“Canadian Tulips: Economic Bubbles and the Housing Market” is a post by freelance writer and TimelessFinance contributor Adina J. By the way, IT’S ADINA’S BIRTHDAY TODAY so wish her a happy one in the comments or you’re a bad person.
Economic Bubbles: A Brief History
While I have no pretensions of being conversant with economic theory or its real-world macro-level applications, as a history buff, some of my favourite historical tidbits involve economics and economic bubbles. The history of the Dutch East India Company is one example, intertwining nautical hijinks with fascinating sidelights on botany, cultural studies, politics and, not least of all, the dismal science. Speaking of the Dutch and their rich and varied history of commerce, another one of my favourite historical anecdotes involves the Tulipmania of the early 17th century. Nearly 500 years later, the tulip saga continues to entertain – and to the wary, caution – us with the foibles of a society who, for a relatively brief moment, appeared to lose its collective mind.
For those who have not yet had the fortune of being regaled with the story at a cocktail party (or, better yet, read the book Tulipmania by Anne Goldgar), here is a brief synopsis. After tulips were introduced in Europe sometime in the middle of the 16th century, they quickly gained popularity in the territories that now comprise the Netherlands, where the tulip turned out to be well-suited to the harsher climate. The tulip was also a perfect status symbol, being relatively rare and strikingly different in appearance as compared to other flowers. Furthermore, its arrival on the scene was perfectly timed, coinciding with the Golden Age of Dutch commerce (centered around the aforementioned East Indies trade) and the rise of the merchant class. As the nouveau riche are wont to do, the merchants strove to display their wealth in increasingly flashy ways – the building of impressive estates, surrounded by resplendent, tulip-bedecked gardens, being chief among them. (Some also bought paintings by Rembrandt, which informs the plot of one of my all-time favourite novels, Picture This by Joseph Keller, the guy who wrote Catch-22. Consider that your literature tip of the day.)
The tulip found a prominent place amid this overabundance of riches, becoming the 17th century equivalent of, say, granite countertops (attractive to look at, and about as useful as a chocolate teapot). Many varieties were cultivated, including certain specimens affected by a mosaic virus that resulted in unusual petal patterns (needless to say, the most sought after). The process of cultivating and producing tulips was not always straightforward, which further increased their desirability. By the early 1630s, a whole market in tulip bulbs sprung up – a shadow of the real Dutch Exchange. Though some of these accounts have now been disputed, it has been written that, at their peak, individual tulip bulbs were being traded for hectares of lands. And then, just as inexplicably as Tulipmania’s growth, one day it was over. The bubonic plague may have had something to do with it.
As I mentioned, modern historians have begun to challenge the traditionally accepted accounts of the proportions of what was, essentially, one of the first economic bubbles. It may be, as now suggested, that tulipmania was limited to a small group of wealthy merchants, few of whom experienced significant fallout from its collapse, given that money actually rarely changed hands in the trading of the bulbs. I prefer the original version, myself; it makes for a better plot. And stories of economic bubbles are a great deal of fun – at cocktail parties and elsewhere – when viewed with the superiority of hindsight. As eminently rational (in our estimation, anyway) consumers, most of us secretly or not-so-secretly relish an opportunity to tsk-tsk the short-sightedness or, better yet, irrationality of our fellow consumers. Nothing like a bit of Schadenfreude, am I right? Few things afford as juicy an opportunity as economic bubbles … too bad they tend to be rather rare.
Or are they?
Economic Bubbles: A Modern History
Economic bubbles are hardest to spot when you’re caught in their midst. The enthusiasm of a large group of similarly-situated and -minded individuals can be contagious; it can skew perspective. With the internet ushering in the Great Age of Opinion, the skepticism of the average person is at an all-time high; where a minority might be driven to seek their oracles on the outer fringes, the majority usually rebounds to trusted sources – their families and neighbours, and, as a last resort, the government and its multitudinous mouthpieces. Yet it is often those very people who fail to alert us to swelling economic bubbles, often because they are equally carried away on the hot air.
