Sunday, November 7, 2010

Will QE2 prevent a Vancouver Housing Collapse?

One of the big questions I am hearing locally is whether QE2 will prevent a collapse in real estate here in the Village on the Edge of the Rainforest.

Of course not.

As I have already mentioned, in the normal cycle of classical Capitalism the expansion of credit/debt and rising assets leads to mal-investment and rampant speculation: overbuilding, overcapacity, over-indebtedness and leveraged bets that misprice risk.

This is precisely what occurred in the 1995-2000 stock market bubble and the 2002-2007 housing/real estate bubble; mal-investment, over-indebtedness, overbuilding and mispricing of risk on a grand, unprecedented scale.

All around the Western World the correction has taken hold, with the exception of Canada and Australia.

In the normal scheme of things, all this bad debt would be written off and the assets would be sold/liquidated. Holders of those assets and the debt based on those assets would both suffer losses or even be wiped out. All the overbuilt/overpriced properties and overcapacity would be sold for pennies on the dollar, and the liabilities (debt) wiped off the balance sheet along with all the inflated assets.

There is no other way to clear the market for future growth.

The Canadian Government has been successful in delaying the reckoning with the record levels of stimulus the Conservatives dumped into the economy in 2009.

The effects of wasteful misallocation of capital cannot be fixed by policies that encourage the wasteful misallocation of capital. But those policies can often help to prop up unsustainable patterns of activity in order to "kick the can down the road."

This is what we have done in Canada, in general, and particularly in Vancouver.

Stimulus can postpone major economic adjustments, but often that makes the ultimate adjustment even worse. And ours is only getting worse.

Put simply, policies and investment practices that are effective and friendly to the short-term can often be destructive and violent to the long-term, particularly when those policies and practices encourage the misallocation of capital.

Everyone is in a tither about how the average price of a single family house in Vancouver rose in October to top the $1 million mark again.

But as we have already discussed, those numbers are skewed.

In October 2010 west side Vancouver SFH sales totaled 161.

One mansion in Shaughnessy sold for $17.5 million along with a handful of other sales in the $3 million to $5 million range.

The $17.5 million Shaughnessy house alone juiced the west side detached average price by $108,695.

Take that away and the average drops to under $950,000.

Will QE2 also juice the market and lead to an increase in sales?

Well it appears the real estate boosters don't think it will.

The Canadian Real Estate Association (CREA) came out with a statement on November 5th (the day after QE2) that 'revised' their forcast for national sales activity downward by 4.9% for 2010 and predicts sales will collapse further in 2011, down by another 9%.

But that's nationally. In BC the CREA sees sales dropping by another 15% in 2011.

That's 15% less than this year's totals where we have spent half the year with sales down by 40% from 2009.

Sounds like a "NO" to me on a rebound from QE2.

With sales hovering at their lowest levels in the last 10 - 15 years, a prediction of another 15% drop is not what I would call 'bullish'.

QE2 may juice the stock market for a while, but it will not save the Vancouver real estate market.

What it will do is keep interest rates from rising in the short term, which will prolong the slow melt.

Meanwhile for your Sunday viewing pleasure: three video clips.

The first is the trailer for the documentary "Inside Job". I had a chance to watch it last night in the only theatre in Vancouver it's playing at (Tinsletown) and it's worth checking out. It didn't explain the crisis as fully as I would have liked, but it does a really good job.

Next is a 7 minute clip featuring Peter Schiff on inflation and QE2. Schiff is bang on with his assessment and this clip is destined to be central to another round of "Peter Schiff was right" videos once this episode fully plays out.

Finally there is a repost of a 45 minute documentary titled 'Overdose: The Next Crisis' for those who may not have seen it the first time around.

Enjoy your Sunday!



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  1. Once again an outstanding post. I hadn't heard of Inside Job, but I'm definately going to check it out. Thank you. And the Schiff clip is bang on.


  2. In addition to Schiff's accurate comments, I think the economy will simply get desensitized to all the newly created capital; the economy will cease to respond to new QE measures as it gets saturated with new capital to the point it can't absorb any more.

  3. Thanks for this. So, youre firmly in the boom, bust, inflation, interest rates, debt balloon, and then finally a scenario doom ultimately taking down N.A. realestate for a good long time as boomers attempt to retire... camp.


  4. As I say to anyone who wants to buy real estate right now... why is it you want to buy?

    Investment? Significantly more money to be made elsewhere.

    First time buyer houselust? Significantly more money to be made elsewhere which over the longer term will allow you to satiate the lust more sufficiently.

    All bubbles follow the same path. If you are here you understand that. The only ones struggling with that reality are those who are impatient.

  5. If QE1 didn't work, why does Bernanke think QE2 will work any better?

  6. texas budget is toast

    "The Texas Legislature will confront what's likely to be the toughest fiscal crisis in state history when it convenes Jan. 11 – a gap of up to $25 billion between anticipated revenue and expenses for the next two-year budget cycle. Here's where the money came from and where it went for the most recent two-year budget"

    that is with a B!

    Our biggest trading partner is imploding state by state. Mad max and 1984 are movies that come to mind when this plays out.

  7. Official Banana: