Wednesday, December 21, 2011

Tues Post #1: Part of the Plan

Yesterday we posted that when the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

Cheap credit, artificially suppressed interest rates and government policy were used to fuel and protect the real estate boom in the hopes that the Great Global Recession would pass before the impact him home in the Land of the Maple Leaf.

How important has Real Estate been to the Canadian economy?

In 2010 the Canada Mortgage and Housing Corporation widely discussed the importance of the housing market for the Canadian economy in the CHMC publication 'Canadian Housing Observer'.

The CMHC’s numbers show that real-estate-related economic activity in 2009 contributed more than $300 billion to the Canadian economy.

That accounts for more than 20% per cent of Canada’s total gross domestic product.

Not only did new residential constructions and sales of current houses positively stimulate the economy by creating jobs, creating higher wages, creating investment, and creating government revenues but far more important to the government was the wealth effect motivated by increasing housing prices.

The housing bubble strengthened consumer confidence and, as a result, consumers spent more.

This was crucial for the Canadian economy. While the world was going through the Great Global Recession, this 'wealth effect' allowed Canada to get by without experiencing any real pain.

In an average recession, the economy starts to rebound after 3-5 years.

So the hope has been to get us through the worst of the recession and then allow growth in our resource based economy to mitigate the debt overhand.

The problem is that this was no ordinary recession.

As many in the blogosphere have noted, this economic crisis began with its financial system and as Bank of Canada Governor Mark Carney noted last week, “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

And that's the problem... the recovery is not going to come in time.

Our nation's plan of "channelling cheap and easy capital into unsustainable increases in consumption" is just that... unsustainable.

It's forced Carney to publically address what, until now, has been a topic confined to the realm of the blogosphere. To wit that the “debt super cycle” in which debt fuels consumer spending as a driver of the economy is an era which“is now decisively over.”

This public admission is stunning for those who have spent any amout of time watching the statements of public officials.

It's your best evidence that the time of reckoning is rapidly approaching.

Which begs the question... how will it all play out? 

As we posted back in 2009 in 'The Anatomy of a Bubble', no model can predict the timing, highs or lows of any bubble.

But all bubbles - be they real estate, stock market or whatever - tend to follow a pattern traced in human psychology.

And when any given bubble 'unwinds', it usually takes as long to wind down as it took to wind up.

Vancouver's real estate market has taken over 15 years to blow up into it's current state.  As a result one could logically expect that the decline will take years, not months, to play out.

Ideally officials like Carney want to see a gradual unwind. That's the plan.

But can you engineer an orderly unwind?

Things don't always go 'according to plan.' The variable is the unknown... events that upset the plan.

I mean let's face it. If things went according to plan, the Recession would be over by now, wouldn't it?


Click 'comments' below to contribute to this post.
Please read disclaimer at bottom of blog.

1 comment:

  1. Canada's last recession was the first time that Canadians did not deleverage. Household debt to income and household debt to GDP ratios increased and are at "edge of the cliff" spots. The next recession will not be like the last one as Canada has already used the household bazooka and we will need to deleverage.