Sunday, July 31, 2016

Pop! Goes The Bubble

It's been almost a decade since the American real estate market collapsed, triggering a world wide recession. Unfortunately, we tend to track the United States -- with about a ten year lag. And now, Alan Freeman writes, the Canadian real estate bubble is about to burst:

For years, this bubble has been carefully nurtured by governments desperate for economic growth, realtors who will do anything for a sale and financial institutions happy to plow billions into housing, knowing Ottawa would always backstop their losses.

And as more and more people, particularly in Vancouver and Toronto, find themselves shut out of the housing market, those who had the good fortune to get in early sit in self-satisfied silence, content in the knowledge that their modest bungalows have turned them into millionaires — on paper, at least.

As was the case in the United States, people who look at the data straight on can see the storm that is coming:

The Canada Mortgage and Housing Corp. (CMHC) reported this week growing signs of “problematic conditions” in the housing market, particularly in Vancouver and Toronto, where there is “a combination of price acceleration and over-valuation.” An overheated price climate was a problem in nine cities; over-building was a problem in seven.

“CMHC assesses that there is now strong evidence of overvaluation across Canada: house prices across Canada remain higher than levels consistent with personal disposable income, population growth and other fundamental factors,” the agency said. In other words, there’s no rational reason justifying current prices.

The Office of Superintendent of Financial Institutions (OSFI) has an even grimmer assessment of the situation. It has imposed harsher criteria on stress tests for smaller lenders, forcing them to evaluate how their balance sheets would be affected by a decline of at least 50 per cent in house values for Greater Vancouver and at least 40 per cent for Greater Toronto.

The problem is that governments have encouraged people who don't have the capital to buy homes. And those who have capital to burn -- particularly in Vancouver -- have made home ownership unaffordable.

When the storm hits, the aftermath won't be pretty.



Steve said...

If you want to see the endgame in Toronto and Vancouver look at Hong Kong. Rent more than 50% of income and no chance every to buy.

Owen Gray said...

If an economy is to work, Steve, people have to share the wealth.

Toby said...

The whole idea of an economy based on consumerism is warped. Once into it the financial institutions and various levels of government do everything they can to get people to spend, spend, spend, pushing other considerations aside. Anyone who has saved instead of spent will ride out the coming collapse. Yes, it is coming. Housing is in a bubble and all bubbles burst.

My advice to anyone who thinks they own a house in Vancouver is to sell now and take the money and run.

To some extent I lack sympathy for people who over extend themselves. They let greed smother common sense.

Owen Gray said...

It's an old story, Toby. We have short memories.

Anonymous said...

The government has nothing to do with this. That's the whole problem. Politicians were essentially bribed to deregulate and prevent regulations. Harper started off the housing bubble in 2006 with some banking deregulation; wanted to get in on the action south of the border that turned out to be a massive web of fraud involving all manner of banker; he deregulated the CMHC (allowing the wealthy to get CMHC insurance on expensive homes and cottages, and banks to offload a few hundred billion in risk.) But all of this was reeled in fairly quickly. (Flaherty, with his sour-puss face, pretending to be a paragon of virtue reining in banking regulations he set loose.)

In any case, that was scaled back about 6 to 8 years ago. Regulations were brought in to ensure variable-rate payers could afford a bump in interest rates (before the realization that the Natural Interest Rate had collapsed into 'secular stagnation' — what the economic theologians call it.) The CMHC started unwinding their shady dealings with bankers more recently.

So my guess is that extremely wealthy Chinese oligarchs parked a lot of their money in Canadian real estate. (Probably would rather have tarsands development; but that hit a few snags.) It's actually a matter of international trade economics. The counterpart of our country running a massive trade deficit with China, over decades, purchasing billions in goods — the counterpart of the outflow of OUR money — is the inflow of Chinese money in foreign investment.

This is something Trudeau Jr. is big on. But just ask Spain, Greece, South Korea and Mexico about the 'economic miracle' that a flood of foreign capital brings.

It could be a currency market manipulation scheme. Like the 'Asian Tigers' phony investment vehicle. A flood of capital flowed in pumping up Southeast Asian currencies; a flood of capital flowed back out producing currency crash crises. That allowed Western investors to snatch up lucrative South Korean appliance and electronics corporations at fire-sale prices. (Must've been coincidental.) The IMF was actually in on it. (Alex Jonesie, but factual. See the accounts in 'The Shock Doctrine' or 'The Return of Depression Economics.') I call this thing the "Full Monty": 1) pump, 2) dump, 3) short, 4) deflate, 5) buy! (Ding ding ding ding ding!) Psychopathic miscreants hit the jackpot. Reeled in the big one. Reel tasty.

