BC’s ice age

The article below appeared in yesterday’s Vancouver Sun, and contains the estimate of a BC credit union economist that the housing market there will fall, peak-to-trough, by just over 30%, before recovering in 2010. This shocked a lot of GenX Yaletowners and Shaughnessy zillionaires who have steadfastly refused to believe Vancouver is not enchanted. However, the fact is with a $700,000 average home price and a $70,000 average family income, this market epitomizes unsustainability. I wrote the article’s author Saturday morning, suggesting a 2010 get-well date was improbable, that average prices will fall by at least 40%, and many condo buildings will be devaued by 50% while other projects are abandoned. I asked him to come here and check us out. So, sit up. — Garth

Related:

BC real estate sliding into recession – Times Colonist

BC condo projects take another hit – Vancouver Sun

Housing may dip until 2010

There’s a light at the end of the housing tunnel, but it’s faint

By Harvey Enchin, Vancouver Sun

Your home may still be your castle, but it’s not worth what it was yesterday.

The latest housing outlook from Central 1 Credit Union economist Helmut Pastrick will not please homeowners, but would-be buyers can look forward to falling house prices in the months to come.

With residential sales expected to drop 30 per cent this year and another 18 per cent in 2009, median prices have declined by 12 per cent since last March and are likely to fall another 13 per cent in 2009 and a further five per cent in 2010, assuming market conditions begin to improve by then, the report says.

That might be a slightly optimistic timeline.

Vancouver is no stranger to real estate booms and busts. Given the uninterrupted advance in prices since the third quarter of 2002, it’s easy to forget that house prices rise and fall in tandem with the economy.

Residential real estate was a good place to be in 1975 when the average price of a detached home was $67,500 in nominal dollars. (The real-dollar equivalent would be $264,508, but we’ll stick to nominal dollar values in this column). By the first quarter of 1981, the price had nearly quadrupled to $233,500 with barely a hiccup in the interim. Then a long recession took the stuffing out of the real estate market. By the fourth quarter of 1982, the average price had fallen to $150,800, a drop of 35 per cent from the peak. And that wasn’t the worst of it. Housing prices did not recover until 1989.

The euphoria didn’t last long. After prices rose to $324,700 in 1990, another dip in the midst of an economic slump shaved 12 per cent from the average price by the first quarter of 1991. It took more than a year to recover to $329,000 in the second quarter of 1992.

The advance resumed until 1995 when prices topped out at $418,100 and a modest economic correction cut the average price by 7.5 per cent to $386,500 in 1996. Prices bounced around erratically for a time but finally turned the corner in the fourth quarter of 2000.

It sounds unbelievable but it was eight — count ’em, eight years — before Vancouver prices surpassed the 1995 level. Finally, in the first quarter of 2003, the price reached $434,700 and never looked back — that is, until now.

Vancouver’s housing history suggests prices can drop sharply and suddenly and take many years to rebound. Deflate today’s average price of $759,000 to factor out inflation and the real price comes to $193,689, suggesting an annual appreciation of 5.6 per cent if you held your property from 1975 to the present.

The University of B.C. Centre for Urban Economics and Real Estate (which compiled the statistics used above) has calculated Vancouver’s house annual appreciation over various periods: 1979-2008, 7.6 per cent; 1981-2008, 4.4 per cent; 1992-2008, 5.3 per cent and 2001-2008, 10.2 per cent.

It is clear that home ownership is not the high-yield road to riches. However, residential real estate is, for most people, the largest component of net worth.

Pastrick states the obvious when he says in his report that current market conditions are consistent with a housing recession and falling prices. But he notes this follows the longest expansion on record, one that drove prices up 100 per cent (in current dollars) from trough to peak.

The average price-cycle recession phase lasts 39 months, he says, but can be within a wide range of nine to 65 months. The housing market will turn around when supply no longer satisfies demand. With housing starts due to fall sharply over the next year or two, residential construction projects postponed because of financing difficulties, and improving affordability as a result of falling prices, there is a light at the end of the tunnel — but it’s faint and distant.

40%

Change in number of homes sold monthly in B.C. since August 2007.

7 years,4 months

Trough-to-peak duration of B.C.’s record real-estate price surge.

15%

Forecast 2009 decline in average B.C. residential selling price.

6.0%

Thawing of the credit freeze will push down the rate for a three-year term mortgage by “later in 2009.”

YES, THE BOOM CYCLE IS DEFINITELY OVER

Economists at Central 1 credit union pegged March 2008 as the end of a record 88-month price escalation in B.C. They now foresee two years of contraction, also known as recession, lasting into 2010. The numbers above are from their Thursday report. The projection at right shows average selling price rising slightly before sliding next year and in 2010. A poor economic outlook for 2009 and tight credit are blamed for the situation.

98 comments ↓

#1 Ultraman on 10.25.08 at 10:19 am

I’m an Yaletowner, not Genx, more like baby boomer and I can tell you that I’m shocked by Mr. Pastrick 30% price cut by 2010. I’m expecting more like 50%-60%. No joke.

BTW Helmut doesn’t a very good track record for his RE prediction.

#2 dboy on 10.25.08 at 10:58 am

What is interesting is that earlier in the year, Pastrick was amongst the majority who were seeing the market through rose tinted glasses claiming that the good times would last forever. At least he has had the courage to restate his position.

#3 Gord on 10.25.08 at 10:59 am

It always amazes me that economists, government officials and the like continue to portray a rosey picture until the inevitable happens. The media only tells the public one side of the story until its to late. Those that try to wake people up (like Garth) are marginalized and portrayed as party-poopers by the media until the day it all blows up. I guess there was a time when people thought the world was round were ridiculed and considered insane.

#4 jesse on 10.25.08 at 11:01 am

“A poor economic outlook for 2009 and tight credit are blamed for the situation.”

Bzzzt! Wrong. Flat wages and poor affordability are the real reasons why prices are falling. Maybe tight credit combined with recession was the spark but the forest was already tinder dry. hoocoodanode?

#5 Helen E.G. on 10.25.08 at 11:21 am

I hope you’re right, Garth. If prices come down 40-50% by 2010 or 2011, then we might actually stand a chance of buying something in Vancouver without giving up our firstborn ;)

#6 Gord In Vancouver on 10.25.08 at 11:25 am

$70,000 average family income in Vancouver

This figure ($70,000/year) is based on current economic conditions in which Vancouver has a steady employment rate and lots of well paying construction jobs.

Vancouver real estate bulls had better pray that lower future salaries have already been factored into 2009-2011 forecasts. Using today’s $70,000/year figure to justify lower future home price/salary ratios will mislead the public – again.

#7 Free Real Estate Blog » STATE OF THE ECONOMY and A NEW REGULATORY THEORY - THE TRICKLE ..= . on 10.25.08 at 11:38 am

[…] BC?s ice age By Garth Turner Vancouver is no stranger to real estate booms and busts. Given the uninterrupted advance in prices since the third quarter of 2002, it?s easy to forget that house prices rise and fall in tandem with the economy. … Greater Fool – The Troubled Future… – http://www.greaterfool.ca/ […]

#8 Mini-Garth on 10.25.08 at 11:49 am

I agree with Garth…

Look what happened to the housing market after the Olymics ended in other countries…

After the Seoul olympics… crash.
Calgary… crash.

I think after the 2010 games… I think that’s when Vancouver is really going to enter a free fall.

#9 Marc on 10.25.08 at 12:06 pm

We have seen some devolopers run out of money halfway through building. When this happens, the developer will go to the presale buyers and inform them their presale agreements are no longer valid, and they can either take the down payment back with interest, or agree to pay current prices for the same unit. Now that the prices are falling, will the developers do the same again? I think not. The people who lined up in the cold to buy a condo that the dirt was not even broken, are now holding depreciating agreements. Now developers are giving cars away to buyers to get them to agree on a presale. That is why I would never consider buying something that is not yet built. I like to touch what I buy, not see pictures of what it might look like.

Also, the lack of regulation is astounding. The Ritz Carlton hotel/condo tower has been shelved for now. The condos range from 3 mil-23 mil per condo. Only half have presold, and I am surprised that many at those prices would presale. Why buy a 3 mil entry level condo, when 750K could get you a penthouse in a suberb on the rapid transit line. But at the end of the day, the building is looking unlikely to complete, but does that stop the developer from taking new presale agreements? Not yet.

#10 Michael on 10.25.08 at 12:07 pm

I went from ‘I’m going to sell my townhouse’ to ‘I’ll be living here for another 4-6 years to be able to turn profit before selling’ in 4 months.

#11 Larry Yatkowsky on 10.25.08 at 12:20 pm

yah, yah, – Old news! Bitching is tiresome. Reasoned solutions required.

#12 dd on 10.25.08 at 12:48 pm

#7 Mini-Garth,

Sound like people will not have to wait until 2010. Why be the last one out of the burning building.

#13 dd on 10.25.08 at 12:58 pm

Ya … the land of milk and honey is like the rest of the world. Even international money will not keep Vancouver from imploding like the rest.

Looks like from the article above that if one would have bought through the lows and sold at the highs a decent buck could have been made. Yes it is hard to time the market, however, the direction of the market is not to hard to miss (like this last correction).

#14 VanIslander on 10.25.08 at 1:17 pm

Garth,

Please check out this article in the Victoria Times Colonist today as they try to tell us that we in Victoria are “insulated” from all of this. The rose colored glasses mantra is alive and well over here on Fantasy Island. They seem to miss out entirely on the severity of the world finanical situation.

I look forward to your visit here in January, by then these people will be quoting much different lines I am sure.

http://www.canada.com/victoriatimescolonist/news/business/story.html?id=f15710e6-b008-4f5f-be77-cb61e32753c0&p=2

#15 hal on 10.25.08 at 1:17 pm

I still don’t get it………If the average family income in Vancouver is 70k how can the prices remain above say 250k for the average family house? You can’t even get a condo for that never mind a family home.

