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Monday, August 16, 2010
Canadian real estate bubble officially pops
Last October on Twitter, I made a simple statement. I said, "By Fall of 2010, it will be clear to everyone the real estate bubble has popped".
The thing is, I don't have psychic powers. But I've never been a follower. As even many libertarians have seen, I'm quick to challenge conventional wisdom, wherever it lies and even if I tend to agree with it.
The prediction I made was based on several months of analyzing rent-to-price ratios in the Vancouver, Calgary and Toronto markets. It was becoming clear, despite the fact that prices were rising, that there was something very amiss in the real estate market.
Real estate investors were pouring in, buying up condos in major cities -- representing about 40% of buyers, bidding prices up and up, while the rents they were getting were stable at best, to edging downward.
When I made the claim on Twitter, a flurry of real estate agents challenged me, making various claims like: "the Canadian real estate market is very healthy" and "rent-to-price ratios do not matter all that much really".
Okay. So how did they do, and how did I do?
Canada’s housing market stalled in July as sales sank 30 per cent from the same month a year earlier, the Canadian Real Estate Association said Monday.
[...]
“We expect a downward correction of nearly 10 per cent in the monthly average prices, followed by several years of stagnation of price growth at the rate of inflation, in order to bring Canadian house prices back to balance,” TD Bank economist Grant Bishop said.
(read the rest at the Globe and Mail)
Ouch. and...
In July, the picture turned negative. The Toronto Real Estate Board said last week the number of sales in the city fell 25 per cent compared with June. While prices have yet to waver, anecdotal evidence of a slowdown is rife. Bay Street office workers point out that many of the newly opened condo towers in the downtown core appear to be devoid of all signs of human life.
(read the rest at the Globe and Mail)
Double ouch.
You know, it's not just rent-to-price spreads that's the problem. It's consumer debt load -- at all-time highs. Canadian consumers have the highest levels of consumer debt in the OECD.
You might also wonder that when inflation-adjusted wages have only increased ~10% in the last fifteen to twenty years, how the hell real estate prices have managed to rise by over an order of magnitude. But most people don't wonder such things. They make silly assumptions based on trends.
Most financial experts rely on the fallacy of analysis by analogy. A perfect example would be: "for the past ten years, real estate prices have risen by about ten percent. Therefore, you can expect that over the next ten years, housing prices should rise about ten percent a year".
This is not an exaggerated example, either. This is exactly what financial analysts on CNBC, Fox Business and Canada's BNN have been saying, leaving myself screaming at my television on more than one occasion.
Naysayers like myself have paid attention to factors that the analysis by analogy financial bimbos have ignored. Like rising consumer debt, rising public debt, and an exceptionally low interest rate environment, making borrowing far too easy.
When I've argued with some financial experts and quote-unquote "real estate experts" on this point, their retort has often simply been to just state that I don't know "how real estate works". A claim that seems somewhat absurd given my track record vis-à-vis theirs. Especially in light of today's news.
And if you're wondering if I take a teensy-bit of pleasure in being right on this, then the answer is -- sort of. It always feels good to be vindicated. But this is a stark reminder of people's ability to get caught up in the moment and ignore obvious warning signs.
The warning signs that a severe housing crash in Canada was coming, is coming, and is now unfolding were numerous, easy to understand and very stark. Yet, instead of consider them, we chose to believe -- without warranted reason -- theories that immigration-led demand, and Canada's "resilience" could sustain the trend. But these were silly pipe dreams.
Posted by Mike Brock on August 16, 2010 | Permalink
Comments
Yes, congratulations on being correct in your predictions. I've been telling people basically the same thing for months and months, and nobody thought that the market would turn.
Though I think you have to look at "Household Income" rather than indiviuals average/median income when comparing to home prices. I think one change over the last 30+ years is that there's a lot more duel income households. Yes, individually salaries haven't kept up with home prices, but there's more incomes coming into each home. I think that's what has helped enable the home prices run-up, along with low interest rates and greedy home speculators, realtors, mortgage brokers, and banks.
Posted by: Taurus1234 | 2010-08-16 10:48:06 AM
Yeah, it's good to be right, but it is still unfortunate that so many got caught up in the madness of the bubble. Similar to your previous post, people just got too personally invested in the notion of homebuying that - perhaps - they took the warning signs of vastly inflated prices as predictions of future wealth.
