When looking for a culprit for rising housing prices in Toronto, many people eventually land on speculators. Speculation, they say, should be curbed, to maintain affordability.
But what is speculation?
Speculation is when somebody buys something in a time of relative abundance to then sell it in a time of relative scarcity. That’s how they make money in the process. In effect, you can think of speculators as transferring inventory from the present to the future.
Joseph from the Bible was a speculator. Remember? He advised Egypt’s pharaoh to store grain inventories during the upcoming “seven years of plenty” to then unload them during the subsequent “seven years of famine”.
Speculation performs an important market function. It signals that, as bad as things might be, they’re about to get much worse (where bad = expensive).
The proper response to speculation is to understand that signal, and respond accordingly.
If speculators are telling us that, though housing is scarce and expensive today, it will become moreso in the future, we should take them seriously. We should look to the policy levers available to curb that outcome.
Radical land use liberalization would be the right place to start.