#16 VanIslander on 10.25.08 at 1:20 pm

As per Helmut, up to a month ago he was still calling for a 10% gain this year. I expect 50% decline easy within 24 months.

#17 dd on 10.25.08 at 1:24 pm

Nandu … very bullish on Canada long-term

http://www.theglobeandmail.com/servlet/story/RTGAM.20081024.wdecloet1025/BNStory/GlobeSportsHockey/

#18 OntarioHouse on 10.25.08 at 1:27 pm

Michael#9
More like 15 years to even break even. Plus your townhome is going to be old and outdated by then. Think of the repairs and facelift that its going to need. Good luck to those “profits”.
Buying on high is never a good idea.

#19 David on 10.25.08 at 1:51 pm

Welcome back Larry. It is not old news just bad news and there is a difference.
If you have an entrepreneurial bent you could make some good bucks selling realtor and homeowner crying towels.
There is no solution reasoned or otherwise to a hyper inflated housing bubble short of a brutal deflationary cycle, foreclosure, mortgage write downs or banks simply refusing to underwrite debt instruments with impaired or declining value collateral.
Orange County California was one of the frothiest bubble areas in the USA. Median house prices peaked at $600 in 2006. Since that time residential home prices have declined in the 25% range and sales are showing signs of severe anemia. Single unit condo prices are trading in some cases at 40% off peak bubble prices and again few willing buyers and potential financing.
Feel free to check the statistics and refute the arguments of the bears on this board. It probably was fun to collect a 6% commission on a $700K bungalow sale and the implosion of the bubble might well result in a much lower income for realtors. The magic of selling overpriced homes to people who couldn’t possibly ever pay for them must have been a blast.

#20 greaterfooled on 10.25.08 at 2:46 pm

don’t worry. we have the Olympics and the rich Asians will keep the market robust

#21 Nelson Eddy mountied song on 10.25.08 at 3:00 pm

Think about all those Vancouverite space saving innovators living crammed in Tokyo-sized condos. In this land of 3 bodies per sq klick.

What was it David Duchavy said Amazon without the rainforest?

#22 Internal Exile on 10.25.08 at 3:26 pm

Someone needs to clear up the issue of what developers are actually required to do when construction on a condo stops – not what people WANT them to do. They are certainly not required to pay interest on down payments they return. My understanding is that as long as they SAY they intend to build (but at some later, unspecified date) they do not even have to return the downpayment. And since it seems to be run on an honour (I use the term loosely) system, there’s no way of ever checking if they really intend on building, or just holding onto your cash.

Can somebody who actually knows clear this up (Garth?).

The other thing is comparing Vancouver to places like California – a state that, by itself, has an economy larger than all of Canada combined. It seems like apples and oranges. I think the crash will be MUCH worse in Vancouver because there is no industry here – just people pumping oil, loading coal on ships headed for China, or one idiot selling his condo to another idiot (which, shockingly, accounts for 10 PERCENT OF BC’S ECONOMY!).

#23 Roger in Victoria on 10.25.08 at 3:35 pm

VanIslander #13 had a link to a Victoria Times Colonist story on falling house prices. This article covered the entire front page of the business section in the Saturday paper. I suspect the advertisers in the accompanying Homes section were unhappy campers today.

Click my name for a scan of the paper

#24 Another Albertan on 10.25.08 at 4:05 pm

Another Anecdote from Another Albertan:

A colleague attended a luncheon in Fort McMurray and had a chance encounter with a well-known Bay Street money manager. After spending some time explaining some of the challenges of engineering projects in northern Canada, my friend summoned the gumption to reverse the line of questioning and asked the money manager about Alberta’s economic prospects for 2009. The response was point-blank: “The other shoe will drop.” and “An economy where 25-year-olds can drive $70k vehicles is unsustainable.”

#25 Downsized and Delighted on 10.25.08 at 4:57 pm

So where is the survivor checklist? It’s “soon” already.

Relax. We’re all survivors here. — Garth

#26 BBC on 10.25.08 at 5:15 pm

It will take a longtime to bounce back from this one. I believe that RE will fall somewhere between your prediction and the articles’ prediction. It will take a lot longer than 2010 to bounce back….think of how long it took to get here in the first place.

#27 dd on 10.25.08 at 5:28 pm

#14 hal,

I don’t get it either. A lot of people that I knew out in Van owned before the real estate took off and did ok. The people that bought in the later boom were just making their mortgage payments. The whole mentality was “if you don’t buy now you will never afford a place to live.”

I bought into this too. It was hard to not to think like this when everyone thought that prices would never go down. The TV, newspapers, investors, and friends were there to convince you that it would be the best purchase that you would ever make. It is hard to sit on the sideline and watch everyone that bought a house get “rich” while you are still renting or selling out near the top.

However, people like Garth and others pointed to the insanity of it all. Thank God there was voice of reason out there.

#28 dd on 10.25.08 at 5:39 pm

#10 Larry Yatkowsky ,

Larry, what do you suggest?

This is what I did before this mess:

1) Sold home, now rent
2) 70% cash in portfolio
3) Save more than I spend
4) Have a job and work in industry that should be steady through the coming hard times

Solutions for what is coming next?
Do the same until time is right to change plan:
1) Moving cash into market – sector, timing?
2) Save more spend less
3) keep job through hard times

#29 dd on 10.25.08 at 5:43 pm

#19 greaterfooled,

I can see people waiting for the “fall off the cliff” before going into the market in Vancouver.

#30 Jon B on 10.25.08 at 5:49 pm

So this place is going to see some hefty price decreases over the next few years. Who will profit from the new reality of significantly lower prices other than first time buyers? How about those in the renovation biz? Auction companies? Recently retired wealth from Ontario?
The impending miseries will be sure to benefit some.

#31 David on 10.25.08 at 6:26 pm

Friends and family in Alberta here. They bought US greenbacks at $1.10 on the Loonie last November. They are laughing now about their ROI. They cashed in their energy stocks to do that, so their return is about 70% over 24 months. Not bad at all.

#32 PQ Jehova on 10.25.08 at 6:27 pm

Garth we’ve heard the score out west – several times.
How about some news from la belle province.. sil vous plais..?

#33 dd on 10.25.08 at 6:54 pm

#10 Larry Yatkowsky,

This is the time to have no debt or very little. Now assets are cheaper now than yesterday. Something that we have not been for a while.

The Buffet saying “be fearful when other are greedy, and greedy when others are fearful” is what is needed throughout ones life.”

#34 brazer on 10.25.08 at 7:20 pm

#30 David

Given you seem so well tuned in Forex, care to make a forward prediction on the USD?

Would you sell all your stocks today to buy USD or CAD?

Which way are we headed. Please share your wisdom.

#35 CalgaryRocks on 10.25.08 at 8:34 pm

Alberta’s economic prospects for 2009. The response was point-blank: “The other shoe will drop.” and “An economy where 25-year-olds can drive $70k vehicles is unsustainable.”
======================================

Maybe there aren’t that many 50 year olds that want to work 12 hours shifts in -50 degree weather.

A lot of those 25 year olds living in camps and working the oil sands come from out east. They came to Alberta so that they can save enough money working really hard for 2-3 years and then go back home an maybe buy a house.

#36 Inventory on 10.25.08 at 11:13 pm

Garth,

Just look at the sales stats for October.
This is looking like a “Black Swan” event.

Real Estate Board of Greater Vancouver
SFH+TH+APT Unit sales
YEAR SOLD / LISTED / ACTIVE/ GROSS $
1994 2,272 / 5025 / 15,711 / 718,566,077
1995 2,128 / 4,660 / 17,422 / 607,571,782
1996 2,543 / 4,925 / 19,428 / 697,867,451
1997 2,232 / 4,459 / 18,246 / 648,298,057
1998 1,502 / 3,409 / 18,130 / 408,650,245
1999 1,770 / 3,047 / 15,652 / 502,603,917
2000 1,836 / 2,929 / 15,625 / 523,673,795
2001 2,453 / 3,210 / 12,675 / 700,621,366
2002 3,015 / 3,688 / 11,495 / 912,501,496
2003 3,865 / 4,368 / 9,484 / 1,313,021,342
2004 2,817 / 3,922 / 13,308 / 1,146,985,649
2005 3,371 / 4,246 / 9,989 / 1,535,412,199
2006 2,801 / 5,038 / 12,925 / 1,535,009,342
2007 3,093 / 4,985 / 11,551 / 1,826,654,804
2008 1,120 / 4,102 / 20,603 / 631,281,587 **
(**Oct 25, 2008)

#37 Rick on 10.26.08 at 12:45 am

El Gordo will call up his pals at the Canwest Global propaganda machine first thing Monday morning and have a retraction printed. Seriously though, even with a price correction, housing prices will remain out of wack in BC until there is a serious dent put in organized crime and the drug industry. In most provinces a “mortgage helper” is considered a suite. In BC, the ‘helper’ is a bit of creative horticulture and some high intensity lighting. Ya wanna lower BC housing prices even more than what is immediately coming down the pipe? Legalize marijuana.

#38 patriotz on 10.26.08 at 3:03 am

Look what happened to the housing market after the Olymics ended in other countries…

Calgary… crash.

Wrong. House prices in Calgary crashed with the oil bust in 1982. The Olympics in 1986 had no effect on the housing market either up or down. Real prices didn’t start rising until a decade later the late 1990’s.

Calgary Price Graph

And the same will be true in Vancouver. The crash is just happening two years before rather than four.

