Have you stored your nuts yet? Split and stacked several cords of seasoned hardwood? Sold those ETFs? Listed your house?
If so, sweet. It’s time, I’d say, we got ready for winter.
The stock market has careened enough this week (600 points) to warrant a bead of sweat. GMAC, the financing arm of General Motors, has gone back to Washington for a bailout. Its third. Another country (albeit a dinky one, Norway), raised interest rates. US new home numbers are dismal. The US is on the verge of extending its $8,000-per-buyer real estate subsidy. And a new report says the affordability of Canadian houses has taken a dive.
Those things may not seem to have much connection, but there is much. They point to a potentially difficult winter in which we should expect an equity market pullback after months of torrid gains, a deterioration in the American economy causing job grief here, and the beginning of the end of the beaver bubble in real estate.
Why such predictions? Simple. You can’t build an economic recovery on duct tape and faerie droppings. At least, not for long.
The facts seems obvious to me.
The auto business is in just as bad shape as it was last winter when it was weeks away from collapse. That’s despite $70 billion in government money from Canada and the US. Car sales are down almost 40%, and the only bright spot came when Washington gave people $4,500 each to secure a new vehicle. The result of that genius move should have been clear to a grade schooler: If you pay people to buy stuff, they will. When you stop paying them, they stop buying.
The same logic is being applied in Canada with things like the Home Reno Tax Credit, which the feds claim has been a bonanza for the trades. So, let’s contemplate what happens at midnight on February 1st, when it ends. Yeah, in the middle of winter. More genius.
Ditto with the US grant of $8,000 tax credit for first-time homebuyers in the States. That’s been credited as the only reason resales have been going up, even if prices haven’t. But that ends in six weeks. What then?
And how about the artificially low, engineered interest rates? I mean what, exactly is Mark Carney trying to tell us? (Hint: rhetorical question.)
OTTAWA (CP) – Bank of Canada governor Mark Carney has repeated his concern that Canadians may be getting in over their heads in the purchase of homes, saying the government has ways of slowing the market. Carney told a Senate committee Wednesday afternoon that the central bank is conducting an analysis of whether Canadians are taking on too much debt, particularly in buying homes.
Canada’s housing market has rebounded more strongly than other parts of the economy with sales at times hitting record levels, although prices remain depressed from last year.
The central banker said “exceptionally low†mortgage rates are luring Canadians into taking on mortgage debt to purchase homes. Deputy governor Paul Jenkins said the effective variable rate is currently at 2.25 per cent, a post Second World War low…..
….Carney said he was speaking hypothetically, but added: “If this were to persist, there are other options. The housing market is subject to considerable regulation and policy influence.
“That would be the way to approach it.â€
There you have it. More evidence the real estate asset bubble is being recognized for what it is – a giant debt trap with the potential to do to our middle class what it did to the American one. As I’ve been saying (and Mark has been reading), when people borrow at rates which will only go up to buy houses that will only come down, this won’t end well. Especially when most new buyers have basically no money, and wouldn’t even qualify if interest rates were not a third of what they should be.
But even so, as the Desjardins Bank report tells us this week, housing affordability is eroding in Canada as prices rise. Less affordable houses mean fewer buyers. Less demand, less bubble. So the only question is whether the regulators will let it die on its own, or move in and squish it. Or both.
Finally, it’s always instructive to look south, even when you’re a superior Canadian. American houses prices are back to 2003 levels, which means anyone who bought in the last six years has lost money. In some cities, like Cleveland and Detroit, they’re at 1995 levels. And this is after Americans have been showered with tax credits, tax rebates, low rates, corporate bailouts, mortgage relief programs and so much public spending that people not yet born will be paying for it.
So either governments keep it up. Or they stop. Or they extend. And then they stop.
Either way, same result.
So pass the axe.