Friday, January 11, 2013

Remember, this bubble was deliberately created. Prices are NOT a reflection of inherent value

Yesterday we laid out the month-by-month evolution of our housing bubble since 2002 as seen in the average Vancouver single family house price.

Presented in that fashion, it makes a compelling list.

In a November 2011 article, the  Economist Magazine wrote: 
"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..."
Never before have house prices risen so fast, for so long, in so many countries.

Think about that.

Despite the fact the evidence is all around us, many of us simply refuse to see what is going on.

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.

Beginning with the dot com crash of 2000, and spurred on by the 9/11 terrorist attacks of 2001, policy was crafted to create an economic 'salvation'.

It began in America. US President George Bush, 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 to expand the economy.

A bubble was created BY DESIGN.

Economist Paul Krugman, writing in the New York Times on August 2, 2002, originally identified it:
The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. 
This was a prewar-style recession, a morning after brought on by irrational exuberance. 
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Yes... you read that correctly. The creation of a housing bubble was a deliberate economic stimulus move. And in Canada, our nation followed America's lead.

The financial stimulus created after the dot com crash and 9/11 - specifically designed to engineer "soaring household spending" - dramatically impacted the economy:
  • Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years.  CMHC also had limits on how much you could buy with their insurance.
  • Just after 1999 CMHC lowered the down payment to 5% with price limits on how much they would insure depending on the area. Amortizations were still 25 years. There would be no price limit on what they would insure if 10% or more was put down.
  • By Sept. 2003 CMHC still only allowed 5% down on 25 yr amortizations, but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased. 
  • In March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured).
  • In March 2006 you had  0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year.  Interest only payments were allowed for 10 years.
  • In November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years. 
  • Canadian banks ramped up the easing in mortgage lending by allowing up to 7% cash back offers.  You could basically get paid if you bought a house.
  • Not only were the rules surrounding the granting of money loosened, but CMHC's cap for granting mortgages grew from $100 Billion in 2006 to almost $600 Billion in 2012.
In the last seven years alone 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 is well under way, but as the Economist noted last year:
"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'.

When our Canadian bubble started to collapse in late 2008, the Conservatives moved in with massive stimulus to delay the collapse. The idea was to forestall the collapse long enough for the economy to recover and allow rising economic conditions to repair the market.

But this wasn't your average global recession (which typically last 1-3 years, 5 at most).

The Conservatives now realize the gamble won't pay off and by kicking the bubble down the road five years, the collapse could be even worse.

The fact of the matter is that the bubble is being unwound... or at least the economic stimulus that made it all possible is being unwound.

Real estate apologists are desperate to protect the image that our real estate is, in fact, a reflection of 'true value' (as we have seen the last few days on Global TV).  They are also desperate to pressure the Government to continue the artificial stimulus.

But that stimulus is unsustainable and Government must change course.

The Economist Magazine noted, Canada is "more overvalued than America was at it's peak." History tells us all asset bubbles created by excess credit ALWAYS bust.

These government policies have generated a tremendous malinvestment in real estate.

That it will be unwound is not in doubt. It's only a question of how quickly it will happen.


Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. The party is over ...time to sober up !!

  2. Cookie Monster economy: Me eat capital!
    No more capital? Debt will do!

  3. 34 sales only yesterday? Yikes.

  4. Down payments should be 10%

    1. That would pretty much mean every late-20/early-30 something I know, even when they have a "real" job wouldn't be able to get in to the Condo market in Vancouver.

      Guess who's not going to vote BC Liberal or Federal Conservative next election.

    2. Sure it would. Prices would adjust down accordingly.

  5. This is one of your best posts ever. Thank you.

  6. Thank you for the clearest, most concise summation of the Canadian housing market I have read to date. People should print this off and hand it out like flyers on Main Streets across the country.

  7. Isn't there a movie bout this? Zero Down Forty?

  8. Its surprising how few people even to this day understand that this bubble was engineered by design and is now being collapsed by design. It is all very predictable.

    Prices certainly aren't a reflection of value, they are a reflection of how badly the population has been scammed.

  9. I concur with the above commenters. This post succinctly summarizes what has occured in the Canadian real estate market. Bravo, Whisperer.

  10. Hope the Conservative have enough balls and not step in again this time when the crash gets going hard.

  11. Great post Whisperer.

  12. What I want to know is what's the next bubble?
    USA has already blown up their $1 trillion student loan bubble.
    Carbon credit scam isn't flying too good so what's next?