#39 Stephen from Toronto on 10.26.08 at 4:43 am

ARE WE STANDING AT THE EDGE OF FINANCIAL ARMAGEDDON-PART 4: SOLUTIONS

4A: How Credit Default Swaps exposed a Fatal Flaw in our 300 year Banking system.

4B- Are there parallels between 2008 and 1929-1933

4C-How to Prepare you and your family for the coming Depression.

I found this article below from a website/blog called The Automatic Earth.blogspot.com. It was part of a series of articles on financial events on Oct 23, 3008 entitled Debt Rattle-“A Massive Ugly War”

Source:http://theautomaticearth.blogspot.com/2008/10/debt-rattle-October-24-2008.shot.

I encourage every blogger to this site who wants to know what is really going on in this global financial panic to please READ THIS ARTICLE. IT IS CRITICALLY IMPORTANT!!!

4A Credit Default Swap Smartest Guy in the Room maybe not

When the smartest guys in the room designed their credit default swaps, they forgot to ask one thing – what if the parties on the other side of the bet don’t have the money to pay up? Credit default swaps (CDS) are insurance-like contracts that are sold as protection against default on loans, but CDS are not ordinary insurance.

Insurance companies are regulated by the government, with reserve requirements, statutory limits, and examiners routinely showing up to check the books to make sure the money is there to cover potential claims. CDS are private bets, and the Federal Reserve from the time of Alan Greenspan has insisted that regulators keep hands off.

The sacrosanct free market would supposedly regulate itself. The problem with that approach is that regulations are just rules. If there are no rules, the players can cheat; and cheat they have, with a gambler’s addiction. In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion – ten times the gross domestic product of all the countries in the world combined. Somebody is obviously bluffing about the money being brought to the game, and that realization has made for some very jittery markets.

“Derivatives” are complex bank creations that are very hard to understand, but the basic idea is that you can insure an investment you want to go up by betting it will go down. The simplest form of derivative is a short sale: you can place a bet that some asset you own will go down, so that you are covered whichever way the asset moves.

Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff if the company defaults within a certain period of time, while the “protection seller” collects periodic payments for assuming the risk of default.

CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to speculate on market changes. In one blogger’s example, a hedge fund wanting to increase its profits could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims. And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy, but that hardly helps the “protection buyers” who thought they were covered.

To the extent that CDS are being sold as “insurance,” they are looking more like insurance fraud; and that fact has particularly hit home with the ratings downgrades of the “monoline” insurers and the recent collapse of Bear Stearns, a leading Wall Street investment brokerage. The monolines are so-called because they are allowed to insure only one industry, the bond industry. Monoline bond insurers are the biggest protection writers for CDS, and Bear Stearns was the twelfth largest counterparty to credit default swap trades in 2006.

These players have been major protection sellers in a massive web of credit default swaps, and when the “protection” goes, the whole fragile derivative pyramid will go with it. The collapse of the derivative monster thus appears to be both imminent and inevitable, but that fact need not be cause for despair. The $681 trillion derivatives trade is the last supersized bubble in a 300-year Ponzi scheme, one that has now taken over the entire monetary system. The nation’s wealth has been drained into private vaults, leaving scarcity in its wake. It is a corrupt system, and change is long overdue. Major crises are major opportunities for change.

The Ponzi scheme that has gone bad is not just another misguided investment strategy. It is at the very heart of the banking business, the thing that has propped it up over the course of three centuries. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.

The problem is that banks create only the principal and not the interest necessary to pay back their loans, so new borrowers must continually be found to take out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. The scramble to find new debtors has now gone on for over 300 years – ever since the founding of the Bank of England in 1694 – until the whole world has become mired in debt to the bankers’ private money monopoly. The Ponzi scheme has finally reached its mathematical limits: we are “all borrowed up.”

When the banks ran out of creditworthy borrowers, they had to turn to uncreditworthy “subprime” borrowers; and to avoid losses from default, they moved these risky mortgages off their books by bundling them into “securities” and selling them to investors. To induce investors to buy, these securities were then “insured” with credit default swaps. But the housing bubble itself was another Ponzi scheme, and eventually there were no more borrowers to be sucked in at the bottom who could afford the ever-inflating home prices. When the subprime borrowers quit paying, the investors quit buying mortgage-backed securities.

The banks were then left holding their own suspect paper; and without triple-A ratings, there is little chance that buyers for this “junk” will be found. The crisis is not, however, in the economy itself, which is fundamentally sound – or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money.

The latest jolt to the massive derivatives edifice came with the collapse of Bear Stearns on March 16, 2008. Bear Stearns helped fuel the explosive growth in the credit derivative market, where banks, hedge funds and other investors have engaged in $45 trillion worth of bets on the credit-worthiness of companies and countries. Before it collapsed, Bear was the counterparty to $13 trillion in derivative trades. On March 14, 2008, Bear’s ratings were downgraded by Moody’s, a major rating agency; and on March 16, the brokerage was bought by JPMorgan for pennies on the dollar, a token buyout designed to avoid the legal complications of bankruptcy.

The deal was backed by a $29 billion “non-recourse” loan from the Federal Reserve. “Non-recourse” meant that the Fed got only Bear’s shaky paper assets as collateral. If those proved to be worthless, JPM was off the hook. It was an unprecedented move, of questionable legality; but it was said to be justified because, as one headline put it, “Fed’s Rescue of Bear Halted Derivatives Chernobyl.” The notion either that Bear was “rescued” or that the Chernobyl was halted, however, was grossly misleading. The CEOs managed to salvage their enormous bonuses, but it was a “bailout” only for JPM and Bear’s creditors. For the shareholders, it was a wipeout. Their stock initially dropped from $156 to $2, and 30 percent of it was held by the employees. Another big chunk was held by the pension funds of teachers and other public servants.

The share price was later raised to $10 a share in response to shareholder outrage, but the shareholders were still essentially wiped out; and the fact that one Wall Street bank had to be fed to the lions to rescue the others hardly inspires a feeling of confidence. Neutron bombs are not so easily contained.

The Bear Stearns hit from the derivatives iceberg followed an earlier one in January, when global markets took their worst tumble since September 11, 2001. Commentators were asking if this was “the big one” – a 1929-style crash; and it probably would have been if deft market manipulations had not swiftly covered over the approaching catastrophe. The precipitous drop was blamed on the threat of downgrades in the ratings of two major monoline insurers, Ambac and MBIA, followed by a $7.2 billion loss in derivative trades by Societe Generale, France’s second-largest bank. Like Bear Stearns, the monolines serve as counterparties in a web of credit default swaps, and a downgrade in their ratings would jeopardize the whole shaky derivatives edifice.

Without the monoline insurers’ triple-A seal, billions of dollars worth of triple-A investments would revert to junk bonds. Many institutional investors (pension funds, municipal governments and the like) have a fiduciary duty to invest in only the “safest” triple-A bonds. Downgraded bonds therefore get dumped on the market, jeopardizing the banks that are still holding billions of dollars worth of these bonds. The downgrade of Ambac in January signaled a simultaneous downgrade of bonds from over 100,000 municipalities and institutions, totaling more than $500 billion.

Institutional investors have lost a good deal of money in all this, but the real calamity is to the banks. The institutional investors that formerly bought mortgage-backed bonds stopped buying them in 2007, when the housing market slumped. But the big investment houses that were selling them have billions’ worth left on their books, and it is these banks that particularly stand to lose as the derivative Chernobyl implodes.4

Now that some highly leveraged banks and hedge funds have had to lay their cards on the table and expose their worthless hands, these avid free marketers are crying out for government intervention to save them from monumental losses, while preserving the monumental gains raked in when their bluff was still good. In response to their pleas, the men behind the curtain have scrambled to devise various bailout schemes; but the schemes have been bandaids at best. To bail out a $681 trillion derivative scheme with taxpayer money is obviously impossible.

As Michael Panzer observed on SeekingAlpha.com: As the slow-motion train wreck in our financial system continues to unfold, there are going to be plenty of ill-conceived rescue attempts and dubious turnaround plans, as well as propagandizing, dissembling and scheming by banks, regulators and politicians. This is all happening in an effort to try and buy time or to figure out how the losses can be dumped onto the lap of some patsy (e.g., the taxpayer).

The idea seems to be to keep the violins playing while the Big Money Boys slip into the mist and man the lifeboats. As was pointed out in a blog called “Jesse’s Café Americain” concerning the bailout of Ambac:
It seems that the real heart of the problem is that AMBAC was being used as a “cover” by the banks which originated these bundles of mortgages to get their mispriced ratings. Now that the mortgages are failing and the banks are stuck with them, AMBAC cannot possibly pay, they cannot cover the debt. And the banks don’t wish to mark these CDOs [collateralized debt obligations] to market [downgrade them to their real market value] because they are probably at best worth 60 cents on the dollar, but are being held by the banks on balance at roughly par. That’s a 40 percent haircut on enough debt to sink every bank involved in this situation . . . . Indeed for all intents and purposes if marked to market banks are now insolvent. So, the banks will provide capital to AMBAC . . . [but] it’s just a game of passing money around. . . . So why are the banks engaging in this charade? This looks like an attempt to extend the payouts on a vast Ponzi scheme gone bad that is starting to collapse . . . .

The banks will therefore no doubt be looking for one bailout after another from the only pocket deeper than their own, the U.S. government’s. But if the federal government acquiesces, it too could be dragged into the voracious debt cyclone of the mortgage mess. The federal government’s triple A rating is already in jeopardy, due to its gargantuan $9 trillion debt. Before the government agrees to bail out the banks, it should insist on some adequate quid pro quo. In England, the government agreed to bail out bankrupt mortgage bank Northern Rock, but only in return for the bank’s stock. On March 31, 2008, The London Daily Telegraph reported that Federal Reserve strategists were eyeing the nationalizations that saved Norway, Sweden and Finland from a banking crisis from 1991 to 1993. In Norway, according to one Norwegian adviser, “The law was amended so that we could take 100 percent control of any bank where its equity had fallen below zero.”6 If their assets were “marked to market,” some major Wall Street banks could already be in that category.