I don't have a personal interest in seeing housing prices fall, per se, but getting some sanity back into the prices of this industry isn't completely bad.
Posted by: Jonathan | 2010-08-16 10:58:25 AM
I suspect that the downturn in the Canadian housing industry will not be nearly as severe as that of the U.S., due to the absence of distorting factors such as ARM's up here. However, the criminally loose monetary policies of our central bank have pretty much mirrored those of Bernanke/Greenspan for many years, so it's reasonable to expect that a large portion of that monetary excess has been fed into the Canadian housing market. This excess must now be deflated, with all the traumatic consequences that must follow.
The lack of a bursting housing bubble in Canada has more to do with economic time lags than the supposedly superior regulatory structure that we have here.
Posted by: Dennis | 2010-08-16 11:07:27 AM
Mike,
You are absolutely correct about housing being overpriced in Canada. Traditional valuation metrics indicate this. I believe you're wrong regarding the timing. This is a small glitch. Housing prices have more room to rise before their eventual crash. I'll start with an analogy before giving you my reasons why I think your call is too soon.
A few years into the beginning of my career, I made a daring call and told my boss that we should be selling our shares of Nortel. The P/E ratio and DCF models indicated that the stock was WAY overvalued. Everyone else disagreed, but I was certain. This was in 1998. Nortel almost tripled from there. I was right, but too early. What I had not analyzed were interest rates and the money supply. To be honest, bubbles almost always last longer than you think. Now for the reasons ...
Have you looked at the balance sheets of the major Canadian banks of late? Some of them have more liquidity than they have loans. Over the last 2 years, they have been taking the BoC liquidity and investing them in short term bonds. This has resulted in a steeper yield curve (i.e driving down short term yields more than long term ones). The reality is that they will eventually lend those funds out. This will result in a flattening of the yield curve (i.e. short rates rising and longer rates falling or staying flat). There is no reason to think they will not lend into the housing market. As they do so, 5 year rates will not rise, they will most likely stay stable or maybe even fall. They are encouraged by the CMHC and the fact that residential real estate lending in Canada is 0% risk weighted in the Tier 1 ratio calculation (when insured by CMHC of course). The game will only fall apart when they don't have any liquidity left to make more loans. At that point, rates will go up, and people will no longer be able to afford their payments. But for now, the Cdn banks have an incredible amount of liquidity available.
So why the correction? Simple. Banks have only been lending a fraction of what they could be lending. They have been reticent because the new capital rules have not been established yet. OSFI still has not decided how it will treat mortgage-backed securities (will they be brough on b/s or not). Once OSFI has made up its mind, banks will open the flood gates. Now given this fact, the market would have remained stable if not for the European credit crisis. Because of the crisis, banks got scared and slowed their lending, which resulted in a rise in rates and the correction you are witnessing. There is no reason to believe, barring a financial meltdown in the next month or two, why our banks wouldn't begin lending again in 2011 (once the rules are clear). At that point, they will lend a significant amount in residential real estate (because they are encouraged to do so) and prices will start rising again.
Now I could be wrong for a number of reasons. Calling the end of a bubble is the hardest thing to do in investing. And I actually agree with you that most investors and real estate people are out to lunch in thinking there is no problem. I just think the problem will get bigger before it blows up.
Posted by: Charles | 2010-08-16 11:20:52 AM
Correct me if I'm wrong, but did this "TD Bank Economist" see the recession itself coming?
Posted by: Shane Matthews | 2010-08-16 11:27:48 AM
"Correct me if I'm wrong, but did this "TD Bank Economist" see the recession itself coming?"
Of course he didn't. They're paid not to.
Posted by: Charles | 2010-08-16 11:29:52 AM
Charles,
I actually get the sense that the Canadian banks are not that stupid and they do see the writing on the wall. So I'm not sure I agree with you. I think they'll continue to tighten lending as they see the market continue to retract and they'll stockpile that liquidity.
I'll re-affirm my strong belief that this is the tear in the bubble.
Posted by: Mike Brock | 2010-08-16 11:38:23 AM
"I actually get the sense that the Canadian banks are not that stupid and they do see the writing on the wall."
The bankers may not be that stupid, but their shareholders are. Shareholders (normally rightfully) see excess liquidity as destruction of capital (i.e. cost of capital exceeding return on capital). But in this case, it isn't their capital, it's our capital. Regardless, bank shareholders will pressure the bankers into lending out the funds. And they will win. They always win. Furthermore, the CHMC and gov't of Canada will not allow a housing-price correction as long as the banks have liquidity. You see, residential real estate lending is heavily politicized. OSFI has already indicated it will raise the limit on the ACM ratio so as to not hamper residential real estate lending when or if MBS come on balance sheet.
But we shall see ;)
Posted by: Charles | 2010-08-16 11:53:36 AM
Oh ... and not to sound like an arrogant asshole ... but I talk to these guys. They've all indicated that they are targeting lower Tier 1 ratios (substantially lower) over the longer term and that they are simply waiting on OSFI.
But as I said, we'll see in 2011.
Posted by: Charles | 2010-08-16 11:57:20 AM
Indeed we will see, Charles. You could be right and that I'm not giving the banks enough credit for being completely stupid.
Posted by: Mike Brock | 2010-08-16 12:31:19 PM
One problem I see is the lack of a good answer to the question: "If real estate growth has stagnated, where can I put my money to get a return?"
In the late 90's I watched as an investment dealer I know weathered the tech bubble. I remember seeing all of these Kanata and Stittsville homes owned outright by people who had gotten massive gains out of Nortel and used them to buy houses mortgage free. Crazy cash being made by morons who had the idea of starting a dot com to sell steaks online, making an IPO, and scurrying away with the cash on the ridiculous venture, only to leave others feeling the pain.
With the tech bubble bursting, people started dumping their dough into Toronto real estate (and, in other countries, London real estate, New York real estate, etc). Prices skyrocketed as real estate became the new thing to invest in.
A two bedroom bungalow in Leaside could/did quickly ramped up by hundreds of thousands in value, to something like $600,000.00. Many of those old stock Toronto home owners sold their Toronto homes, and moved out to the burbs where they bought homes (sometimes bigger) at a much lower cost. Many would consume the difference: in my town, I'd see people who make perhaps $60k per year yet were driving to their jobs in Toronto (perhaps 45 to 90 minutes away) in a brand new gas-hungry Escalade. Fuel prices exploded for a while. Those same folks now drive compact cars, having burned through much of their cash on trips to the Bahamas etc.
House prices in the burbs doubled (where I am, at least) within 3 years of the tech bubble bursting, and have remained at those silly prices ever since. New homes were built, boasting "starting in the 300s or 500s or even 700s...the 300s, 500s, or 700s?!...whole subdivisions of them? In a country where the AVERAGE person's income is about $30k, and where most home owners do not make more than double that.
What would one get for 300s, or 500s, or 700s? Largely, cheaply and badly made houses that will be falling apart at age 20. Absolute junk, some on lots as skinny as 36' (a.k.a. bowling alleys). Of course, the municipalities have been cashing in too, allowing houses to be crowded and requiring smaller lots, because the smaller the lot, the greater the number of property-tax taxpayers, and the greater the revenues (they have hoped). The result: from my perspective, neighbourhoods that differ only in degrees from trailerparks.
I wish no person financial hardship but I've been telling Mrs McKeever, since house prices skyrocketed, that this too shall pass. I remember the late eighties, and how magnificent old Vics lost as much as half of their value once that real estate bubble popped. There should be some good buying opportunities if things go the way I've been expecting them to go (for far too many years) and the way that Mike sees them going in the immediate future.
Incidentally, Charles and Mike: even given the ridiculously low interest rates and incentives, the number of houses selling in the $300k-$500k range continues to astound me, given the average income of individuals in Canada. I can only imagine that their mortgages are variable rate, and that the terms of these mortgages is so long as to survive the death of the mortgagor (i.e., that the banks are, essentially, renting homes to people for about $3k-$5k per month, knowing that the homes will never be paid off). Any other insights into what has made it possible to sell so many thousands of units at such prices to people who seem to make nowhere near enough money to justify such puchases?
One other thing: is there any data concerning the number of units that are being sold to foreign investors (whether for the purposes of flipping at higher prices, or for the purposes of renting to Canadians)?
