What we cannot seem to see

I read a great quote today:

"Many of the world’s financial and economic woes since 2008 began with the bursting of the biggest bubble in history. Never before had house prices risen so fast, for so long, in so many countries..."

That's how a recent Economist article, 'House of Horrors 2: The bursting of the housing bubble is only half over', begins. And it makes a statement that few in Vancouver truly understand. It bares repeating:

"Never before had house prices risen so fast, for so long, in so many countries"

Vancouver's house prices are not a reflection of inherent value. They are a by-product of a world-wide debt phenomena that was deliberately created. Click the image below to enlarge and read a critical quote uttered by economist Paul Krugman on August 2, 2002:

In America, US President George Bush almost singlehandedly, through cheap rates, lax regulation, government housing subsidies, presidential boosterism and financial engineering, managed to get the home ownership rate to 70% as part of a deliberate strategy in expand the economy. A bubble was created BY DESIGN.

In Canada, Prime Minister Stephen Harper added fuel to the bonfire.

In the last six years we’ve had more pro-real estate initiatives than in the quarter-century prior to that.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And most significantly, CMHC absorbing all lender risk.

Cheap credit, artificially supressed interest rates and government policy have fuelled this real estate boom.

You must understand this... our sky-high real estate prices are not a reflection of real value but a by-product of a deliberate strategy to create a bubble and inflate the economy.

In many countries the bust of the boom created by these policies have started. But as the Economist notes:

"The bust has been much less widespread than the boom. Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark. But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia and Canada, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued."

Many here think that because our bubble has not burst yet that we are not really in a bubble and that our housing prices are not artificially inflated, but are a reflection of 'true value'.

They are wrong. We ARE in a credit inflated bubble, a bubble that is part of a world wide phenomena. And that bubble is unsustainable.

As the Economist concludes, the worldwide housing bust is only half over and the full impact is yet to begin in many countries.

Canada is one of those countries.

We are, as the Economist notes, "more overvalued than America was at it's peak."

Unfortunatly most of us cannot seem to see that.

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Email: village_whisperer@live.ca
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