Nationalization has traditionally had a bad name in the United States, but it could be an attractive alternative for the American people and our representative government as well. Turning bankrupt Wall Street banks into public institutions might allow the government to get out of the debt cyclone by undoing what got us into it. Instead of robbing Peter to pay Paul, flapping around in a sea of debt trying to stay afloat by creating more debt, the government could address the problem at its source: it could restore the right to create money to Congress, the public body to which that solemn duty was delegated under the Constitution.

The most brilliant banking model in our national history was established in the first half of the eighteenth century, in Benjamin Franklin’s home province of Pennsylvania. The local government created its own bank, which issued money and lent it to farmers at a modest interest. The provincial government created enough extra money to cover the interest not created in the original loans, spending it into the economy on public services. The bank was publicly owned, and the bankers it employed were public servants. The interest generated on its loans was sufficient to fund the government without taxes; and because the newly issued money came back to the government, the result was not inflationary.

The Pennsylvania banking scheme was a sensible and highly workable system that was a product of American ingenuity but that never got a chance to prove itself after the colonies became a nation. It was an ironic twist, since according to Benjamin Franklin and others, restoring the power to create their own currency was a chief reason the colonists fought for independence. The bankers’ money-creating machine has had two centuries of empirical testing and has proven to be a failure. It is time the sovereign right to create money is taken from a private banking elite and restored to the American people to whom it properly belongs.

Patriot Radio News Hour(All American Gold.com) October 16, 2008 podcast

Credit Default Swaps on Collaterized Debt Obligations (CDO) mortgage derivatives is estimated to be $530 trillion. If house prices fall 31% across the USA it will cost $164 trillion to fix the problem($500,000 to $340,000). If prices fell 50% the cost would increase to
$215 trillion($500,000 to $250,000).

To give you an idea of how bad the Lehman Brothers default on Sept 15, 2008 was consider the analysis by Jim Cramer of MSNBC Mad Money on his October 21,2008 show from 6-7pm on the AIG crisis.

Companies wrote insurance against Lehman Brothers to pay off its $158 billion debt. Hedge Funds bought $365billion of CDS with the blessing of Chris Cox, chairman of the SEC.

Hedge funds then issued put options to begin short selling Lehman Brothers stock. Then they called the media informing them of a run on the investment bank. Stock prices dropped rapidly. The value of CDS policies increase. Credit rating agencies like SP500 and Moodys start downgrading the bonds. LB becomes insolvent especially when the US Government refuse to come to its rescue. The result is that LB is firebombed out of existance.

The biggest underwriter on Wall street AIG is unable to cover the $365 billion CDS although having $1Trillion in Assets is unable to come up with the cash to pay out the insurance policies. AIG stock fall on Tuesday Sept 16, 2008 putting the company at risk of default.

US government over space of 2-4 weeks loan AIG $122 billion in two payments ($78 +$43billion). Common and preferred stock holders are wiped out. AIG is forced to liquidate its assets.

US Government cuts cheques to Hedge funds in the tens of billions of dollars. The final bill to the taxpayers of the United States is estimated to be $500 billion.

During this time AIG paid $440,000 for staff trips to a resort. It also paid out $5million in bonuses and gave its outgoing CEO a $15 million dollar parachute. The company is currently under investigation by NYS Attorney General Andre Quomo for fraud.

Lehman CDS auction puts value at 8.625 cents on the dollar as reported by CNBC on October 10, 2008

#40 Bailing in B.C. on 10.26.08 at 5:44 am

I’ve been a long time listener of this site. There are many people on here who are obviolously smarter than I am, but I think that some where along the lines I have gathered a bit of common sense .

It’s going to go horribly wrong.

Those of you who are waiting for house prices to go down will find their discounts, but it’s not going to be any great victory. The prices of houses will be the least of our worries.

Bail outs will not work. If they have any effect they will (have been) be very temporary

Unless you have cash houses will be very difficult to buy. If you have cash why would you want to buy one?

It’s time to look at the very real possibility that the world as we know it will never be the same.

This can be terrifying or exciting depending on how you look at it.

Please check out the crash course at

http://www.chrismartenson.com/

Yours’ with a tin foil hat

Bailing in B.C.

#41 Stephen from Toronto on 10.26.08 at 6:45 am

ARE WE STANDING AT THE EDGE OF FINANCIAL ARMAGEDDON-PART 4B

Parallels between 2008 and 1929-1933

If you have read post #39 on Garth Turner’s article “Rolling Them” and post # 35 on this blog a number of financial pundits are comparing this time to the events of the Great Depression between 1929-1933. Is there any information that confirms this scenario?

Jim Cramer CNBC Mad Money-October 10, 2008 5-6pm
show from Wall Street in New York City.

Mr Cramer tells his viewers that we face either the October 19, 1987 or 1929 scenario.

In the 1987 scenario stocks were at 29x earnings without credit default swaps. In addition the big three automakers were introuble with low sales.

In 2008 stocks are at 11x earnings, wages are high and companies from all sectors in the SP500 have had their stocks battered by fear, panic and hedge fund trading. Companies such as Heins, Kraft, General Mills and Coca-Cola have high yields and no debt.

Jim Cramer feels that we are in the 1929 scenario.

He points out that on September 3, 1929 to July 8, 1932 stocks fell from 381.17 to 41.22.

General Motors fell from $73/share to $8/share in this period. In 2008 it went from $43/share to $4 dollars which is the lowest price seen in 50 years

Mr Cramer points out in last Fridays “Mad Money” show that a review of John Kenneth Galbraith book entitled “The Great Crash” (p141)indicates that we may be in the 1929-1930/32 period. The stock market declines have already happened in this volatile period. Between January-March 1930, stocks rallied until April 1930 when they lost momentum. The Dow-Jones fell between June 1930-June 1932. US Steel had a value of 262 on September 3, 1929 and fell to 22 on July 8, 1932. On June 24, 2008 it was 196 and on October 24, 2008 was at 30.

In 1933 the GDP of the US fell by 60% and the unemployment rate was 25%. In 2008 the growth of the GDP was 0% with 7% unemployment (actually its about 10-11% according to shadowstats.com)

The US economy at present is suffering a housing bubble crash, leading to a major drop in consumer demand compounded by a liquidity crisis.

Patriot Radio (All American Gold.com) October 15, 2008 podcast.

Their research indicates that in the Great Depression the stock market dropped 91% between 1929-1932 and industrial production fell 50%. Corporate profits fell 49%. In 2008 JP Morgan/Chase Manhattan and Bank of America profits fell 84% while industrial production fell 60%. The DJ Composite index fell to 1275 on July 8, 1932. The DJ reached its highest point to 14, 168 on October 8, 2007 and fell -777points to 8579.00 on October 9, 2008. On October 10, 2008 it fell 128 points to 8451.19 points.

They also examined the price to earnings ratio (PE Ratio ) of stocks on the SP500. Currently it is 15. The lowest average seen was 6.6 between July-August 1982. The PE ratio had an average of 10 between 1977-84.

The SP500 could fall to 600 and the Dow could fall below 6000. To get to 6.6% the Dow could fall to 4000 and the SP500 to 400 before the end of 2010. The Dow and gold could equal 4000. The money supply is 97% electronic and 3% in Federal Reserve notes. The overall money supply M3 is currently at 15.5 trillion and grew by an astonishing 18%

In 1993, Lord William Rees-Mogg and James Dale Davidson published a book entitled “The Great Rekoning-Protect Yourself in the Coming Depression” published by Simon and Schuster, NYC, ISBN: 0-671-86994-9 was a comprehensive review of economic history, forecasting and depressions. If you want to buy it, Amazon.com has copies under $30

In the chapter entitled “Clues from the Past” the authors point out parallels between 1929 and 1992-93. There are 23 points between pages 376-78 that when reviewed show amazing parallels between 1929 and 2008. Key points to mention are:

2. in both cases, the predominant nation had abandoned gold. The world experienced inflation/deflation cycles.

7. Twenties and eighties were decades of low inflation in which major tax cuts extended credit booms.

8. Consumption spending in twenties fueled by debt was the main engine of growth.

9. Job growth was in services not manufacturing. Manufacturing jobs declined along with the number of manufacturing firms.

11. Both decades saw growth of speculation and strong bull markets on Wall Street.

13. Both decades saw wealth and business glamorized, and politics took a conservative turn, with Republican presidents in the White house.

14. Both decades experienced strong construction booms with substantial growth of home mortgage debt.

17. Both decades saw widespread bank failures. From 1921-1929 5,421 banks failed.

Next -Predictions from late 2008-2013?

#42 David on 10.26.08 at 8:23 am

Brazer, that is a tough call on the US greenback. My family in Alberta make a secondary living from US dollar denominated income for about 10 years now.
For what is worth, I personally think the Canadian Loonie will slide about 12-15 cents in the next 4 months before a rebound. In other words a slide to the 63-66 cent range then a steep upward climb. Cashing out and profit taking is an inexact science.
It works like this, the closer to currency parity, the more American goods my family buys. The further away the greater the desire to save up greenbacks or cash out to Loonies.
One does not even need the Forex to speculate on the Loonie. First Calgary and Alberta Treasury Branches have excellent low fee US dollar accounts. Citizens State Bank Roseau Minnesota is great for Canadian drafts as well. Citizens Bank does bank by mail and never had a problem getting a cheque to my family in Alberta.