Posted by: Paul McKeever | 2010-08-16 1:55:14 PM
Paul,
I run a model which tracks what's called housing affordability (which is literally mortgage payments / household income). The rent to price ratio (although useful as a long term indicator of value) is useless in the short term as it does not take interest rates into account. My model assumes current prices of homes, current household incomes, current five year fixed interest rates, 25 year amortization period, and 10% downpayments. The mortgage to household income ratios are all within normal ranges (27% in Ontario for example) except for B.C. (where the market is completely insane). So in other words Paul, given 5 year fixed rates, houses are still affordable (for now) given the current rates. They're obviously even more affordable on a variable rate or a longer amortization schedule. Now, as I said, this is unsustainable. These prices are not affordable in the long term. I just think the eventual crash will come a bit later (when the banks run out of liquidity). I could be wrong if OSFI decides to increase the liquidity requirements or if banks decide to not lend on their own (as Mike has suggested).
Posted by: Charles | 2010-08-16 2:45:00 PM
Just like in America the retards will deny whats happening until everything is dismal and the smoke clears to show a truly disasterous result.
So be it. Everyone will get what they deserve soon enough. Then they will cry foul. Well please dont cry. Its your own choices.
Posted by: Jed | 2010-08-16 7:17:44 PM
Next housing pop to be Australia, and yet again everyone there will be soooooooo surprised.
"It's different here". haha. kangaroos will not keep prices artificially high. 20%-50% bye bye.
Posted by: Bill | 2010-08-16 7:56:21 PM
Bill:
Indeed Australia is next on the pieper's list to visit. Our bang (I'm Aussie) is going to be much louder than Canada's though due to the enormity of our bubble. Aus' bubble is like "Japan-1989" big. I've been following the Canadian RE market closely, and the similarities between yours and our markets are frightingly similar.
Posted by: G-Man | 2010-08-16 9:39:25 PM
Okay, you base this on: Vancouver, Calgary and Toronto markets. These markets soar and crash regularly. The Steady Eddy locations in Canada are not even considered???? Why is that?
This price per salary view breaks down when you look outside your three cities. I know that Canada's average house cost per salary is like 3.2, is this out of control and going to pop? From my recollection, Calgary and Vancouver have popped a number of times without causing similar pops in the rest of Canada. Will a increase of interest rates trigger people to run away from their houses?
Posted by: Connie | 2010-08-16 10:33:29 PM
Is negative gearing legal in Canada? This is one thing that keeps the Australian Bubble inflated somewhat.
Posted by: Mike | 2010-08-16 11:18:47 PM
Thanks for the very informative post Mike.
I'm quite piqued with Charles's perspective too.
This has all made for a very interesting read.
Site Bookmarked!
Charles: Curious, do you have a blog?
Thanks guys.
Posted by: jay | 2010-08-16 11:34:52 PM
Connie:
Yes this mainly applies to the "bubble" markets only, them being BC, Calgary and Toronto. For the areas that have not experienced the exuberant price surges, life will go on as usual. This is also the case with some markets in the US like Atlanta, Houston, other Texan cities, etc. that did not have bubbly housing markets and hence have not been too profoundly affected by the US crash.
Posted by: G-Man | 2010-08-17 12:27:46 AM
Canadian investors made one mistake, but it was a big one. They invested in the Canadian ponzi bubble. Had they been a bit smarter they could have avoided all risk and invested in the Aussie ponzi bubble - a truly unstoppable RE market.
But then Australia is different, we have kangaroos :)
Posted by: they call me bruce | 2010-08-17 4:26:59 AM
Jay,
No. I've thought about it. My job is rather demanding. I'd probably have to run the thing in the evening and I'm not sure I'd have the energy for it ;)
Posted by: Charles | 2010-08-17 5:18:56 AM
An interesting post. But stop calling me "Pops".
Posted by: ebt | 2010-08-17 11:35:35 AM
I've been tracking the bubbles in Australia, Canada, UK & USA based on the Price/FamilyIncome ratio. Based on that metric, Canada's bubble was $80k in June.
Due to our recourse mortgages, we wlll probably face a flat market 'til 2017 rather than the deep plunge (28%) seen in the USA. Our bubble was worse in 1989, prices dropped only 6% and we had ten lost years...
Clik my profile for our monthly chart.
Posted by: Freddy Hutter, TrendLines Research | 2010-08-17 12:42:18 PM
Freddy,
I believe the housing bubble is systemic of a much larger economic imbalance, and it's effects will ultimately be far worse than 1989.
