Friday, November 25, 2011

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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  1. Excellent... bloody... post!! Well done.... esp to the paragraph listing out the points... ending with CHMC.

  2. Hopefully (haha) there are no more bubbles to inflate and the people will realize all the debt piled on in the last 30 years plus peak oil in 2005 means peak GDP and pretty much peak everything else.Get used to the End of Growth.
    The correlation between oil use and GDP is exact.

  3. ^ its amazing that people dont understand this. 6% GDP... once energy costs more, the economy shrinks.... less than 5, it expands. Maloney talks about Wealth Cycles based on oil booming and crashing. Can read it like a book apparently... he also suggests going forward that you can expect huge swings... Tremendous highs and lows because of a very limited resource.

  4. Shadowfax said... peak oil. Stop spreading this lie, peak oil is a fairy tail! Get inform and spread the word. Flaherty and Carney are very well aware of what they were created. Mark Carney was at the, secret and illegal meeting of the bilderberg group(illegal for some attend y because of the function they have) were criminal George soros had to escape by the wood to escape a warrant arrest. Very troubling for you, if you bough a house at the peak this year! Soon are later its going down. But now the *elite are scared because their program getting ex pause, like NEVER BEFORE and the more they wait, the more...

  5. Canadian housing bubble is a slow motion train wreck. If Europe falls apart(and chances are it will) and China demands for Canadian commodities wane(its definitely will). There will be a triple whammy effect for Canadian economy: Job lost due to export and construction, bigger provincial and federal deficit and spending cut, over leverage consumers and tumbling housing price. I hope we never come to that, but it is a real possibility. Our government keeps selling Canada as the best economy in the world, but dig a little deeper and oops, we are the same. As of 2010 the total debt (combining federal, business and household)

    Canada debt is at 274% GDP
    U.S debt is at 289% GDP(not inc obligation)
    Italy debt is at 313% GDP(The next Greece???)

    If Canadian housing/commodities economy bust our debt/GDP ratio will look a lot worse...

  6. ^^ Plenty of oil.... just getting more and more expensive to get at. Once it hits up a couple ticks....... crashhhhhhh.