Before I turn to the elephant in the room, time for a little anecdote. While it’s not something I widely advertise about myself, I am what you might call a nail polish connoisseur. You probably didn’t know that such a thing existed, but I assure you that a whole sub-culture thrives in the far reaches of the world wide web. (Take any fantasy-based multiplayer game fandom, subtract the cosplay and substitute nail polish, and you will have an idea of what I’m talking about.) The “hot new thing” in the polish world nowadays are indie labels – i.e. regular people making glitter-loaded concoctions in their kitchens, which are then sold to the adoring masses. Some of the makers of these polishes are quickly attaining cult status among the aficionados. For obvious reasons, indie polishes are made in small quantities relative to the demand, which serves to create an environment not entirely unlike that of the tulip-mad Dutch marketplace of the 17th century. Having retained a certain sense of proportion in these matters, I recently came to realize that I was on the verge of experiencing, first-hand, a micro-bubble. That moment of realization came when a bottle of nail polish was sold for a little over $1,000 on eBay. You didn’t read that wrong, and I did not misplace a comma. One thousand dollars for about 15 ml of liquid that will, by definition, be used up sooner or later (or even go bad). The Dutch have nothing on polish fanatics.
All in all, this was an easy bubble to spot, because it involves a non-essential consumer good. When prices spike beyond a certain ceiling – driven by speculators selling the treasured good to each other and predicated solely on the expectation of further capital gains – it doesn’t take a psychic to know how it will all inevitably end. Anyone who lived through the Beanie Babies craze can tell you that. Nevertheless, it is infinitely harder to maintain the same objectivity when it comes to the value of something that constitutes a crucial part of most people’s lives: houses.
Canada’s Tulips are in Full Bloom
Obviously, I’m not the first person who has posited the existence of a real estate bubble in today’s market; I’m not even the first this week. But I am amazed by the vast number of people who continue to deny, ignore, or be oblivious to either its existence or its unavoidable denouement, or both. These people need to heed the cautionary tale of Tulipmania. The longevity of a bubble shouldn’t really be the focus of discussion either because, save for the speculators, the buyers of real estate are in it mostly for the long haul. It’s not just money that’s fueling this bubble; emotions and dreams are, too. With average house prices now 5 to 10 times the average income in most Canadian markets, and dismal prospects for a significant surge in income, what are the chances that this or future generations of otherwise over-extended buyers will continue to be able to service or take on the debt required to keep the market, and this bubble, going? If house prices continue to rise at the rates seen in the last decade, by 2030, it will take a 7-figure income to pay the mortgage on a suburban builder’s special. How many financed-to-the-hilt degrees is it going to take to make that kind of bank?
My goal is not to bash the idea of home-ownership; it would be hypocritical of me to do so, considering I bought a house myself two and a half years ago. Nor is my purpose to gleefully announce the coming of the real estate Apocalypse, because I am hardly in a position to enjoy any attendant spectacle from above the fray (see my previous point). But I believe that it always pays to be aware of the possibilities, good and bad (and especially the latter). Taking steps to be prepared for the worst, which may not happen, will put you in a more advantageous position than hoping for the best, which will almost certainly not happen. What can you do?
Start by assessing your financial situation; be honest with yourself. If you’re over-extended, look at ways that you can reduce your risk and exposure to the effects of a bubble collapse. If you have debt, throw everything but the kitchen sink at it. If you don’t, do the same thing to your mortgage. Check for any places where your budget is hemorrhaging money. I’m not advocating living like a hermit (or moving off the grid, or doing any of those things that watching The Walking Dead might inspire you to do, because unless realtors start getting really desperate, zombies will not be part of the equation – and neither, one hopes, will the bubonic plague), but this is also not the time to be cavalier with the money that you do have. Speaking of which, you may want to look into getting a second job or other revenue stream. If you’re worried that doing all of these things might still leave you ill-prepared for the future, then it might be time to think about unloading your real estate. But, again, be honest with yourself – about the true costs of selling (and moving), the likely profit you might realize (or loss that you might need to absorb), your options going forward, and your actual ability to be happy whilst renting/living in your parents’ basement/camping in the local park. (I’m kidding about the last one; I’m pretty sure there’s a bylaw against it.)
What are your end-of-bubble plans?