It could also bring bad investments. A lot of pointless construction in Spain. Put the economy in crisis. Debt in euros like a millstone. Government somehow on the hook. Supply siders argue: build ANYTHING and they will come. The ones smart enough to realize the doctrine is entirely a looting scheme will be placing bets. (But even the 'true believer' economists are usually nasty people, you'll find, if you follow their tweets.)

My opinion: if the Chinese are not investing in corporations that produce goods or services of some form, they are not investing. They are simply demonstrating that free trade outsourcing schemes are a double whammy: jobs and wealth pour out of the economy; the trade deficit has an accompanying budget deficit according to the Twin Deficits hypothesis; and to add insult to injury, an equal amount of wealth that flowed out of the country must now flow back in, in the form of debt owed to Chinese oligarchs encroaching on the scope of democratic government with investor protection treaties that do absolutely nothing for Canadians. (I know, I'm a pearl-clutching hyper-nationalist.)

Anonymous said...

So the hundreds of billions that went out to China, are now coming back in, in the form of investments, which can be in real estate because there are no regulations saying that it can't. So why not? God ain't making any more of it.

Only now — 10 years after it was acknowledged there was a housing bubble forming — are they starting to rein in foreign real estate purchases with regulation. The solution? The BC Liberals have decided to tax the properties owned by the oligarchs. Some of the pigs are squealing. So it might be more effective than it sounds. But then again, the pigs might realize that squealing can mitigate the regulations. So who knows.

This single statement from Christy Clark indicates to me, anyways, the whole thing was a Bust Out: "The real estate sector has had 10 years to get it right on self regulation and they haven't." So it only took 10 years of watching a housing bubble grow out of control to finally come around to: "We gave you guys a shot and you blew it!"

And remember, The Bigger Short. For every hyped-up worthless investment that has been pumped up into a bubble there are many investment vehicles around that allow filthy bankers (of all ethnicities) to make money betting the bubble will burst. Of course, the Canadian bubble won't deflate as fast as the US housing crash. There, predatory lending was involved. (The place was a zoo; still is; now car and credit-card ABS.)

Our housing bubble will deflate like Japan's: not out with a bang, but with a 15-year bear market. Their economy never recovered. They faced bigger-than Great-Depression-level losses of GDP. It's shocking. Their GDP has contracted to 1993 levels with no recovery in sight. (The business news media downplays it: a 23-year "lost decade.") G-D GDP was 10 years of lost GDP; then a world-war-fueled recovery. (Clearly not a contemporary solution to what ails our globalizing economy teetering on the verge of collapse, civilization along with it.)

(Trudeau says the TPP is the solution; Clinton has to pretend she's opposed. Looking good.)

-Bernie Orbust

Owen Gray said...

We'll see if the TPP actually gets done, Bernie. I have my doubts.

Owen Gray said...

It's called making sure you've got it both ways, Anon. The perfect crime.

Anonymous said...

Politicians are getting paid promissory bribe money to implement the TPP. Trudeau Jr. is on board. Canadian centrist cattle are more docile than American. Might moo a bit. Might not. So Canada's good to go.

Hillary thrives on hatred. I imagine she's already picturing the look on the faces of "Bernie Bros" when she screws them over signing the TPP. So she gets paid twice: the bribe money and the schadenfreude social capital.

Just look at Kathleen Wynne. She's getting paid big bucks to privatize the province's electricity system. (The only explanation that makes any fiscal sense. The money raised from the sale is about the equivalent to an annual deficit for doling out big income and corporate tax cuts to the rich.) The cattle mooed a bit. Then went right back to munching from their prole-feed bags. Might even re-elect her. (The Star is doing a lot of damage control. They feel the province is their colony. They might be able to get her another term. They'll certainly do their darndest.)

-Bernie Orbust

Owen Gray said...

No politician should take too much for granted these days, Bernie. In Canada's two largest provinces, the end came quickly for both Dalton McGuinty and Jean Charest.

Anonymous said...

TPP is nothing more than a ruse to extend the myth!


Owen Gray said...

In a casino -- or a casino economy -- the house never loses, TB.