Sunday, March 20, 2011

Punishing the Good!

The mantra of the last decade has been reward speculation and punish prudent behaviour. Im
agine you are back in 2003 or 2004 and you are thinking of buying. Your parents taught you to be prudent and so you are quietly saving up a good down-payment, denying yourself nights out, fancy cars etc.

Meanwhile the property market is in a parabolic up-trend whether you are in Vancouver or Toronto. So you wait. Everything that goes must eventually correct. You wait patiently. But the Federal Government
Ok's longer mortgages. So property takes flight at a steeper rate. You just wait, keeping your powder dry and saving your nest egg in conservative interest bearing stuff.

You see the housing bubble in the US start to burst in 2005 and by 2007 it is in full retreat.

The whole world goes into an orgy of speculation, egged on by the likes of Greenspan and
Bernanke and in 2008 the orgy of debt finally bursts.

This is your moment. This is when your hard saved up pennies will finally be worth something. Wrong!

The Federal Government goes crazy- doubling the
CMHC and allowing them to under-write a ruinous amount of risky mortgages. Meanwhile the Bank of Canada drops rates to near-zero. The Provincial Government backs the Credit Unions regardless of the risk on their books and the Federal Government takes car loans and second mortgages off the books of the major banks.

RESULT: RE has a tiny correction, blink and you missed it, and you are now left getting LESS than inflation on your savings. All to bail out the irresponsible.

This does two thing to the psychology of the nation.

1) It tells the buyers left, that the Government will not let RE drop.

2) it tells speculators that they will always be bailed out, no matter how over-extended they are. Once it hits the fan, the Government will load the risk onto tax-payers.

We then get a huge rebound in prices and the prudent are completely screwed. HAM money, Olympic money, Government subsidized spending etc add to the fire and prices go parabolic. All the time, interest rates are held sufficiently low, so that all savings whither away. The message something, Anything! Gold/ RE/ Stocks anything but hold savings in safe bonds.

The final play in this saga.

The graph goes STRAIGHT UP. There is panic buying. The Governor of the Bank of Canada and the Finance Minister lecture Canadians about their lack of savings and irresponsible borrowing!!

They decide to remove the most irresponsible lending but give enough lead time to allow the last push into tax-payer risk-assumed mortgages.

Possible end game

The property market finally drops under it's own weight or is driven down by inflation and higher mortgage rates. The Government panics and once more finds a way to try and bail out speculation by making mortgages tax-free, or providing direct support to banks, or printing money to pay the
CMHC debts (as in the US) and finally destroys any equity the prudent may have left.

Thanks to Larry Yatter for permission to use his chart.


  1. I am one of the prudent savers that is getting whipped and I feel sick. What can we do? Either throw the nest egg into speculative stocks and hope they go up faster than real estate or just pray for a melt-down. Neither of which sounds great.

  2. I have seen that chart dozens of times and never actually realised that the climb is now steeper than ever. Things are going crazier now than before the big scare of 2008. Didnt anyone learn any sort of lesson at all from the mini crash of not even 3 years ago?

    Just for curiosity I was wondering if the HPI looked any different. To average things out a bit I used all of greater Vancouver since the westside of Vancouver proper has been going insane and skews the Vancouver only average pretty hard.

    Mar 2009 $649,342

    Feb 2011 $848,645

    30.6% increase (about 1.33%/month). The average shows about a 50% increase in that time.

    May 2008 $771,250

    Jan 2005 $482,233

    60% increase (about 1.5%/month). The average shows about a 63% increase in that time.

    So it would seem that greater Vancouver hasnt been going quite as nuts as just Vancouver proper. Still, things are still going almost as fast as before the mini crash according to the HPI.

    Also, slightly different topic, my parents got a free 3 month subscription to Vancouver Magazine and when I was visiting for dinner last night I noticed the cover mentioned real estate so I gave it a read. The little intro actually mentioned bubble so I thought maybe this would be a fair article discussing both sides of the discussion but sadly it was just a puff piece about mainland chinese immigrants buying everything in sight.

    One very interesting thing I found in the article was it mentioned price to income ratio and had vancouver pegged at 9.07 years of income vs average house price. I thought this would be the demographia survey but this one included 400 cities (many non-english speaking ones, big difference from the demographia one which seems to include mostly english speaking cities) and apparently had Vancouver somewhere in the middle (exact words "near the median").

    There was a table showing other high up price to income cities with the winner being Istanbul at around 53. The graph showed 16 cities all higher than Vancouver with places like lisbon and paris getting around 13. One thing I didnt understand was that london was at 14 which was quite different than demographia which says london was less than 8.

    Anyway, I have no idea where this survey is and the article never mentioned where exactly Vancouver ranked in this survey and I never saw any actual name or reference to this survey of 400 cities.

    Has anyone heard of this 400 city survey? This is all news to me and I would be quite shocked to find Vancouver ranked around 200 in this thing with a price to income above 9.

  3. Davidoff- what you experiencing is 'ZIRP-anxiety'.

    This is an anxiety that you just cannot keep up, because your savings are disappearing as fast as you put them aside and prices are racing up. It is a condition caused by the irresponsibility of Zero-interest policy which the Central bankers instituted to save the bloated speculators around the world and those same Central bankers have the nerve to turn around and lecture us on not saving enough!

    Jesse- there is not enough land - it's just that simple. Which brings me to my next post later this week...

    BTW- the Government in Lisbon is about to fall and the Country (Portugal) is very near default with high I expect the income (denominator) to drop in that city even more and unless the numerator drops as quickly you may see an even higher PE ratio.

  4. Fish, for once you are right. It has taken some time for you to realise that RE wont go down in this city. But finally you've made it.
    I have been saying for some time this, the goverment wont let down RE owners, but wishful bears wont listen to anything that does not match their preconceived ideas.
    The best thing to look for the diretion of RE here is australia. We have similar economy, HAM, lifestyle, debt, income, etc. Yet, interest rates are 8 to 10% there and RE has not come down. Debt and RE prices are similar to here, if not worse.
    Interest rates are going to stay low for many years, people fail to realise this. look at japan.
    Yes, savers are being cheated, but that is not a very farsighted take on things. Savers save money because other people spend, so in a way, savers made their money because of spenders, otherwise if everybody kept saving, money will be completely worthless. So, it is payback time. That is what socialist goverments do, like it or not.
    70% of canadians are owners, what kind of goverment will do smth against their interests?
    The goverment will pump/stabilise RE for the foreseable future and they will manage it succsefully given the tools at their disposal.
    I see no correction coming in Canada.

  5. Anon thanks for letting me not the club of the wise.

    "I have been saying this for some time' to whom? Your spouse or did you post here under a different name?

    In any case, even the actions of the most determined bubble blowing governments can fail- the US is a pr ime eg of this.