#43 dd on 10.26.08 at 10:03 am

#34 CalgaryRocks,

So true. The “North” has always paid more for the most part. Who wants to live in camp and work in -30 weather for $20 an hour.

#44 GrandePrairiegirl on 10.26.08 at 11:11 am

#38 & 40 – Stephen From Toronto.
That was almost as painful as the three plus hour video I watched on the banking system. However well worth watching.
When the deriviative sector melts down none of this will matter. We’ll all go down.
Analyzing the current problems is to a large degree pointless I think. If there is a recovery then it will be weak barring another bubble of some kind. Another bubble will take it all right back to another crisis such as the current one.
Google “GEAB” you’ll find a website called Global Europe Anticipation Bulletin. They have called it spot on for several events to date usually six to eight months out. They are of the opinion the U.S. can no longer service it’s debt and are predicting a total collapse by Summer 2009. Any country that does not decouple itself from the U.S. will go down the same road.
Also anyone really interested in a solution ought to watch The Money Masters:How International Financiers Took Control of America.
Have coffee on standby, you may need it to stay awake during some parts. Overall its well done and the last hour or so is the best of course.
http://video.google.ca/videosearch?q=the+money+masters&www_google_domain=www.google.ca&hl=en&emb=0&aq=0&oq=the+money+mas#

No matter what the U.S. government is currently attempting it will not work.
They are applying bandaids to symptoms and not addressing the root problems. Unless of course this was all planned with full knowledge of outcome. Let the rout continue, wipe out the middle class completely, have their little summit,announce new regulations and a new currency.
If they truly want to recover and remain a “Republic”
not “Democracy” (read up on those two sometime)
they need to do this:
1. Pay off the debts with debt free U.S. issued notes.
2. Abolish fractional reserve banking.
3. Repeal the Federal Reserve Act of 1913. And
repeal the Banking Act of 1864.
4. As the Federal Reserve withdraws it’s money from circulation the U.S. floods the market with an equal amount of U.S. issued notes.
5. Withdraw the U.S. from the IMF, World Bank and the BIS (Bank of International Settlements).
And this would work because they’d be eliminating the Fed,Fractional Reserve Banking and the BIS.
Pay attention to the part of the video that explains President Andrew Jackson’s system with the Greenback. It worked very well. But that of course didn’t sit well with the European Banksters and the rest as they say is History.

Too bad they’ll never do what needs to be done.

#45 dd on 10.26.08 at 11:19 am

All,

Peter Hodson of Sprott … China’s demand for energy…

http://www.financialpost.com/scripts/story.html?id=907115

#46 dboy on 10.26.08 at 11:26 am

# 26 dd

You are so right. The hype was all consuming. It was like a frenzy in Vancouver. The collective mentality was better get in now or you never will.

I was thinking of buying last march when a friend of mine gave me the globe and mail with an article by Garth. I did n’t buy.

Thanks Garth for being the voice of reason.

#47 dd on 10.26.08 at 11:26 am

#40 Stephen from Toronto

1987 or 1929?

In 1929 there was no unemployment insurance, bank bail outs, Fed, cap x project spending, and farm aid. And the dust bowl compounded the problem. All these program were set up because of the depression.

This recession will be really bad. But 1930’s? There are more safety nets today compared to the 30’s.

#48 Rick on 10.26.08 at 12:33 pm

As Gary Trudeau once wrote in Doonesbury “When you’ve dug yourself a hole, why do you insist on calling it a tunnel?”

#49 Another Albertan on 10.26.08 at 2:33 pm

@34, 42,

I think you’ve taken the quotation out of context. What I presented was an anecdote FROM Fort McMurray ABOUT Alberta. Fort McMurray is an anomaly for the reasons you both have cited.

25-year-olds in Calgary or Edmonton or Red Deer driving big trucks or high-output German sports cars is not the definition of an “import” who is working here for a finite amount of time with the intention of taking savings out of the province in order to set up a household somewhere else.

Based on the invoices I’ve seen and endorsed in the past few years for journeymen and apprentices, I think many people would be shocked to see that the contracted hourly rates aren’t nearly as high in some trades as some have been led to believe. Back in the peak of industrial construction in 2007, I could get journeymen electricians, techs and linemen to basically any spots in the province for $65/hr – and that’s the rate charged by their employer before a raft of overhead and such. The discount down to the level of first-year apprentice was steep enough that, by my calculations, there was little chance those 20-21-year-olds were making more than $20/hr… in the middle of nowhere.

Outside of industrial construction in frontier locations where labour rates will tend to sustain a higher level than average, construction work predicated on businesses and households cutting cheques on discretionary work (renovations, etc) has already been clobbered and will continue to go down that path. The slowdown in residential work earlier this year will be followed up in early 2009 in the commercial sector.

I believe this was the point of quote from the money manager in the first place.

#50 Charles on 10.26.08 at 2:51 pm

dd (#46)

In your post you state “This recession will be really bad. But 1930’s? There are more safety nets today compared to the 30’s”

The total corporate, government, and consumer debt in this country is off the charts. We have a massive unfunded liability in the Canada Pension Plan, Medicare, Old Age Security, and in infrastructure replacement and upkeep costs.

The so-called “booming economy” we have all experienced in the last few decades is a big lie. Our “boom times” have been solely due to the injection of more and more debt into the economy. Just look at the wild expansion of the m3 money supply in this country since the early 1970’s.

Where is all the money needed to pay for these safety nets going to come from?

#51 Downsized and Delighted on 10.26.08 at 4:14 pm

I’m really starting to get curious about all the posters here. Every other one says either “I sold last year”, or “I was going to buy last year, but didn’t thanks to Garth”. I have to assume that it isn’t Garth himself posting these (although I haven’t ruled it out entirely)

Seriously, since any comments or opinions are biased by the poster’s current position, could the posters state whether or not they own (or have owned) real estate?

I downsized a year ago, but I still own a home.

Just to be agonizingly and needlessly clear, I do not post on the comments section other than in this fashion. — Garth

#52 Rasputin on 10.26.08 at 5:13 pm

Sold my house in Calgary last Feb. Sitting on cash in the bank. Right now I’m just munching the popcorn and enjoying the show. I also know full well that things could get so bad that the prudent get sacrificed by the government to protect the large group of debtors. More votes in that group.

#53 Bluesman on 10.26.08 at 6:10 pm

BUT: if Garth doesn’t like your post it won’t be posted. Wonder how many went the way of the ether?

A few idiots have been deleted here. Wish to join them? — Garth

#54 john on 10.26.08 at 6:18 pm

I know of a couple in the 4th year of a 10 year fixed at 4.25% ($250k mortgage). Husband works construction @ 65 K Gross, wife stays home. 10K owing on a vehicle. They always seem quite comfortable.

I invite others to give their thoughts on this.

#55 anonymous on 10.26.08 at 6:40 pm

Good news: Bought 2003, sold Spring, 08 in Alberta. All cash converted to US dollars after sale.

Bad news? A large chunk of the money went into the US stock market in June and July. Oh well. Still, overall not too bad, considering that I was bearish on commodites and oil/gas at the time, so I suffered no direct commodity bubble loses. [Note: As of last week, I am now very bullish on non-tarsand oil/gas stocks].

It will soon become apparent that the United States is the safest place to put your money. Not yet, but soon. With the great forex funk-up already underway, there will be a big inflow of cash into the states.

The loonie is dying.

#56 lgre on 10.26.08 at 6:41 pm

Downsized and Delighted – what is so hard to believe about someone selling or not buying?????
I sold in May, it had nothing to do with Garth or his blog. I don’t know how many people are actually on this blog but I’m pretty sure it’s not a whole lot..most people are on here because one way or another they agree in the information being passed around daily, so therefore they would naturally make decisions based off that, wouldn’t you say?

#57 Bailing in B.C. on 10.26.08 at 6:51 pm

#50Downsized and Delighted.

Here’s my real estate history.

Bought a townhouse in 1997 for $185,000 with a 10% deposit. Almost immediately the value of the property went down by about 10% and stayed that way for about 5 years. (Lesson 1: Real estate can go down).

2003 with two kids in tow and knowing (guessing?) that real estate was about to go up it was time to buy a house. We were going to list the townhouse for $190,000, hoping to get back what we had paid 5yrs earlier. Found a house that we could afford ($270,000) with a two-bedroom rental suite. Since the market was going crazy no one was taking offers subject to sale. With no time to sell the townhouse we decided to keep and rent it. This required some fancy footwork (lies) with the bank.

2004 we sold the townhouse for $280,000 an increase of almost $100,000 in one year. (Lesson 2: Real Estate can go up)

With the proceeds from the Townhouse we bought a full duplex in another town. For $265,000 we got 4000sqft both sides of a duplex, one side with a basement suite. Where as the townhouse needed to be subsidized to the tune of about $400 per month ($1200 per month rent) the duplex cash flowed with a rent of $2300. Over the last 4 years the rent increased to $2950 and the value of the property rose to over $500,00.

Meanwhile our house had also risen in value to over $600,000.
I was getting the feeling that the good times couldn’t last much longer. Too many people were buying “investment properties” that didn’t cash flow and I knew prices couldn’t keep going up. However I thought since my duplex cash flowed I would just ride out the storm.

That’s when I found “The Greater Fool” and it all suddenly clicked. I listed the Duplex in Aug for $539,000 dropped the price to $519,000 in Sept and sold it for $500,000. The Deal closes tomorrow.

Tomorrow I will be completely debt free. The duplex will cover the mortgage on the house, the line of credit and pay our credit card bill with money left over for capital gains tax.

I would have liked to sell the house as well, and become a wealthy renter but I think I’ve missed the boat. In March I would have listed our house for $640,000 now if I were to list it I wouldn’t go over $570,000. Since NOTHING is selling where we are who knows how low we would need to go to dump it.

So here we are mortgage free and with a rental income from the suite of $900 per month. We are sitting pretty. Too bad the whole worlds screwed and none of us are going to come out of this unscathed

#58 Rick on 10.26.08 at 7:19 pm

#47 Rick on 10.26.08 at 12:33 pm As Gary Trudeau once wrote in Doonesbury “When you’ve dug yourself a hole, why do you insist on calling it a tunnel?”
———————-
Not the Rick who has successfully been pissing off Realturds on this site for the last year. No offence dude, but please choose another handle.

#59 Rick on 10.26.08 at 7:34 pm

#49 Charles on 10.26.08 at 2:51 pm dd (#46)
……….snippage………….
Where is all the money needed to pay for these safety nets going to come from?
_______________

Hopefully from the baby boomers who created the mess to begin with. Without government intervention, that would be the natural course. Unfortunately the boomers in government will f*** it up on the way down, just like they did on the way up.

#60 Sam on 10.26.08 at 7:46 pm

so how come these guys Toronto are immune ?\

http://www.thestar.com/News/GTA/article/524758

#61 O'Ryan on 10.26.08 at 7:49 pm

I sold my Kelowna home in May,originally purchased in 1996. I am renting a lovely condo and am really enjoying life these days. Might think about buying in a year or two. So much on the market at a reduced rate…is that the odor of desperation in the air?

#62 Rick on 10.26.08 at 7:50 pm

#48 Another Albertan on 10.26.08 at 2:33 pm @34, 42,
…..snippage……
Based on the invoices I’ve seen and endorsed in the past few years for journeymen and apprentices, I think many people would be shocked to see that the contracted hourly rates aren’t nearly as high in some trades as some have been led to believe. Back in the peak of industrial construction in 2007, I could get journeymen electricians, techs and linemen to basically any spots in the province for $65/hr – and that’s the rate charged by their employer before a raft of overhead and such. The discount down to the level of first-year apprentice was steep enough that, by my calculations, there was little chance those 20-21-year-olds were making more than $20/hr… in the middle of nowhere.
———————-
THANK YOU!!!!!!!!!!!!!

I have been saying this for years. As a tradesman in a trade that is “most in demand” I have been saying ‘show me the money’ for the last decade. Other than the occasional ‘bag licker’ who makes what the media portrays, wages for skilled workers in Canada have done nothing but tank in the last decade, regardless of this perceived “boom.” Bring this up, or complain about it and one quickly becomes seen in a negative light, regardless of reality. Thank God for my secure government job at this moment, the same one my collegues ostracized me for up until recently, the one that pays significantly less than in private business, the same job they would kill for today. LMFO!!!

#63 Vancouver renta on 10.26.08 at 7:53 pm

Downsized and Delighted:

If I could have drunk the koolaid and jumped into the market a year ago, I might have. But….with only 165,000 cash in the bank, a job that pays 50k year, a paid-off car, a single person with no debts, I couldnt afford a house in Vancouver!

The banks would only give me another 200k to add to my savings and guess what? Still not Good Enough!

That’s why this first time home buyer is still waiting, renting, working, saving. Ten years ago, it would have been easier to get that house but now, because of the greed, the speculators, the people that decided to make “real estate” investments instead of what it all should have been – a home, a roof over your head and a place to raise a family.

Am I bitter? Yeah, damn right. To those individuals that stretched themselves too thin – boo hoo, to those that participated with other sellers in bidder wars, to those specuvestors, condo-flippers, oversea’s investors, excuse me if I don’t shed a single tear when this house of cards comes crashing down on you. We all get what we deserve.

#64 Dawn in Calgary on 10.26.08 at 8:04 pm

Seriously, since any comments or opinions are biased by the poster’s current position, could the posters state whether or not they own (or have owned) real estate?

++++

We moved to Calgary almost at peak RE market — May 2006. Decided to rent for a couple of reason; 1) the cardboard shoeboxes they were asking $450k for were NOT worth the money. 2) Our first house purchase was in 1999 for $75k for a 4 bedroom bungalow that was built properly and I hadn’t drank the ‘buy now or forever be priced out Kool-Aid. 3) We’ve owned three houses, and my blood pressure and bank account can’t take owning any longer.

A house is a place to live, a home is what you make of it. It’s not an investment. I just shook my head and looked at rentals. We’ve owned good places, and money pits. I’m extraordinarily glad we rent. It’s easier on the psyche.

#65 Another Albertan on 10.26.08 at 9:18 pm

@61 – no problem, Rick.

I should also note that there are vastly different pricing schemes out there depending on whether the work is industrial, commercial or residential.

From my experience (everyone else’s mileage may vary), residential is a cesspool for shenanigans and has a generally shallower talent pool. Contracts in industrial and commercial work are usually for multiple hundreds or thousands of labour hours. Residential work is more one-off, especially when dealing with individual home owners. Of the residential contractors I’ve dealt with in different forms, there is not the degree of care and diligence I find in the other sectors. There is also typically a much higher charge per unit of labour (i.e. – hourly rate). This last point is usually because individual home owners are more prone to accepting what is presented without discussion. When your reno is over-time and is cramping your family’s style, you’ll do and accept almost anything to solve the problem.

In commercial and industrial, you’re more apt to find people like me who will beat contractors into line if attitude or quality slips. Those companies know that their reputation and future work is on the line. I really haven’t had the “warm fuzzies” on the residential side since this last run-up started a few years ago.

#66 Downsized and Delighted on 10.26.08 at 9:57 pm

Rasputin, Anonymous, Bailing in BC, O’Ryan, Vancouver Renta, Dawn in Calgary;

Now this is more like it! Uplifting personal stories of non-greedy people who have made or saved money on real estate. Sure beats the non-stop doom and gloom on this site lately. Not that I disagree with the negative outlook, but it sure is depressing.

Good luck on your closing tomorrow “Bailing in BC”. Debt free! Won’t that be great!

#67 Rick on 10.26.08 at 10:40 pm

#62 Vancouver renta on 10.26.08 at 7:53 pm Downsized and Delighted:
…snippage…
Am I bitter? Yeah, damn right. To those individuals that stretched themselves too thin – boo hoo, to those that participated with other sellers in bidder wars, to those specuvestors, condo-flippers, oversea’s investors, excuse me if I don’t shed a single tear when this house of cards comes crashing down on you. We all get what we deserve.
———–
Yes, no argument, but you are rehashing the ol’ Realturd; “no one forced you to buy” convoluted and simplistic position already flogged to death. Reverse to about 100 blogs back.

#68 Hogtown prowler on 10.26.08 at 11:18 pm

Back to Toronto’s prime downtown.

The One Bloor site. They’ve demolished and levelled off.
I wonder how the parking will work as I’m not sure if it will be the usual dig down because of the subway. They pulled out the basements of the old buildings and filled it in. Usually it would be left unfilled for the dig down. I’m not sure if this is due to the ergonomics of the site or the present (credit?) situation.

Just thought I’d ‘poke’ and give a heads up.

#69 kc on 10.26.08 at 11:32 pm

# 53 – john on 10.26.08 at 6:18 pm – “I know of a couple in the 4th year of a 10 year fixed at 4.25% ($250k mortgage). Husband works construction @ 65 K Gross, wife stays home. 10K owing on a vehicle. They always seem quite comfortable.”

I invite others to give their thoughts on this.

About wanting thoughts, they are locked in @ 4.25 for the next 6 years? If so I feel they will be ok with that for interest rates are going to be getting higher, If they have the same payment due for the next 6 years that is good for they can budget to meet the numbers.

here is what I have to question, You never stated in what construction nor area, (not that it matters) however, keep in mind that Canada is heading for a SLOW down and many projects are going to become finished and/or just bankrupted. Do they have any other major debts? credit/store cards? you said a car payment oweing…. You say they seem comfortable, does this mean they live with in the means of saving every month? And can they financialy handle 3 months of no income? or placed another way, do they have enough cash in the bank to sustain an abrupt loss of job and income?

if the answers to this are positive, then i feel things should be ok, however with that said, there are no 100% deals in life, except death and taxes.

#70 $fromA$ia on 10.27.08 at 12:05 am

Garth, now that the Conservatives are in…. We hear all this doom and gloomabout economy downturn.

We Canadians are suckers to our own Government.

#71 Rick on 10.27.08 at 12:13 am

Another example to illustrate what drives BC’s disproportionate housing prices;

http://www.canada.com/vancouversun/news/story.html?id=0eb10496-422a-48d4-bb1c-baba31f926b5

#72 kc on 10.27.08 at 12:45 am

# 44 – dd All,

Peter Hodson of Sprott … China’s demand for energy…

http://www.financialpost.com/scripts/story.html?id=907115

—————–

I read this news article you linked to, and somethings don’t fully add up here. Henry Ford had a stroke of genuis many years ago when he figured out that to sell more cars he had to give his employees a wage that made it affordable for them to be able to buy them, this kept the wheels going. Employees could buy what they manufactured. In China, (in this article) the thesis is that there is going to be a HUGE demand for cars, the writer states that the added influx of people coming into urban areas are going to be buying these cars and hence needing fuel. The problem with this assumption is that they have JOBS that pay high wages. China is hoping that with the global slowdown of their exports, the population there can consume the durable goods that are produced. However, the underlying problem is that the majority of the jobs are low paying jobs and the disposable income is NOT there to support this theory.

#46 dd on 10.26.08 at 11:26 am #40 Stephen from Toronto

1987 or 1929?

In 1929 there was no unemployment insurance, bank bail outs, Fed, cap x project spending, and farm aid. And the dust bowl compounded the problem. All these program were set up because of the depression.

This recession will be really bad. But 1930’s? There are more safety nets today compared to the 30’s.

