Entries from August 2009 ↓

Now here’s an interesting pattern for you.

Alberta is wallowing in debt and apparently pissed away the oil boom. Sigh. Was it only a year ago crude was $140 a can?  Do I smell a retail sales tax on the wind, or did your horse do that?

BC is wallowing in debt, and has apparently pissed away the Olympics boom. Hard to believe the reversal in fortunes – now a carbon tax, soon the HST – and a massive tax on citizens in the form of speculative house prices.

Ontario is wallowing in debt, and pissed away its headstart as the financial and manufacturing hub of the nation. Now it’s in record deficit and also about to jump citizens with that honking new sales tax.

And, yeah, Canada’s wallowing in debt. New borrowings this year alone will be north of $55 billion, a record. Hard to believe a surplus of $15 billion in 2006 morphed into a deficit of $55 billion in 2009. The consequences of that are obvious, despite the fact nobody’s paying attention.

Meanwhile oil prices have solidly entrenched above $70 – basically doubling in a matter of months – and the banks are raking it in again. RBC profits zipped 24% higher, which proves some people have figured out how to make billions from an economy in recession with 1.5 million people unemployed and interest rates in the dirt.

At the same time, our dollar is rising along with oil, and the central bank is all but powerless to stop it (any immediate rise in interest rates will send the loonie flying to par). That means more serious troubles for manufacturing, tourism and natural resources.

I guess that leaves the nation in the hands of bankers and realtors. Praise be.

While this pattern continues, most folks are following the politicians – borrowing and spending. But unlike governments, they can’t issue bonds, tax their neighbours, increase the money supply or goose inflation to relieve their debts. In fact, they just get squeezed. Higher interest rates over the coming years make existing debts harder to pay, while the underlying assets depreciate to nothing (cars) or slowly erode (real estate). Some plan.

But this is the price of financial illiteracy.

Case in point is Kate. You might have seen her posting here a day or two ago, trying to make the argument for buying a house now at low mortgage rates instead of later when prices fall, at higher rates. As proof she offered amortization tables showing payments on a 3% mortgage over 25 years to buy a $400,000 house with $50K down were less than the total cost of a mortgage at 10% over 25 years on a home valued 30% less.

What she forgot was that a 3% rate is VRM, and will be higher by this time next year; that mortgage terms are renegotiated at least every five years; that rates could triple and still be lower than the historic norm; that house prices will fall as higher rates kill demand; that buying at the top of the cycle could easily result in negative equity; and that buying later with a lower debt profile – even at a higher rate – is the far less reckless path.

Sadly, Kate don’t care. And neither do most buyers, especially the newbies. Long ams have now made paying back mortgage money irrelevant. Instead, the idea is to rent capital to get what you want – real estate. As prices rise, you just sell, pay the rented capital back, and keep the profit. It’s exactly the strategy that a few million subprime mortgage borrowers in the US did so well with…

So, here’s the point of me typing these 700 words: When I wrote ‘Greater Fool‘ and started this blog 17 months ago I had big doubts about the direction of the economy, and the momentum of the housing market. But at least almost every government in Canada was in surplus.

When I published ‘After the Crash’ seven months ago, I was seriously worried about a deflationary spiral. But at least the feds were in the black.

When I finish this and go for a midnight ride, it’s a new game. More government debt than ever before, and no roadmap out. A personal borrowing binge, and no grasp of the consequences.

Enough to make a boy want to stuff his saddlebags with cash, head to southern Cal and vultch. At least their bomb’s already gone off.

But I’d miss you. You too, Kate.

Van realtor posting vids from his car. Big City GTA Broker renting a giant concert hall to give his views on life. Multiple bids in the midst of recession. Economists spewing market-pumping nonsense. Reporters lapping it up.

I’d say these are signs of an impending endgame in the current bubble world of real estate. Yeah, yeah, I know it’s been mere days since we had word of sick July sales, but when salesguys starting walking like deities, check your pulse.

As for the usual sources of impartial market wisdom, picture this: The hardest-hit manufacturing city in the country, where 15% of the workforce is out of work, where front lawn ‘for sale’ signs outnumber pooch droppings, where a house can be had for less than a minivan, and mere miles away sits the sad and crumbling hulk of a once-great American city, half its population fled.

And what does a noted bank economist say about Windsor’s economy and housing market?

“We expect to a return to more normal growth for Canada’s economy of about three per cent by early next year, and Windsor’s economy will benefit from the general improvement in economic conditions,” Sal Guatieri said during a panel discussion Wednesday on the state of the area’s housing market. The buyer’s market has come to an end and the number of listings reflects a good balance between listings and demand, said Guatieri. “Following last year’s slump it looks like Canada’s housing market is on a solid rebound,” he said.

See what I mean? The scary part is, a newspaper recorded the crap down and published it.

The truth is, there’s no fix for Windsor next year. Once factories close, they take eternities to reopen.

Truth is, there’s nothing but downside risk at the moment for all those young buyers bidding to buy condos from the Van cam man or the scary Brad Lamb. Sure, these guys (and so many of their colleagues) are superb at turning human greed, envy and ambition into offers, debt and cash flow. But it often means properties are being bought with less care than goes into finding the right pair of Capri pants.

And in some markets, like Vancouver, bubblification does not begin to describe what’s going on, as what’s essentially a small regional city drifts into a price range reserved for places that actually seem to matter. While I love Van and almost all of BC, there is no better example in North America right now of what local delusion (and a dashboard cam) can do to the commodity of housing.

Of course, this will not last. The reasons for my conviction have been fully mined here. All that remains less than crystal is the timing, and the catalyst events.

Maybe it’s an economist ho. Maybe a realtor rock star.

But we’re closer.