act of faith as his tithing in church." Then the conversation picked up.
Canadians are richer than ever - thanks to their homes. Statistics Canada reports that the average family has doubled its wealth since the millennium began, with property values behind most of the gain. For those who bought over the past couple of decades, their homes must feel like piggy banks: With each mortgage payment, they fill their float just a little more.
All this has vindicated the long-standing faith Canadians maintain in the virtues of home ownership. A recent survey by the Mortgage Professionals of Canada reported that, even amid the current uncertainty in the real estate sector - this week a Reuters poll of property market analysts found there's been a cooling off - a mere 4 per cent of Canadians consider real estate a bad investment. For everyone else, belief in the value of real estate remains unshaken. And yet, if we really took the cold, analytical approach my friend in the café claimed to do, we'd realize the facts seldom justify this belief. To an outsider looking in, its tenacity makes it appear like some form of religious fundamentalism, unshaken by facts.
That's not surprising. The imagery we summon when we think about wealth reveals our essentially spiritual relationship to it. Start with money itself.
When most of us hear the word, we picture something physical and real, such as the coins or dollar bills in our pockets. So, too, with what we call equity. Home equity is like money that's been converted into matter, stored in bricks and mortar and hardwood floors, kind of like the energy stored in a block of wood. (The analogy isn't accidental: Economics models itself on physics.)
And, just as you can release the energy stored in wood by setting it on fire, so, too, can you release the money stored in a home by selling it or taking out an equity loan. In all this, money serves as a medium of exchange, a lubricator that enables us to convert one form of matter (our home equity) into another (whatever we choose to buy with the money it releases to us).
Such a model simplifies a complex reality, breaking it into neat, bite-sized pieces. It's the kind of logical and elegant construct that appeals to economists, a profession that psychological research has found disproportionately attracts people with a fondness for order. But it's also make-believe. Money is not so much a medium of exchange as an immensely powerful leap of faith. For it to work, we have to believe.
Consider how money comes into being. Just as we think of it as real, we tend to conceive of banks as big, secure vaults. Safer than our mattress, they allow society to pool its cash for everyone's benefit (even if service charges and CEO bonuses sometimes make Canadians question those benefits). So when you go to your bank and take out a mortgage, you might well think it's pulling together money from its clients' savings and depositing it into your chequing account - naturally, with the promise to repay them later.
That's not how it actually works, though. In reality, the bank essentially summons the money out of nothingness, using one of the cleverest conjuring tricks ever devised. Here, dear reader, you play a vital part. Once the bank believes you'll be able to create value somehow in the future, perhaps by selling a resource you own (collateral) but more often by giving the bank some of your future labour (in the form of the income you'll forgo in mortgage payments), it will tell the seller that it's good for the money. It's a fiction. There's no actual money there. However, trust in your promise persuades all parties to the transaction to act as if there were. So the builders break ground, the suppliers fill their orders and you effectively create something from nothing.
The invention of this kind of banking gave birth to capitalism and the modern world. It's one of the most remarkable things humans have ever conceived. And it all comes down to faith. This is one of the reasons that physicists, for instance, respond skeptically when economists describe their discipline as a science. Try as you may, you can't, like Peter Pan, will gravity out of existence.
But you can drive the value of your home toward the sky, enabling its bricks and mortar to release ever more money, if you can persuade enough people to believe its value will rise. They will then bid up its price, creating a self-fulfilling prophecy. As the Bank of Canada's own research has found, this climate of conviction - what the central bank more drily calls "expectations of rising future house prices" - has been central to rising Canadian house prices over the past two decades.
Needless to say, my friend in the café was having none of it. Although other people might behave irrationally, he insisted, he knew the facts. "I bought my first house 20 years ago for $200,000.
Today, it's worth half a million."
The facts spoke loudly, all right.
But they weren't telling me what he thought they did.
"Best investment you could ever make?" I teased. "More likely one of the worst." I'm often told I did Canada a favour by not choosing a career in diplomacy.
"You'd have done better in the stock market, better yet in American shares and even better than that in emerging markets." Yes but, he quickly added, having memorized his catechism, home payments filled his piggy bank.
Had he not bought the house, he'd have had to rent. Then he would have been filling someone else's piggy bank.
Psychologists call this confirmation bias: filtering information to maintain a belief system that would otherwise come under threat. Thus, when calculating the benefits of home ownership, my friend noted the expense of rental payments. But he left out the costs of upkeep, maintenance, interest payments, taxes, insurance and legal fees.
Tallying all these up, adding compound interest, then lopping the total off the current value of his home, he'd have ended up with a much smaller profit than the $300,000 he imagined he'd made. "If you approach investing with the same skepticism you apply to your buddy's religious faith," I told him, "you'll probably stop evangelizing for the creed."