—————————–

49 Charles on 10.26.08 at 2:51 pm dd (#46)

In your post you state “This recession will be really bad. But 1930’s? There are more safety nets today compared to the 30’s”

The total corporate, government, and consumer debt in this country is off the charts. We have a massive unfunded liability in the Canada Pension Plan, Medicare, Old Age Security, and in infrastructure replacement and upkeep costs.

The so-called “booming economy” we have all experienced in the last few decades is a big lie. Our “boom times” have been solely due to the injection of more and more debt into the economy. Just look at the wild expansion of the m3 money supply in this country since the early 1970’s.

Where is all the money needed to pay for these safety nets going to come from?

—————————-

Let me add to these 2 very interesting thoughts. On one side DD #46 makes the important statement about the safety nets. We should not forget that no matter the net under you, it may take years to climb out of debts obtained from loss of incomes. The wheels fall off the tracks very fast in a down turn. It is almost like the falling RE investments, over many years of up swing to regain the losses in prices. Sure you get UI cheques, however, the banks and card companies still wnat the cash, as would the landlord. The fed’s WILL NOT bail out your rent nor your mortgage payments after you slide while waiting your 6 weeks waiting times.

#49 – I need to 100% agree with your opinions, and let me add if I may; “BOOMING ECONOMY” with a reality check we need to keep in mind that what is the underlining factor to the boom? it is what has the world in an upside down glass, the housing bubbles. Never is it stated in the stats the Govt. gives us WHERE this boom actually comes from….. let us suspect it is 1/2 housing/commodities (bubble) and 1/2 retail (services employment) manufacturing jobs yes to some degree however, as you state DEBT fueled, IE the housing bubble supported. Funny thing is we have all been buying into it for years and now it is time to pay for all those promises and IOU’s. There are only so many “new” jobs that can be created – however, how many of these jobs that are in the stats are just old jobs that some one quits from and are just relisted in the “now hiring” sections?

It is a real catch 22, almost like taking Visa to PAY American Express one month then reversing it the following month. What is transpireing is the debt swaps, Canada’s gross GDP is based on a complete fraud called credit.

#73 kc on 10.27.08 at 1:05 am

Hey Garth, Just wondering something, how many hits to your blog/website here do you get a week and since Canada has been slowly unwinding are the numbers going up, down or staying the same? Thanks

#74 patriotz on 10.27.08 at 3:02 am

The total corporate, government, and consumer debt in this country is off the charts.

Government debt/GDP today is way lower than it was in 1993. It’s going to go back up a bit because of Harper’s mismanagement but let’s hope he’s out after another two years. As for private sector debt that’s for the private sector to work out.

We have a massive unfunded liability in the Canada Pension Plan, Medicare, Old Age Security, and in infrastructure replacement and upkeep costs.

CPP has its own segregated assets. There is no unfunded liability. Everyone is already on Medicare. OAS will go up as the boomers retire, yes.

I think you’re projecting the US’s fiscal issues onto Canada. Yes we have problems but they’re not the same.

#75 Vic Reader on 10.27.08 at 9:08 am

Real estate slowdown causes jump in B.C. bankruptcies: experts
Gerry Bellett, Canwest News Service
Published: Monday, October 27, 2008
Dropping real estate values are sending more British Columbians into financial crisis and causing a spike in personal bankruptcies, according to professional debt counsellors.

Federal Industry Ministry data show that B.C. consumer bankruptcy filings for August were up more than 10 per cent over the same period last year. August also saw a 16.3 per cent increase in proposal filings, an alternative to bankruptcy.

And that was an improvement over July, when B.C. consumer bankruptcy filings were up 14 per cent over the same period last year and proposal filings were up 20 per cent.

Email to a friend

Printer friendly
Font:****”It’s a big jump,” said B.C. Association of Insolvency and Restructuring Professionals director Lana Gilbertson. “We don’t know if it will continue upward, but during the recessions of 1981 and 1990-91 there were rapid increases in insolvency rates.

“Our professional community is seeing more and more individuals who can’t sell their property for what they thought it was worth and who can’t refinance or borrow more money against their property,” she said.

http://www.canada.com/victoriatimescolonist/news/story.html?id=4f45e020-e625-4740-b973-f23dd7795498

#76 dd on 10.27.08 at 9:44 am

#72 kc,

You have some valid points. However there is going to be 3 billion more people on this plant. Period. The Asian population is growing fast. They will want more of everything. There will not be enough resourse to feed, cloth, and heat all these people unless some big changes are made.

You said “However, the underlying problem is that the majority of the jobs are low paying jobs and the disposable income is NOT there to support this theory.” Yes correct. However wages don’t have to stay low, they can increase over time. And I bet a car or durable goods in China will be available to the majority of the people within our lifetime. Don’t just look at what someone can efford today … it is tomorrow what holds the promise.

Read Garths book on DOW and TSX at 30,000. Why? Because resources will be needed for that extra 3 Billion people.

#77 dd on 10.27.08 at 9:50 am

#72 kc,

The point is that WE do have support. The economics might be a 1930’s playout, however, we do have welfare, IE, free hospitals, and the governments are acting more quickly this time.

Yes it will be tough. But in the 1930’s there was NO support.

#78 dd on 10.27.08 at 9:58 am

#72 kc,

It is estimated that 3 million people a month move into cities in China.

So a city the size of Toronto has to be built every month. I said size and not standard. People have to be housed and transfortation has to be built.

And this is just China. The Middle East population is growing, Thailand, Vietnam … They will earn more money tomorrow than today. They will want more goods tomorrow than today.

#79 No Fool.... on 10.27.08 at 10:45 am

Frig,
I heard this morning that developers of a massive new condo development in Calgary Eau Claire District (downtown on the River) have “postponed” their development outright because of economic uncertainty.

They said that they were supposed to break ground in the spring, but that they may now be delayed to the summer.

Ya, right. Summer of 2013!
Go find your own article reference. I speak the truth.

#80 pbrasseur on 10.27.08 at 11:16 am

Some signs that the US RE market is seeing some light at the end of the tunnel:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCnoEGB5FdDo&refer=home

I believe that the US will come out of this first and as usual Canada will follow.

Europe on the other hand still has to face up to its own RE bubble but also to its financing (much more than the US) of the credit bubble in emerging countries (ex communist bloc and South América in particular).

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3260052/Europe-on-the-brink-of-currency-crisis-meltdown.html

#81 pjwlk on 10.27.08 at 11:24 am

#53 Bluesman said:

“BUT: if Garth doesn’t like your post it won’t be posted.
Wonder how many went the way of the ether?”

As far as I’m concerned Garth’s got the thickest skin of any human I’ve ever seen. I can’t believe some of the stupid and insulting comments that he’s allowed posted in the past. Far worse than I would ever tolerate. The man definitiely stands up for everyone’s freedom of speech whether he likes what you’re saying or not.

#82 Downsized and Delighted on 10.27.08 at 11:46 am

Downsized and Delighted – what is so hard to believe about someone selling or not buying?????
I sold in May, it had nothing to do with Garth or his blog. I don’t know how many people are actually on this blog but I’m pretty sure it’s not a whole lot..most people are on here because one way or another they agree in the information being passed around daily, so therefore they would naturally make decisions based off that, wouldn’t you say?

Igre: I would expect to find you (as the seller) on this blog, but I was curious if I would find your buyer here as well. Not likely. But then I wondered how many people are on this blog who basically do nothing (neither buying or selling). Any do I really want advice from them?

#83 Another Albertan on 10.27.08 at 11:47 am

@79: http://www.canada.com/calgaryherald/news/city/story.html?id=a43f9bb5-1383-40e5-9de0-af62077a22d5

#84 Downsized and Delighted on 10.27.08 at 11:53 am

I know of a couple in the 4th year of a 10 year fixed at 4.25% ($250k mortgage). Husband works construction @ 65 K Gross, wife stays home. 10K owing on a vehicle. They always seem quite comfortable.

I invite others to give their thoughts on this.

John 54: I’m not sure what you’re asking here, but the information you left out is more important than the information that you gave. What is their current equity on that property? (ie, did they make a good down payment, and has the property gone up in value over the past 4 years, and was the mortgage to purchase the property or to finance a line of credit that they pissed away, and is the property their principal residence therefore giving them a capital gains exemption, and is it in good condition and not needing alot of work in the future, and if that property drops in value by 30%, will they be under water?

#85 Panic Profit on 10.27.08 at 1:11 pm

I shake my head at the delusional masses of sheep who chimed “Vancouver is different” and “It won’t happen here.”

Yeah – we’re different all right – we don’t have a real economy to speak of except people profiting directly or indirecting from real estate which is financed with marijuana trade (our real ‘green’ economy)

Profitable Ideas?

Any ideas on how to make $ when market is going down – in real estate or otherwise? (aside from #19 David’s idea of ‘crying towels’)

* I have been shorting the Cdn and US stock markets for about 1yr.
* Bought lots of gold (getting hurt badly but continue to average down believing that gold and silver is oversold)
* Ideas?

#86 Roger in Victoria on 10.27.08 at 2:05 pm

One often hears people say it is always a good time to buy. “After all housing always goes up in the long term and you are throwing your money away on rent.”

So I set up a spreadsheet model to show what happens in a falling market. Is it is better to buy now or rent for a few years with the intention of buying later??

