Thursday, March 3, 2011

The Coming Recession: Don't Blame Real Estate!

Cruisin through the Toronto Star yesterday morning I came across two articles in the Business Section. The first was entitled “Bank of Canada leaves key rate unchanged at 1%”, the second was “Condo market in 'oversupply'” with the subhead: “But crash unlikely despite high inventory Scotiabank report says” Now don't put two and two together. Those articles were on opposite pages for a reason. After all, it is the opinion of the Toronto Star that there is no “bubble” and Canada's economic recovery depends on low interest rates and global monetary systems.

Here's the connection between low interest rates and the real estate correction. And a sneak peak at what (or who) will (or should) get blamed when the shit hits the fan.

Here is what Adrienne Warren, a senior economist for the Bank of Nova Scotia, said to a bunch of real estate people:

“We have a situation of rising multi-housing unit inventory which has been trending up since 2008,”

“The current outstanding stock of unsold new homes is higher than average.”

However, Warren is not calling for a crash in the condo market. The severity of any potential correction depends on future building, which would impact supply, she says. … we expect these excess units can be absorbed without a major price adjustment,” said Warren.

Let me get this Warren, there's a lot of condos in Toronto, way more than usual. In fact, according the Toronto Star there's 286 projects in the Toronto market, the highest of any city on the continent (take that Vancouver!)

But no troubles! According to Warren, empty condos will be bought without having to cut prices, or even sustain a loss. Adrienne Warren believes that if you build it, they will come.

Contrast to Capital Economics analyst Dave Madani who is calling for a correction later in 2011.

“A downturn in the housing market later this year will lead to further slowdown in consumption growth and a more severe contraction in residential investment,” says Dave, “a correction in the overheating housing market could derail the domestic recovery.”

Scotiabank economists are morons. A different Warren, a Warren Jestin, says “we may see some price corrections, but it won't be a bubble.”

The reality of the situation is that there will be a price correction in the Toronto condo market (and other real estate markets across Canada) that will, as Dave explained, cause a slowdown in the consumer sector and a contraction in real estate investment. There are a lot of people to blame for this massive economic fuck up, so let's go right to the source:

The Bank of Canada.

The artificial tinkering with interest rates sends artificial tinkering messages across the economy. A period of low interest rates has encouraged massive consumption and investment in what people like the most: owning a house. Or a nice condo in Toronto. Or a shit house you can dress up and sell later. Whatever your preference, low interest rates have made this a lot easier.

But one look at our savings rate should indicate that this has been an artificial expansion of credit. Eventually it will dry up and we'll experience a bust.

Until then though - Mark Carney, the governor of the Bank, would like to keep interest rates low because he thinks it might help. What's the definition of doing something over and over again and expecting a different result?

Bat-shit Crazy?

The reality of the situation is that the federal government encouraged this housing bubble by offering tax incentives and guaranteeing things they shouldn't have, but it was the central bank that got the thing off the ground. Interest rates actually mean something in the economy, and artificially lowering it below the market level is a stupid way to get rich. All artificial booms end in a bust.

All over the head of Mark Carney, however. This man is either lying through his teeth or he really believes that Canada is on the road to recovery but threatened by foreign events. These are the reasons Carney is hesitant to raise interest rates: he fears high commodity prices without linking them to QE2. He's worried about European troubles although Canada has similar structural problems. And he's worried about the high value of the Canadian dollar as if it's a bad thing!

Clearly this man is dangerously unqualified to be running the nation's finances.

Of course blame for the recession will be on those foreign issues, and certainly anything that originates from the United States. Naturally, the free market will also be blamed and more government regulation will result. Hopefully I'm wrong about this.

The sooner we get this recession going, the sooner it will end. Perhaps during the process Mark Carney's past history with Goldman Sachs will draw some media fire. Maybe Mark Carney will become known as the Bernank of Canada: an incompetent bureaucrat with no real understanding of economics.


  1. Who do you honestly believe are the people who set the price of real estate in Canada.
    The current situation is self evident that the law of "Supply and Demand" does not rule the market.
    We have far too many people in the marketing of Real Estate that artificially decide the pricing of housing in any given market.
    They are protected by a very large lobby in the business that they support. (with no moral standards).
    Real Estate Agents / Developers in my community have flooded the market with housing developments and hundreds of condo's that they can't sell. By that I mean they influence the local government and political folk, telling them that it is a good thing. Now, in my community they are perpetrating a lie that there is a strong market. Condo's in reality are selling for 100k below what the realtor's want them to sell for.
    The problem is that these unproductive, non contributers to economic output are like cockroaches in that they hide in the dark and come out when the light of taking advantage of the plight of people presents itself.
    I think that there is a special place in hell for these folks.
    They have no place in a society that subscribes to the individual doing something productive to the economy.

  2. Who do I honestly believe are the people that set real estate prices? I already explained in my post. These artificially low interest rates send signals throughout the economy that cause these malinvestments and create bubbles. Everybody is still acting according to supply and demand, everybody is still working towards profit. The problem is the path is unsustainable because of monetary intervention thanks to governments/central banks.

    As far as I can see real estate agents/developers are making money by voluntary means. I have no beef with them.

    The ones that use government to their advantage are dishonest, but this is more of a problem with government than with these people. The only reason they lobby for these benefits is because government is a coercive monopoly. Who wouldn't want to do business with an institution that demands payment by force?

    As long as there are real estate agents and developers in business, the consumer will have already spoken. They are productive contributors to our economy. They are not cockroaches, but human beings just like you and me.

    The problem is the State, and it's coercive monopoly on money and interest rates (as well as many other things it controls).

    I suggest you read up on the Austrian business cycle theory for more information... Also, if the market is not run by supply and demand, then what is it run by? I'm curious to know.