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Leadership If house prices continue to drop, certain businesses will feel the pain

Founder and CEO of O2E Brands, the parent company of 1-800-GOT-JUNK?, WOW 1 DAY PAINTING, You Move Me, and Shack Shine.

Fewer millennials own homes than the previous generation did at their age, but it’s not because they don’t want to — the market has become so inflated and inaccessible that they have no way in.

JONATHAN HAYWARD/The Canadian Press

I’ll never forget when I bought my first home: I was 24 years old and invested $397,000 in a brand new home. Today, a house of the same size, in Vancouver, at least, would cost about $2-million — and would be nearly impossible for someone that age to buy.

Real estate makes up over three quarters of Canada’s national wealth — the highest it’s been since 2007. This boom is thanks (in part) to increases in land value, which more than doubled between 2009 and 2017. This is great for the economy, but it also means that the housing market has gotten out of control.

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Our company is based in Vancouver, where housing and land prices are notoriously high (more than double the national average). It doesn’t matter if it’s a mansion or a rundown shack — buying a home (or the land to build one on) has become a pipe dream for many people.

Over the past year, the real estate market has started to show signs of a slowdown. While this is good news for prospective homebuyers, how it will affect consumer spending in other industries is unknown. As home service providers, here’s why we’re keeping a close eye on changes in the housing industry.

What’s slowing the real estate roll

Millennials are now the largest generation in Canada, making up over a quarter of the population. People often refer to them as a lazy group who’d rather spend money on avocado toast than save for a down payment — but the reality is they’ve been locked out of the housing market.

It’s true that fewer millennials own homes than the previous generation did at their age. But it’s not because they don’t want to — the market has become so inflated and inaccessible that they have no way in. My brother, who just became a doctor, has been wanting to move home to Vancouver but he can’t afford it. Instead, he’s working in Syracuse, N.Y., where buying a home is more realistic for young people.

But it’s not just an age thing: interest rates have skyrocketed, and with the new stress test, it’s become harder for anyone to get a mortgage. It’s a Catch-22: homes are unaffordable because property value is high, and at the same time, Canada needs property values to stay high to maintain its wealth. Canadians are caught in a lose-lose battle with an economy at odds with itself.

So what happens when people can’t buy something that has been a symbol of status and success for decades? It forces them to re-examine their values, for one. But it also affects how they spend their money across the board.

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How real estate prices influence consumer spending

Consumers fuel the economy. That’s why our customers are our top priority — if we don’t take care of them, they won’t support us. If we want people to spend their hard-earned money on our services, we have to earn it.

But regardless of what companies do, consumer spending always ebbs and flows. It comes down to the “wealth effect”: a measure of how changes in household income affect how people spend their money. In other words, people are more willing to spend when they’re earning more. And in most cases, when they’re flush with cash, they’re spending it on things like travel and home improvement.

We see this first-hand in our line of work: The strength of the home-services industry is as much of an economic indicator as housing prices themselves. When people are paying for premium services — like junk removal, painting, moving or house detailing — it means they have disposable income. But when our business cools off, it’s a clear sign that money is tight for our customers.

It’s happened before: The 2008 recession hit us hard after 10 years of hypergrowth. With fewer people willing to spend money on premium services, our revenues fell by $40-million. We managed to bounce back even stronger, but if housing prices continue to drop, we’re going to feel it again.

In any case, it doesn’t look like there will be any steep pullbacks in real estate prices (yet). Economists say that even though prices have come down, consumer spending won’t slow down in a noticeable way unless there’s a dramatic drop. For now, we’ll keep going the extra mile to serve our customers. There’s still a long way to go to correct the real estate market but it has to start somewhere

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