For years it’s been one of the hottest markets in the country. There was a time when a word ad would appear in the morning, “NICE house, three beds, two baths”, and by dusk there were several offers, all above asking, no conditions.
But a lot’s changed in Fort McMurray, not the least of which is the price of crude oil, now crashed through a resistance line and sitting at ninety-four bucks. And it appears more hurt’s coming – for the economy, commodity prices, oil and a northern Alberta town where people have often shelled out the better part of half a million for a mobile home.
This week the influential Geneva Report warned of a “poisonous combination” of slow growth, low inflation and massive debts around the globe with the potential for “a vicious loop, putting the world at risk.” Some believe it’s already happening. Europe’s struggling, China’s production is down, Canada is a swamp, Russian finances are in reverse and Argentina defaulted. It’s what this pathetic blog has been yammering about for the last two years. The Big D.
Yeah, deflation. It’s what you need to worry about, now that we’ve all pickled ourselves in debt.
Here is how the Geneva eggheads put it: “Indeed, the ongoing vicious circle of leverage and policy attempts to deleverage, on the one hand, and slower nominal growth on the other, set the basis for either a slow, painful process of deleveraging or for another crisis, possibly this time originating in emerging economies (with China posing the highest risk). In our view, this makes the world still vulnerable to a further round in the sequence of financial crises that have occurred over the past two decades.”
These guys understand that debt’s okay (whether it’s a national deficit, or your brother buying a condo) so long as there’s growth (giving a country more tax revenues, and your sibling a higher income). The trouble is that six years of ridiculous interest rates have encouraged elephantine debt everywhere, and yet growth is fizzling in all but a few economies (we’re not one of them). This is very bad news for the indebted.
Deflation – even the simple lack of inflation – means stuff (like real estate or a barrel of oil) stops rising in value because demand wanes. So the capital value of an asset (like a house) stagnates, and often declines. When deflation picks up a little speed, not only do asset values erode, but also incomes – creating that vicious loop economists fear (because they can’t fix it). People who have less to spend, or figure they soon will, spend less. Demand falls. Assets values plop more.
Worst, lower incomes make debt harder to pay – so it’s the people with big mortgages and the countries with fat national debts – who take it in the gut.
But I digress. We were talking about Fort Mac. Boom town. The oil and truck nuts capital of Canada, and these days a fine little microcosm of global economics. Let’s have a few words from Leonard, who has a fresh dispatch for us from the tailing ponds:
“So for all those people that think that housing is still crazy in Fort McMurray, think again. I (as a completely ignorant 1st time home buyer) bought a house up there in 2008 just as the market started to soften. My very average home cost $660K. Tack on CMHC fees and I owed the bank $684k
“Gone are the days of house values climbing daily by thousands (if not tens of thousands of dollars). My house has been a rental property for 4 yrs now, and I just listed it for $649,900. 6 years later, and a net negative value (If I’m lucky and it sells for $649k. I have my doubts). I can barely believe it myself.
“Has it been worth all the stress? NOT A CHANCE! When I originally bought the place, my magic # on the house was when it was worth $ 1 million, I’d sell it, and buy a house outright whereever I lived (currently Edmonton). It was a nice dream, but a dream was all it’s going to be. I’m just happy almost all of the money paid to my mortgage company was paid for by my tenants, because If I had been shelling out upwards of $200k in interest in the first 5 year mortgage term (remember, I obviously did a $0 down, 40 year mortgage like all the other virgins back then), i’d probably be looking to jump off the high level bridge.
“Feel free to use me as a warning sign to my fellow Canadians.”
I will. But you’re also a symbol, Lenny. How many other people have borrowed massive amounts of money to buy real estate because (a) mortgages were cheap, (b) houses always go up and (c) it’s different here? These are the folks who’ve never experienced negative growth, think deflation means iPhones will cost less (and is therefore good) and believe property values will keep bloating so long as rates stay low. They sure have a surprise coming.
Oil could drop to eighty bucks in weeks or months and Len’s house might end up selling in the fives. Wouldn’t be a big shock. Most booms turn to busts because most people think with their pants. Especially in Alberta.
But the wider risk is out there. If the Big D arrives, even modestly, assets like real estate will be hit first, and hardest – since that’s where the debt lives. In contrast, money becomes more valuable, as its purchasing power rises. This is why you want the bulk of your net worth in financial assets. It’s also why renters will win.