The comparisons between 1989 and today are stark. Principally, consumer debt is insanely higher, savings are insanely lower, the imbalance between the consumption component and production components of our economy have shifted drastically towards the former.
Canada may have maintained a trade surplus with the United States, but it has a trade deficit with the rest of the world right now --mostly due to our massive consumer imports from Asia.
I am extremely wary, as I said in this post of using past-performance trends to predict future performance, because the underlying macroeconomic factors are completely different today.
Posted by: Mike Brock | 2010-08-17 1:06:33 PM
For the past two years, Canadians have taken on more consumer debt, by maxing out their home equity loans, leveraging up on cheap lines of credit, and generally being spendthrift on their credit cards.
This "consumer confidence" we have witnessed is endemic of the ridiculously loose money policy courtesy of Mark Carney.
Sometimes, and I know this skirts conventional wisdom, "confidence" is the last thing we need from consumers. Sometimes, we need consumers to stop and think "shit, maybe I should pay off my debts." not... "maybe I should taken on more debt considering how cheap I can borrow".
All of Canada's recent success on the consumption side has largely been a function of the latter scenario, and for that reason I am predicting not just a crash, but a fairly devastating crash.
Canada's ultimate saving grace will be it's resources sector, which will serve to fuel the reinvestments in production that will ultimately be necessary to restore the economy to balanced growth, but that will only come after a painful re-adjustment.
Posted by: Mike Brock | 2010-08-17 1:15:47 PM
Mike, in my mind the Bank of Canada has a two-fold role: keep inflation around 2% and strive for the natural unemployment rate.
Unlike the USA, Canada did not have a Recession in 2001, but we did come out of that slowdown with an 8.7% Unemployment Rate. A low interest rate regime & a 62-cent Loonie helped us get that down to 5.5% by late 2007 ... a feat not seen in decades, but hardly what economists would call full employment.
You are free to say BoC & various Fed'l Govts were overindulgent, but social price for your preferred tightness was far too great, imho.
If the expansion of money supply was excessive, the economy would have revealed visibly high wage demands and more strikes. We never got there...
So, how far do you expect the avg price to fall in Canada? How high do you expect Unemployment Rate to go in this so-called collapse?
Posted by: Freddy Hutter, TrendLines Research | 2010-08-17 2:47:55 PM
You are free to say BoC & various Fed'l Govts were overindulgent, but social price for your preferred tightness was far too great, imho.
The social price will be paid one way or another. We're looking at a serious problem with the capacity of the consumer to continue being an engine a growth when we're sitting a record debt-to-income levels.
If we continue with near-zero rate policies in the near future, there will come a time, as unbelievable as it may seem, that Asian countries will start to question whether or not they want to hold our currency. And when the happens, all hell will break loose.
I mean, the only thing of value that w'ere exporting to asia is intellectual property and raw materials. Which is why, of course, Canada and the United States are so concerned about IP enforcement in China. Because we don't have anything else to sell them to balance the account in our trading relationship.
Take away the comparative advantage of intellectual property, for say, making BlackBerrys and you don't have much other than raw materials to make up the trade balance.
The Keynesian economists have oft dismissed the problem of trade imbalances, with the -- what I think is mistaken -- assumption that Asia needs us to consume what they produce.
Peter Schiff probably had the best analogy to explain this imbalance:
"Some people got stranded on a island. And I think it was six or seven Asians and one American.
As soon as they got stranded on the island, they had to divy up the jobs.
One Asian was given the job of fishing. The other one was hunting. One of them got a job of gathering fire wood.
So they all had jobs, and the American was assigned the job of eating.
At the end of the day, they would gather around and prepare this feast -- and the American would sit there and eat it. But he wouldn't eat it all. He'd leave just enough crumbs so he can give it to the six Asians, so they go on and repeat it again tomorrow -- spending all day preparing a meal for the American to eat.
The way modern economists would look at it, they'd say; 'this American is vital to the whole island economy! Without him, nobody have to fish, nobody would have to hunt, nobody would have to gather firewood. I mean, he's creating all this employment on the island!' But the reality is, every Asian on the island, his lot in life would be dramatically improved if they kicked that American off the island. Because now they'd have a lot more eat, and they might not have to spend all day hunting and fishing. And then they can lie on the beach a little bit."
And when you consider the foreign currency reserves that Asians have built up from Western countries, since they have nothing to buy from us -- from our economies of non-exportable, high-value services, the analogy isn't hard to follow.
Posted by: Mike Brock | 2010-08-17 3:38:32 PM
Don't forget the commercial real estate bubble. Its up next in the US, or has it popped already? Will the same happen here? I haven't forgot our debate Charles, but been way to busy so far this summer to even think about it much. I see that you are very understanding of how such things work. If I was in the market in any way, I would certainly turn to you for assistance, if you had the time to offer it :)
Posted by: Steve Bottrell | 2010-08-17 3:40:10 PM
Mike, most of your comments pertain to Americans moreso than us, and I am in basic agreement that the USA will be a basket case for a generation. Canada will not have a problem selling its securities abroad in our lifetimes.
Our economy generally rises and falls with the USA's 8.5-yr business cycle, and you can rest assured that the BoC will again raise rates about 3% over the next five years.
But we do not want the Canadian consumer to become the "engine of growth". That's exactly the route the USA went, albeit they are always in the top 3 of export nations. And Canada must strive to build an environment for diversified exports. The 2009 Recession revealed some of our sectors (auto mfg & softwood) are too dependent on a healthy American economy.
Posted by: Freddy Hutter, TrendLines Research | 2010-08-17 4:06:37 PM
Well, this will be a point of contention, because I believe Canada suffers from many of the same structural problems as the US. We're overwhelmingly consumption oriented with a marginally better manufacturing sector and much bigger resource sector.
But the Canadian consumer's balance sheet is actually more abysmal than the American's.
Posted by: Mike Brock | 2010-08-17 4:24:56 PM
That being said, Mike, if you feel we are headed into a black hole, please feel free to give us magnitudes and a timeline ... not just hysterical rhetoric. So respectfully, I'll ask again: what % drop in housing are you forecasting and how high will unemployment go?
Posted by: Freddy Hutter, TrendLines Research | 2010-08-17 4:36:09 PM
Freddy,
The reason why I won't give you a timeline or numbers is simply because of the degree of political uncertainty. It is an unknown to me, the degree to which the BoC is willing to use further rate easing and open market operations to keep the charade going for a long time.
It's further complicated by the US dynamic, which adds further political uncertainty.
My sense is that the United States will likely not get through the next two years without a major currency crisis. And the number of different scenarios that could play out as a result are innumerable.
I can garauntee you, though, that Canada faces a certain domestic downturn within the next five years that will be far worse than what we just experienced.
The Quebec Provincial balance sheet is also a huge risk factor.
Posted by: Mike Brock | 2010-08-17 4:46:08 PM
It's ALL about to go horribly wrong in Australia. Sooo many people down here have ego and emotion wrapped up in property. They refuse to believe it's all about to go...POP! It's sure to happen, just for the same reasons its happening in Canada and elsewhere!
Posted by: SS | 2010-08-17 7:50:24 PM
But Australia has a severe supply shortage of housings! Our real estate industry assured us by 2020, we will have a shortfall of over 200,000 houses! I have to say we are definitely different, and we are more rational than you Canadians. Your real estate bubble may pop, but ours wouldn't! Our banks are strong, and we have plenty of resources to sell to China as well! You will have to kill us before we sell our houses for a reduced price. It's an Australian dream to own a house, and this culture will separate us from the rest of this world! House prices to the moon!
Posted by: Temjin | 2010-08-17 10:36:03 PM
While we don't agree on the Cndn demise, I concur on the USA financial crisis. The Barrel Meter at my website proposes the secular decline of the USD that started in January 2002 will continue 'til it hits 0.55 agin the EURO (compared to 0.75 today).
This will drive crude oil back to $140/barrel by 2011Q3. At $91, USA New Car Sales will collapse. At $108, several G-20s will relapse into Recession. Then Demand Destruction will kick in again, as it did in 2008Q3, and oil will plunge to $52/barrel.
Optimistic as I usually am, I have very little faith in the ability of Congress & their celebrity President responsibly addressing the Deficit/Debt wall that will bring this upon them.
Posted by: Freddy Hutter, TrendLines Research | 2010-08-18 12:44:54 AM
"Demand Destruction". We're talking different languages. You're using a Keyensian analysis. I reject the Paradox of Thrift, for instance.