I made some basic assumptions:
– renter pays $2500 per month rent
– owner pays $2500 as mortgage payment during entire mortgage
– both have saved 100K
– 500K is the price of the property
– constant mortgage rate of 5.75%
– renter pays rent out of 100k savings until property is purchased
– savings interest, property maintenance, taxes and utilities are not considered

Click my name to get the results as a pdf file

CONCLUSIONS
—————
Wit a 5% drop the “buy now” purchaser comes out ahead. At 8% it is a tie and at 10% and 12% drops the patient renter comes out way ahead. For example with a 10% annual price drop:

– Former renter ends up mortgage free two years earlier
– In 2015 & 2020 former renter owes much less on outstanding mortgage

The renter is much better off than my model suggests if you consider interest on the savings and that the “buy now” owner was paying property taxes and maintenance for one or two years while the renter was not.

I deliberately left investment return on savings out of the model. In the past I have found people will discount my entire projection because they disagree with the investment return. For similar reasons I set the rent at the same level as the mortgage when we all know you can get some pretty decent rentals for much less than $2500.

#87 My_View on 10.27.08 at 3:00 pm

Were nothing like the Americans…..

http://www.financialpost.com/money/story.html?id=907054

#88 john on 10.27.08 at 3:05 pm

Downsized and Delighted

Initial downpayment = $40K
Mortgage = $250K
Home purchased at $290K
Current Value $370K
Principal home (6 years old)

Thoughts…

#89 anonymous on 10.27.08 at 3:15 pm

dd,

Look, I hear what you are saying about the “long term” growth stories, but even you have to agree that your stories are bullshit, right. The Chinese are more than willing to go back to eating rice for 10 years if they need to. They aren’t like Americans. They don’t NEED their cable TV or ipods.

There is one reason why you should buy oil/gas names (ex. tarsands), and that’s because the hedge fund liquidation is coming to an end in that sector. It’s oversold. Demand isn’t as bad as everybody says it is. It’s due for a 30-40% pop.

It’s the same reason why US banks look attractive at these levels.

I ALWAYS TRY TO TIME THE MARKET. Long-term, buy-and-hold is dead. It takes some work, but that’s the future of investing. We expect our mutual fund managers to do this for us, but of course, they can’t. They just tell us to invest for the long term.

#90 David on 10.27.08 at 5:10 pm

Watching the Final 15 on BNN today was incredible.
The entrepreneurial types might want to try making a buck flogging Black October t-shirts on Bay Street with a TSX graph on it. Should be a great seller among those lucky enough to still have their jobs next month.
Panic Profit, you mentioned the BC Green economy. Plant transpiration completely rots out the average McMansion in 18 months. Do you remember the scenes from Calgary in 2006 when hundreds of people lined up for countless hours to bid on former grow houses? Cleaning up all that toxic black mold, wrecked wiring and structural damage does not make for much of a bargain.
Expect to see more see through condo projects in the near future.

#91 CTA on 10.27.08 at 6:15 pm

#63 Vancouver renta
…property prices in Vancouver are coming down. Look at Los Angeles and surrounding cities…prices have crashed 35-50%, same in Phoenix, Fort Lauderdale, Miami, and Las Vegas. Why? Easy credit, belief that land is scarce ( ie Vancouver and the trend of building upward such as condos). Same happened along south Florida coast… speculation and condo building was rampant in 2002-2008. Now most of those Florida condos have units that are foreclosed on because prices have come down due to a glut and many found themselves holding a mortgage more than the purchase price. The few owners who bought into these condos face paying higher maintenance costs due to the fact of those foreclosing in the building and those who backed out of the deals. Those who continue to rent and save money will come out ahead. Property in Vancouver will crash and burn back to realistic prices. Prices have been driven up by speculators who make a living buying up properties and flipping them at higher prices to those who bought into the fallacy that real estate always goes up.

#92 brazer on 10.27.08 at 6:27 pm

The S&P/TSX tumbled 8.1 per cent, or 756.75 points, to 8,537.34 points, its lowest close in four years.

http://www.reportonbusiness.com/servlet/story/RTGAM.20081027.wmarkets1027/BNStory/Business/home

didn’t i say next stop would be 8,000?
coming soon to a graph near you.

#93 brazer on 10.27.08 at 6:29 pm

Loonie poised to slide further: RBC
http://www.reportonbusiness.com/servlet/story/RTGAM.20081027.wloonierbc1027/BNStory/Business/home

The loonie has already witnessed its largest one-month move since 1950, as commodity prices plunge and the U.S. dollar surges, he notes…

On Monday, the dollar fell another 0.97 cents to its official Bank of Canada close of 77.59 cents.

#94 dd on 10.27.08 at 6:54 pm

#88 anonymous,

HA … thank for the laugh. Sometimes I take myself too serious. But seriously … I can’t time the market right at the bottom or top. I can guestimate what the Macro tends will be. For example, most knew that the housing implosion was going to happen in Canada … the question was when. We had a great crystal ball … the US, UK, and Australia.

A lot of assets have been oversold compared to fundamentals. “Demand isn’t as bad as everybody says it is. It’s due for a 30-40% pop” you said. I totally agree. But what are the fundamental in this case? Why is oil going to pop? Are we not addicted to oil? Consumption and population are going up most years. IT IS A FACT NOT BULLSHIT.

The following graphs tell the story (stroll thought the document):

http://www.paulchefurka.ca/Population.html

More people on this plant = more need for energy. IT IS A FACT NOT BULLSHIT.

How many coal plants are the Chinese building a month? How many new cars will be on the road next year in the developing world?

Why is the world population growing, because people like to have sex and do not take birth control? IT IS A FACT NOT BULLSHIT.

“The Chinese are more than willing to go back to eating rice for 10 years if they need to. They aren’t like Americans. They don’t NEED their cable TV or ipods.”

Sure they are. Once you get a taste of this life it is hard to go back. Materialism is a drug. Most socialites that taste it cannot go back to the old ways. Can you? Could anyone on this site want to go back to the 1900 and live like that? Why are you investing? To make more money so you can live better? What are your motivates?

Go visit any large Chinese city. It would blow you away how much growth is going on. There is much poverty but it is changing and they what to change too (for the good or bad of it). They will become the new America. They want goods, they want cars, and they want modern houses. They want more. IT IS A FACT NOT BULLSHIT.

You don’t have to time this play at the bottom. You just have to get the Macro play generally right to prosper.

Oh … thanks for the reflection

#95 Downsized and Delighted on 10.27.08 at 7:10 pm

87 John: In the U.S., house values have decreased by around 30%. Most of the problem was created by zero down mortgages, and mortgages that would reset at higher rates in a short number of years. These types of mortgages appealed to (l) people with no money who couldn’t afford a home to begin with (2) greedy investors who leveraged to the max to own as many properties as possible to flip in a few years. This only works so long as properties are going up in value.

So for you, the situation is different. You wanted the home for yourself. You put a fairly good downpayment, and in the few years since, your equity has built to over 25%. Your interest rate is fixed for 6 more years at a very low rate. Your home is new, so shouldn’t have too many big surprise bills. Assuming your job is stable and you are able to put some money away for a rainy day, it all sounds good to me. Even if your property dropped in value by 30%, you wouldn’t be any worse off than where you started.

#96 kc on 10.27.08 at 7:22 pm

dd on 10.27.08 at 9:50 am #72 kc,

The point is that WE do have support. The economics might be a 1930’s playout, however, we do have welfare, IE, free hospitals, and the governments are acting more quickly this time.

Yes it will be tough. But in the 1930’s there was NO support.

—————–

During the 1930’s relief was given out to the needy, the usual package was $10.00 a month. Today you would call it welfare or the Dole.

———-

#76 dd
#72 kc,

You have some valid points. However there is going to be 3 billion more people on this plant. Period. The Asian population is growing fast. They will want more of everything. There will not be enough resourse to feed, cloth, and heat all these people unless some big changes are made.

Yes correct. However wages don’t have to stay low, they can increase over time. And I bet a car or durable goods in China will be available to the majority of the people within our lifetime. Don’t just look at what someone can efford today … it is tomorrow what holds the promise.

————

OK, here is the test then, wait for the next big UP-TICK (personaly I feel give this battle 10 years, we are headed for a whopper) then in the place of the Chinese Economy to come full circle they will need to have in the wings the orders to produce the wealth that they have experienced, however, in that same time I will bet you that there will be a different country (say Ethiopia) that will be exploited to extremes. Remember that in the last major bubble everything seemed to be made in Japan. (through the 80’s early 90’s) My gut feelings are that China has had its moment in the sun and a new place will take over. The way things are going here who knows it could be Canada for that matter that will be next in line to be greater exploited.

Now for that thesis to work out in China, there will have to be a great wealth shift, as the article stated, there is rich and poor, that’s it. With out consumerism and jobs that support wages high enough to purchase autos, how can more cars be purchased? I fully understand what the article is saying; *maybe* over many, many, years it will become powerful enough to have/supply wealth to the poor peasants that migrate from the farming/agricultural areas into the cities. The pill that is greatest to swallow however is the one that implies these migrant workers with their heads full of dreams will become wealthy enough to purchase the life style they are yearning for. With what i’ve read and watched on TV about the rising of China, the majority of the wealth produced has been on the backs of the poor, these poor immigrants make enough to support their meagre exsistance (let me add that many companies in China supply workers dorms to stay in) and these workers also send home to the parents what ever cash they have left to help support the remaining family members.

The affluent whos’ parents had sent their offspring to schools in major towns and cities are the ones that are able to aquire better jobs and the credit needed to live out the *western life style* that this article states. These lucky few are smaller in numbers than the actual poor workers that are exploited in the sweat shops and factories.

#97 dd on 10.27.08 at 11:08 pm

#95 kc

“My gut feelings are that China has had its moment in the sun and a new place will take over.”

You have got to be kidding. Like UK in the early century, US in the mid to last half of this century, it will be China then India in this half of the century.

#98 Greg on 10.28.08 at 2:05 pm

Here’s more support: http://www.globeinvestor.com/servlet/story/RTGAM.20081028.whousingmerrill1028/GIStory/