Tuesday, March 3, 2009

Beware The Light At The End Of The Tunnel.

Recession or Depression, it will end at some point and the economy will turn around.

And whether or not you agree that Vancouver is in a housing bubble that is in the process of bursting (with condos declining 50% from peak and houses 40% from peak), there is one worrisome element that haunts every realtor and homeowner heavily vested in the book value of their property.


Yesterday Warren Buffett, known as the Sage of Omaha for his ability to make millionaires of ordinary investors in his company, released his keenly anticipated annual letter to shareholders.

Within that letter came the dark assessment which could ultimately deal the crushing blow to Vancouver Real Estate.

"The multibillion-dollar bailouts handed out by the US Government will bring on an 'onslaught of inflation'... Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel,” Mr Buffett said. “These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation.”

Every economist worth his salt has been sounding alarm bells recently about the amount of money being thrown into the financial crisis. It may be seen as a short term solution, but in the long term there will be a ton of liquidity around after all the deleveraging.

The worst of all possible worlds is declining purchasing power combined with high unemployment and rising prices.

This is 1970s-style stagflation.

But because inflation numbers have been understated for years, and money supply is set to increase at unprecedented rates, this time it could intensify into a hyperinflationary depression.

Does anyone remember that in the early 1980s, the actual interest rates for Lower Mainland families was 22% (prime was 19.5%)?

A return to 1970/80s style inflation will result in a return to sky high mortgage interest rates.

Even if interest rates ONLY soared to 15%, the result will devestate housing prices.

Consider... in order to have the same monthly payment on a $650,000 dollar mortgage today, the mortgage amount would have to drop to $250,000 at 15%.

When interest rates spike to combat inflation, no one will be able to afford a $650,000 mortgage.

If you want to sell your house, that $650,000 price tag will HAVE to fall to at least $250,000 to find someone who can afford to buy it.

And those poor souls who have to renew their large mortgages under these conditions? Well the monthly payments on that $650,000 will be over $7,000 per month when renewed at 15% (can you say default and foreclosure?).

If you knew that the $650,000 house you were thinking of buying today would only be able to fetch you $250,000 3-5 years from now, would you buy it?

There's a light at the end of the tunnel for potential homebuyers in the current Vancouver Real Estate market.

But beware... it's a steam train called 'Inflation', and it's barrelling towards us at a speed which will crush Real Estate values, destroy anyone holding a large outstanding mortgage and should scare off any prudent, potential buyers contemplating purchasing real estate this year.

Let's face it, only a fool would assume such a large mortgage with these economic storm clouds on the horizon.


Email: village_whisperer@live.ca


  1. it's "Oracle of Omaha" :)

    Great article, it is crazy times and risk avoidance does seem key.

  2. Thank you for the comment. I kept the description for Buffett used by the British in the Times article intead of the comment phrase used in North America (ie. Sage of Omaha instead of Oracle of Omaha). Welcome to the blog.