Broken

When I say a game is broken, I don’t mean that there are faults or errors in its execution. Whether it’s a chess set that ships without any bishop pieces or a video game that crashes without a series of post-release patches, the game itself as conceived by the designers is not broken. The media are faulty, but the underlying game is intact.

What I consider to be a truly broken game is one that “works” in the technical sense but where the rules are so contrary to our standards of fairness, enjoyability, or sense of the spirit of the game that we simply cannot abide with it until the rules are changed. This can often be the result of the overpowered nature (or as one of my friends once called it for short, OP-ness) of certain cards or strategies that almost certainly lead to victory over any alternative plays (where one or more alternatives are seen as having inherent legitimacy rather than just being blunders to avoid).

Earlier this week, Canadian Minister of Finance Bill Morneau announced an updated set of rules for mortgages which may alter the Canadian real estate game. I am delighted by this because I see it as a solid attempt to prevent a game that is anything but trivial or recreational from becoming broken. It’s not a good thing when people see the only way to get ahead is to load up on debt.

In this post I won’t be making any arguments for or against the timing of a correction or a crash, nor whether it’s a good idea for any individual to be able to buy right now. I don’t have the expertise to give specific advice and I am not going to try to predict the future. What I will be talking about is risk vs. reward in a game; I am of the opinion that it’s a good idea to adopt rules which dissuade Canadians from going all-in betting on real estate, regardless of whether or not it’s a “good investment” in any individual case.

First, let us consider the possibility that what goes up must come down. Not everyone agrees that prices are unsustainably high. Some people believe for a number of reasons that house prices will continue to rise for decades to come (with only an occasional hiccup) and that it only makes sense to get onto the train as soon as one can. It would then seem unfair to millennial renters trying to get on board to have to do more to qualify for a mortgage. Some people would say we are losing while we wait. But consider for a moment that the price of a typical house blasting past the million dollar mark without a corresponding boom in wages and salaries is the sign of something very unhealthy. If it doesn’t go up forever, then the game isn’t as broken as it could be. Those who gamble will eventually lose, with the magnitude of the risk increasing as the stakes get higher and higher. However, even if the game is not broken in that sense it’s still the case that the higher prices climb, the bigger the fall. Having had front row seats to what happened in the USA ten years ago, we Canadians should know better than to keep on raising the stakes until catastrophe strikes. New rules that bring us down slowly are a welcome alternative.

Now, suppose the average millennial’s dad is right when, over Thanksgiving dinner, he channels the Lex Luthor from the 1978 film Superman and tells them to buy land because it’s the one thing that nobody is making any more of. After all, it worked for him when he bought a house in the 1970’s. But for a moment let’s put aside any skepticism and imagine for a moment a world where Canadian cities, lead by Vancouver and Toronto, never see a meaningful correction or crash. Those priced out now can never afford to buy there again and both prices and rents get launched into the stratosphere. Vancouver becomes Manhattan. This is what happens if the game is broken and it stays broken. The logical end of this scenario is a new aristocracy where the only good way to get into the market is to be born into a family that is already in the market. This is much, much worse than having a bubble burst. If such a thing was possible and it really is buy now or buy never, then it would be time to change the rules before the commoners start getting agitated.

So, one does not need to know much at all about the finer details of finance to reach the logical conclusion that regardless of what happens in the market, average people looking to make the most of what they’ve got are in for trouble when the game is broken. In order to sustain itself, any gamble (whether it is an investment or a betting game) will have to find its place in the following triangle:

A runaway market will eventually fix itself, but the human consequences might be hard to take. It’s all fine and dandy to be priced out of the market for Dutch tulips or for the returns on Beanie Babies to crater, but when we are talking about places to live and life savings it becomes necessary to try and mitigate the extreme consequences. And so we come back to the new rules. They transfer more risk onto the lenders and less onto the taxpayer, reducing the moral hazard of banks being able to lend out increasingly outrageous amounts of money to people whose ability to repay is dubious if anything goes wrong. They crack down on people hoping to get around paying taxes on rental income by misusing principal residence exceptions, putting them on a more even field with other kinds of investments/income streams. They ensures that people take on less risk when they sign up for 20+ years of debt. Are the new rules enough? Will they yield the desired outcomes? I don’t know. But I find it encouraging that we have a government that is making an attempt and signalling that there may be more to come.

It’s bad news if your finite game involved becoming rich by jumping on the train at just the right time and laughing at people like me when we still have to pay rent when we are old. Good news, however, if your infinite game involves changing the rules mid-stream to allow as many players into the game as possible. In changing the rules to not favour real estate over other kinds of investment as much, we are not just encouraging the market to calm down to the point where people aren’t priced out of the market just because they can’t get a small loan of a million dollars from the bank of mom and dad. We are also creating the conditions where a young person can get ahead by investing in other things. Boomers may have coveted the garage and the yard and encouraged their children to do the same, but the post-millennial generations may instead choose a future that involves participation in the sharing economy rather than owning cars, investing in companies that create and implement the technologies of the future rather than counting on real estate equity for economic security, and retaining flexibility by living in a housing co-op rather than having to spend previous time mowing the lawn. The economic game of the future needs rules that don’t unfairly advantage the holders of the homeowner title, as that boomer dream may not last forever.

So whatever strategy we employ to invest in our future prosperity, let it not depend on the game being broken in a way that gives us an unfair advantage over our peers. Let us seek to play by rules which allow as many players as possible to be a part of the game. If the history of wealth inequality is any indication, our survival as a nation may very well depend on changing the rules when the game is broken.