An excerpt from a Globe and Mail article
on the upside of debt:
When you don’t have the cash to buy something today, but are very confident that you will be able to pay for it over time, it can be good to take on debt. The most common case of this is buying a house. Without debt, very few people could ever buy their first house.
(Emphasis is mine)
That last sentence struck a chord with me. It got me thinking - is it true? If there were no such thing as mortgages, would home ownership become unattainable for the general public? At first blush, it certainly seems true. After all, who has $350,000 sitting around with which to buy a house?
But the more I thought about it, the more I questioned this assumption. It's certainly true that very few people can come up with the huge sums of cash it would take to buy a home outright. But isn't it also true that that very fact would exert enormous downward pressure on home prices? Doesn't that statement completely ignore the "demand" half of "supply and demand?" If there were no such thing as mortgages, would that $350,000 house still cost $350,000?
Wouldn't it be significantly cheaper?
If all of a sudden, everyone had to pay cash for houses, the real estate market would shift dramatically. Homes listed for $350,000 would either sit on the market for vastly longer terms than they currently do, or they'd do what sellers have done since the dawn of time when unable to attract buyers. They'd lower their price until it sold.
Maybe the reason houses cost so much is precisely because
of mortgages. Numerous economic studies which highlight the enormous burdens facing this generation's middle class cite 2 key factors in our reduced quality of life compared to our parents and grandparents: The dramatically increased cost of education and housing.
It just so happens that the past decade has represented a historical "golden era" of easy access to exactly those two kinds of debt (student loans and mortgages). Coincidence? Or cause and effect?Is easy access to credit - the very thing that's supposed to be improving our quality of life - distorting the "supply/demand" equation to the point where our lifestyles have become too costly?
If there were no such thing as mortgages, and people had to pay cash for homes, would the "housing" component of our budgets settle back down to a more reasonable piece of our income pie? Would we be able to buy homes for 1/2 to 1/3 of their current prices, freeing up money that could be used to improve our quality of life, or fund our currently-woefully-underfunded retirements? Are the banks and their easy-credit responsible for the squeeze on the middle class?
Of course, nobody has to borrow the money if they don't want debt. But isn't it kind of like an arms race? If you and a stranger both want to buy the same house, but you insist on paying cash and he's willing to take on a 35-year mortgage, don't you have
to be willing to take a mortgage, in order to compete? The price of the home will be driven up by virtue of his
willingness to shoulder debt, regardless of your own commitment to paying cash. As a result, whatever house you buy will have its price inflated - even though you're paying cash - because your competition is getting an artificial "boost" from cheap credit.