Monday, August 23, 2010

The Slow Melt will continue.

I get asked this all the time.

If the Bank of Canada is getting ready to regularly raise rates, doesn't that mean the economy is turning around and the worst has past?


The problem is, the worst has not past.

And the reason is simple: debt. Massive amounts of debt.

The last 50 years have given rise to the biggest credit bubble in human history. And we are still in the early days of watching it collapse.

This is what many do not understand... or simply do not want to accept.

Our government tried to temporarily stave off the effects of this reckoning with the belief that buffering against the worldwide firestorm would allow us to bridge the gap to a world wide recovery.

But that recovery isn't materializing.

As David Rosenberg notes in today's Globe and Mail, we got a pause in initial phase of the 2008 collapse with a spectacular bear market rally in the final eight months of 2009 and early 2010. But we are now rolling back into a period of pronounced economic weakness, with contraction in gross domestic product likely to soon follow the stagnant economic conditions of the current quarter.

There is simply too much debt overhanging household balance sheets and the process of balance sheet repair is still in its infancy (particularly here in Canada).

"We are a long way off this deleveraging phase from running its course, both in magnitude and duration. If history is any guide, these transition periods to the next sustainable bull market and economic expansion typically last seven years."

Rosenberg observes that government has expended tremendous resources to cushion the blow but now we will see first hand what happens when policy stimulus and a mini-inventory cycle fade in a credit contraction: stagnation in the third quarter followed by renewed economic contraction in the fourth quarter.

We are in an extraordinary period of economic and financial history. We have seen an almost 80% rally in the stock market since the financial crisis. The last time that happened was in the early 1930s. That event was followed by gut-wrenching spasms to the downside.

With economic recovery not gaining traction in 2010, the parallels to 1930/31 are eerily similar.

For Vancouver real estate it means the slow melt will continue. With no worldwide economic recovery; there is nothing to drive a resurgence in real estate.

But, as mentioned yesterday, sellers are not prepared (by a long shot) to accept the changing realities of the market. Therefore we will see more and more listings pulled from the real estate market as those sellers (who have the financial means to do so) will attempt to outwait the stagnating market.

But less listings will not change the economic condition. Thus prices will continue to decline even with less listings out there.

Real estate this autumn will primarily showcase the four D's: death, debt, divorce and displacement. These are the forces which will push sellers to actually sell at market rates in the current stagnating climate.

And to entice buyers, sellers will have to cut asking prices.



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