Friday, June 12, 2009

$50 Billion in the Hole

After telling us for a year there would be a surplus, then a small deficit, then a moderately large deficit, the Harper Government finally had to come out and told the truth. We are heading into an enormous $50 Billion hole, and very likely don't know is that is the bottom either.

The 'good news' was that big chunks of money were being rapidly dispatched from Ottawa to build things that we may or may not need.

Add this to the Provincial debts, and in one year , we are back to the Mulroney days of unsustainable deficits.

Such is human nature- here in Canada and everywhere. When things are hot, the politicians take the credit, when they are not they point at the sad state of affairs in the world as the cause.

When the asset rise was red hot, they did nothing but watch and in fact made sure fiscal measures where so lax as to ignite the asset fire even more.

Now that the pyramid has collapsed of it's own weight, they are doing the only thing they know how, which is throw more money at it.

Back to housing. Housing is just one asset. As you noticed all assets have been roaring back since March...RE, stocks, Oil , copper and gold. They were in free-fall. This is a good thing, the alternative is that we all KYAGB. However I think this is an interlude. I don't think this is a new bull market in any of these assets.

When things go up, we can see nothing but blue skies ahead, when they dropping, we see the pits of despair. Such is human nature.

No one can deny that RE has shown strength for the last 3-4 months and prices have stabilised. Some buyer's have got panicked into bidding wars, buying well over listed. Where they smart? In a few months we will find out.


  1. I seriously agree with you, Fish. I'm sure someone out there has data on how quickly we've bounced back from previous recessions. I'm too tired to do the leg work right now, but I'm guessing that this would be considered a record-fast comeback for even a mild recession. How is it that so many people are willing to convince themselves that we are so bulletproof that we can dance next to the edge of the worst recession since the Great Depression and then come flying miraculously out of it in mere months. Imagine the terrific "v" shape the graph would make. Yeah, right!

  2. We came close to the abyss and looked over and that is why the governments have ben throwing money at it by the bucket full, even as tax reciepts have been collapsing.

    This, of course , was the thinking that go us into this mess in the first place. To try and prevent even a mild recession over the last 20 years, we were now facing a depression.

    However they have now had their best shot. Any on-going weakness and prolonged high unemployment, will lead the Provincial and Frederal Governments into serious fiscal problems, like California, which is faced with having to make drastic cuts into the teeth of a major recession or default.

  3. I'm no forture teller, so I have no idea of what will happen in the future.

    And as fish said, currently, if one merely analyizes the real estate market from the perspective of the top line stats; the market slide has stopped.

    However, the under-currents all indicate that the pressure on prices will be on the down side.

    For instance, job losses. The thing I find concerning, is not that I know people who have lost thier jobs, happens all the time; no, what is differnt this time, is that they are not finding new ones. In addition, I have heard from some knowledgable sources, that a noticable amount of individuals are starting to break leases because of job losses. Many of which either return home to live with parents; or just leave town, if they are from somewhere else. Would you live in one of the most expensive cities in the world if you weren't working?

    Remember the term "accidental landlord". If you don't already know one, you soon will. Currenty, they are competing for a diminishing amount of tenants, in a market with increasing supply- can you say, cash flow negative. However, they know- in their heart- that an infinitly wealthy foreign investor will purchase their property after the Olympics. Although, I wonder if some of those, savvy, investors will be more attracted to the much higher yields provided by real estate investments in cities such as New York and San Fransico.

    I would sure like to know the current mix (investors, FTB's)of buyers and sellers. Remember, Angelo Mazzullo telling everyone that Country Wide was in good shape, while he was flogging stock out the back door.

    Opportunity cost, is something that is becomming a very real consideration- even for Vancouver natives. I mean, if you are somewhat skilled, in an industry that has not been decimated by the recession (construction workers don't qualify), you can make as much money (and, a lot more in some cases) anywhere else in Canada. And, buy real estate for a third of the cost. Vancouver is a nice place, but is it that nice?

    A flattening and rising yield curve. If Vancouver has reached a support level for price declines, and a resistance level for price increases- a so called market ballance. Wouldn't prices have to come down to compensate for more expensive financing costs? Save and wait might not be the best strategy, but it is certainly the safest.

  4. interested: "Wouldn't prices have to come down to compensate for more expensive financing costs?"

    From the numbers I've seen, there isn't a ultra high correlation between ABSOLUTE prices and financing costs though intuitively there has to be to some degree. Interest rates in 2002-03 were pretty close to current levels yet prices were significantly lower. So is it absolute prices that are affected by interest rates or more short-term sentiment among marginal buyers?

    When financing costs are the primary decision maker, that's a sign of buyers speculating that prices will be higher when they want/need to sell: a free put of sorts on housing prices. Now people will buy slightly more house for the same monthly payment but the yields still suck.

  5. The only reason the market has stabilised is because the BOC has dropped rates to never-before-seen-lows.

    The market was in a complete free-fall last fall. I spoke to some realtors who were in shock. Suddenly the scarcity of land, rich immigrants, Olympics etc went out the window, and there were no buyers.

    The depression-level interest rates, has forced money back into assets, be it stocks or RE or oil or gold.

    However, this is probably it for interest rates. Short or variables cannot go any lower. Long rates could, but that would be in a depression, massive deflation scenario.

    So we will now have to see how demand shapes up. Was that it for the recssion? Will the provincial govt fess up to their fiscal mess like the Feds just did and start cutting spending? What will happen to commodities? Will the world rebound? I cannot answer any of these questions for certain (though I have my own views)...and yet all of these will influence RE.

    IMVHO anyone buying now with a big mortgage, better know their job is 100% secure for the next few years.