Fat chance of that. His faith was undiminished. As is the widely held Canadian belief that rising house prices don't just enrich us individually but benefit the whole country. The good times have seldom seemed as good as they do now, with Canada's economy having received a healthy jolt from the buzzing housing sector. Alongside the jobs created in construction, real estate, insurance, banking, furniture and hardware stores, not to mention the demand for lawyers, electricians and plumbers, rising house prices have filled government coffers. Most importantly, the "wealth effect" produced by rising house prices has loosened purse strings, as happy homeowners take out equity lines of credit and go shopping or do yet more investing and home improvement.
And yet, seen dispassionately, all this good news may actually be bad. Think about it. A house produces nothing. It's not a factory, it's not a farm, let alone a new technology that will enjoy widespread application or transform the economy. Moreover, the jobs created by housing lie mostly in sectors of the economy where productivity growth is lowest.
When the housing boom ends, there won't be much left to show for it.
That's because the better things get in real estate, the worse they get elsewhere. Thinking of starting a business in Toronto or Vancouver? You'll struggle to make rent before you meet any of your other expenses. And don't even bother asking for a loan. Adair Turner, who headed Britain's Financial Services Authority at the time of the global financial crisis 10 years ago, points out that over the past halfcentury, real estate has become so important that it now accounts for more than half of all investment in Western countries.
Only a sliver now goes toward creating or expanding businesses. Canada mirrors this trend.
The country's net rate of new business formation has been slowing for years.
It's no surprise, therefore, that a study last year by the Bank for International Settlements found that countries with high house prices suffer low economic growth. Still, like a biblical literalist faced with scientific evidence, millions of Canadians cling to the faith. Like a cargo cult, we encourage others to go through the rituals of home ownership, promising them riches untold if they do. That's where the conversation in the café ended, with the atheist telling his friend to ignore the doubters, that the benefits of home ownership were everywhere to be seen. "Don't miss out," he admonished.
And you can't argue with a prophet whose predictions come true. For as long as enough new converts join the home-owning cult, prices will indeed continue rising. Still, I can't help but picture the anthropologists of a distant future, looking at us the way some anthropologists today regard the Easter Islanders of a distant past: just a little too preoccupied with building religious monuments to apply our ingenuity and resources to more mundane concerns - like actually building an economy that works for everyone.
Likening economics to religion is not to knock either, by the way.
For everyone who vainly gives their church tithes in the hopes they'll get rich, there's another like a former student of mine, who found religion, overcame alcoholism and went on to a hugely successful corporate career.
And just as my dry friend's church gave him the discipline to stay out of bars, some people benefit from home ownership because being forced to pay a monthly mortgage is the only way they will ever save.
In other words, there are all sorts of good reasons for buying a home - reasons that have nothing to do with facts or the supposed science of investing. Such as the security one senses from having a place of one's own. Or the feeling of belonging that comes from being able to join all those dinner and water-cooler conversations about home improvement or interior decorating. Or the social status accorded to those who have gone through the initiation rites and joined the propertied class. In myriad ways, millions of Canadians feel whole after buying a house the way others do after prayer. All power to them.
But, just as most religion teachers will tell you that a questioning faith is a strong faith, we are entitled to probe the promises of the home-owning cult.
Young people, in particular, can ask if a simple faith has morphed into something more sinister - a sort of mythical volcano god with a ravenous appetite for the endless sacrifice of their future dreams. Not only is Canada's real estate boom inhibiting long-term economic growth and transformation, it is also widening social divisions. Over the past two decades, Canada has followed other Western countries in witnessing a growing concentration of wealth at the top. The richest fifth of society is amassing ever more of its wealth, mainly because its wealth is growing faster than the economy. Driving the bulk of this growth? Real estate and pension entitlements - with an overlap between the two, since pension funds have been snapping up lots of real estate and riding the boom.
When an economic doctrine gains widespread acceptance within a society and its leadership, it can function as a state religion, providing structure, purpose and meaning to people's lives, giving them rules to live by, offering a vision of a promised land and a road map to reach it, uniting them around a set of shared beliefs. Faith and trust provide foundations for economic prosperity. Without them, we could not have attained the prosperity we have.
Nevertheless, any such faith should serve people, not the other way around. It's probably time to ask if our belief in the miracle of real estate, such as that held by our southern neighbours before the 2008 crash, is starting to resemble a doomsday cult. And we should stop pretending there's much science behind it all. We've grown as rich as we have in large measure because we believed, because we swallowed the doctrine and rushed into the temple.
But without new believers, this whole temple could come crashing down.
ILLUSTRATION BY CHRIS WOODS
Tuesday, September 18, 2018