I would argue that price deflation and a return to net consumer savings instead consumer spending is just what the doctor ordered.
Posted by: Mike Brock | 2010-08-18 7:38:55 AM
Freddy,
Further to my previous comments, I think your analysis fails to take into account the economic-political dynamics of Pan-Pacific trade. It has become such that, we depend on Asian workers to subsidize our consumption, and by extension, our quality of life by trading buying power for Western debt.
That includes Canada and Europe.
We have entered a period where your Keynesian theories of demand smoothing are going to be completely annihilated.
It will happen when the Chinese no longer have an interest in trading buying power for Western debt.
Even with Canada, China has to buy our debt, so we can buy their products. If they did not do this, they would not be able to ship Chinese-manufactured products to either the US or Canada.
China has allowed this to go on for as long as they have, because they have relied on Western expertise to modernise their economy and build China into a self-sufficient powerhouse. But this is changing, and a floating RMB would decimate Western economies, as the cost of Chinese-manufactured goods would skyrocket, reducing the aggregate buying power of the West and causing China's comparative wealth to go sky high.
When this happens, China will move aggressively, buying Western companies and assets, while we find ourselves with absolutely nothing of value to export to them other than raw materials.
Canada will be in a much better position than the United States because of the size of our resource sector. But by "much better" don't fool yourself into think that means we'll have a higher quality of life than we have today. We won't.
Posted by: Mike Brock | 2010-08-18 8:00:34 AM
Mike, we agree on the demise of the USA, but your premise has become far too simplistic if it includes Canada - which had operating and trade surpluses for most of the last fourteen years.
Until the USA dragged us into Recession, we did not have to go hat-in-hand to the Chinese bankers. And they currently hold a negligible portion of our National Debt created by past sins.
Posted by: Freddy Hutter, TrendLines Research | 2010-08-18 12:54:54 PM
Freddy how much of Canada's exports are to the US?
Anyone who claims the demise of the US, Canada's largest trading partner, yet believes Canada will merrily continue along unfettered is hopelessly deluded.
Posted by: Tony Danza | 2010-08-18 7:21:14 PM
To get back to the topic at hand, this week's new economic data reveals the Canadian Housing Bubble stands at $79,000. A month-end update of our Monitor will show the national monthly avg for home prices has declined $17k from the peak in May. Our Recession Meter infers GDP dropped to 1.8% in July (from 6.2% in January).
Posted by: Freddy Hutter, TrendLines Research | 2010-08-19 6:09:46 PM
Who are we kidding, exports have shrunk to the USA, only China exports are stable to lowering, china is about to slow down- like it or not . Canadians are up to their neck in debt, housing pricesses will continue to fall. Its all part of the great "Global leveling" Noth America versus the Far east, we have been overly expensive in housing and labour cost for the last 20 years. The piper must be paid. Interest rates will rise to try and stem inflation- all... not good for housing loans. And new housing starts. Lest brace ourselfs for 5 years of reducing house costs.
Posted by: ray winfield | 2010-12-04 4:28:05 AM
As part of one of my business ventures I do research on properties in and around the Toronto area all the time. I've been doing this regularly since 1995. The most disturbing thing that I have noticed over this time is the lack of equity most home buyer have when they acquire that new home. I have seen properties where more than 90% of the selling price of the property is in the new mortgage for that property.
When you have situations like this (which I believe account for the majority of sales today) you basically have no "wiggle room" on your monthly mortgage payments. When mortgage rates are being kept artificially low as they are today (around 3% variable), many people can afford a house nearly twice the value they should be buying. If you raise those rates to 6% (still considered low based on the last generation's standards) you have a situation where your mortgage payments are now practically double for the same property if you only have 10% equity like I see happening. Factor in all the consumer debt out there and you have a scenario where most of these home owners will no longer be able to afford to pay that mortgage and the house of cards comes tumbling down.
It's basic mathematics...something that has been grossly under emphasized in the Canadian school system in the last generation. The result being that you have a large portion of the population today who cannot figure out the costs of borrowing money and how they will never recover from the mess they have put themselves in. The USA is just an example of what will continue to happen around the world for the next generation until we all smarten up...literally!!
Posted by: Arthur | 2010-12-29 1:16:27 PM
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