After they’d been thoroughly patted down by staff, and their van sniffed by Vixen and Tease, the Global TV guys were warily admitted through the front gate of the bunker compound.
They’d come to shoot a clip on the Flaherty mortgage rules gig, but probably spent too much time asking about the Google Earth deflector installation.
In any case, it was one of a string of interviews I’ve been asked to do over the last couple of days, by media from BC to NS, all wanting to know if this thing by F proves we have a housing bubble after all. A shocking number even mentioned this blog.
And my answer was what you’d expect: Duh. When the price of a commodity which people buy with 95% leverage increases by 20% in one year on record sales volume, while the economy limps, jobs are lost and incomes stagnate, it’s called a bubble. It exists because of human greed. Houses did not become more attractive because they got cheaper. They turned sexy because they’re hot.
Of course, I use ‘hot’ in its academic, Keynesian, technical context. As in, ‘Lindsey Vonn is hot.’
This is something they don’t teach economists. It explains why they hate bubble talk, and are still trying to stomp it out. Economists, like governments, think economies can be controlled because humans can be tricked – through interest rates and tax credits, for example. Thus, when the BoC dropped rates to, like, nothing and the feds started paying you money to renovate, it was intended to restore some confidence in the housing sector.
But that’s not exactly what happened. Cheap mortgages bred a buying frenzy, amid repeated statements from economists and F that everything was cool. So, sensing no danger of paying or borrowing too much, the frenzy went out of control. It went bubble-postal.
So, here’s the thing. To economists, bubbles mean failure. The actions they recommended created a dangerous situation (thanks to uncontrollable humans) which now threatens to defeat the very logic of having acted. Bubbles burst and wreck havoc, as happened in the US. Or, bubbles deflate and suck the oxygen out of the economy. But bubbles never, ever just disappear.
What happens next?
The consensus seems to be that frenzied and panicked property virgins will rush the market in the next eight weeks, trying to beat the new mortgage rules, along with the looming HST in BC and ON and the Carneyivorous rate increases slated for the summer. This is a fair bet. It would be consistent with what they’ve done so far – which is to wisely buy assets at their most expensive (which will fall) using pots of borrowed money (which will rise). Isn’t growing up fun?
After that little tempest, we’ll definitely be into the oxygen-sucking phase.
And here is another failure of those who use government jokes to try and move the economy. For example, the home renovation tax credit which recently expired was credited with having goosed more than $4 billion in renos. That sounds good. But it didn’t create $4 billion worth of activity so much as it borrowed it from the future. The reason is simple: consumers did not earn extra billions. They just spent (or borrowed) them.
Rightly says a TD Bank report: “We believe that the stimulus measure likely borrowed $3-billion of demand from the future – as those with future plans for renovations undertook the spending in 2009, rather than waiting until later years.”
This is exactly what the F Spring Rush will also accomplish. Just as housing sales were starting to slow before the Flaherty announcement, the rule change may well pour more gas on the fire. That’s what CREA is expecting, along with Scotia economist Derek (‘I’m not hot’) Holt: “The effect of the tightened mortgage rules will be to spur avoidance activity before the new rules become truly effective in July after the pipeline commitments on preapprovals burn off.”
Hard to see how this early-2010 orgy will not have an impact during the back side of the year, and beyond. I mean, come October – with the new sales tax in effect, interest rates on the rise, the economy still lagging, mortgages harder to get and reams of new homeowners leveraged to the hilt – what will we have to get excited about? No more 2% mortgages. No bidding wars. No bubble talk. No Lindsey. No oxygen.
I love economics.
Garth’s latest podcast is here.
