All eyes on the Bank of Canada

With GDP YOY growth at over 6%, the highest of the developed countries.

With the jump in personal debt spurred by zero rates.

With the bubble in housing across Canada, not just in Vancouver.

Will Carney and his band have the balls increase 0.25% tomorrow? Remembering that neutral would be nearer 3%

6.1%

California Dreaming...

Did China just Blink!!

Ok folks forget my last post.

It looks like China has the Western disease. They cannot quite bring themselves to burst a bubble. You see, there is no property tax in China, so a lot of wealthy people buy homes and just sit on them. They don't even rent them out so they can stay pristine. It's like a property savings account.

The carrying costs are low..due to low interest rates and no property tax. Well the Chinese government who has always been tough and heavy-handed with speculators in the past said the tax was a-coming. Not fun if your holding half a dozen apartments in Beijing. God forbid- you may to sell one of them.

Well they may have blinked.

Tonight there are reports that the tax would be delayed for three years. Shares are soaring on the Shanghai exchange, led of course by property companies.

No one has the guts to kill or even pluck this goose until the dang thing is so big, that it plucks us!

DID CHINA BLINK?

Brace Yourselves...

Chinese RE melts down

This is what happens when a government decides to burst a speculative bubble.

Of course our governments can never do that. There would be too much of a back-lash from all those who would lose out..so much better to do whatever they can to keep bubbles inflated.

Yes, that's a much better policy. Pass that hot potato along and hopefully it will burn the next administration.

The problem is we never know what the fair value for an asset is when policy makers have decided that the asset needs to be supported at all cost (and future liability via the CMHC)

In answer to Chad...

I think Chad's point in the last post's comment section was that inflation was rampant from money-printing CBs and zero rates therefore Gold, which is limited and Vancouver RE which is also limited should be priced against each other. At least I think that was his point.

And he said that gold was indicating inflation.

Well the graph above shows inflation for the US. Even if assume some manipulation, there is no inflation.... and apart from China, I think the chart would look the same for most large economies.

Meanwhile here is gold over the same period:

http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=3&mn=0&dy=0&id=p52154258457

Not much of a correllation.

The only thing we should measure Vancouver RE against is:

1) Local earnings

2) The cost of carrying debt

3) Government incentives to buy

4) Add in a % for Out-of-Province buyers. eg Albertan retirees and Asian buyers who may not show up in the earnings stats.

1) is way off the charts. 2) is as low as it can get. 3) the government is coming to it's senses after helping drive us into this bubble. 4) who knows?

I do think the end game for all this debt, and we are amongst the most indebted in the world, is high inflation to wash it away. However we are some way from that.

The SEVEN year ITCH....

Speak to old time Realtors and investors in this town and they will tell you about the seven year cycle.

Now it is not an exact science like aeronautical engineering, but it does seem rather interesting that RE tends to top and bottom in 7 or so year cycles.

It would be even more noticeable if the price chart was adjusted for inflation, since a flat year would in fact be a price drop. However even on a regular chart it is pretty obvious.

Take a look above. Our first top is 1980-1981. The bottom came around 1987-8. The next top came in 1994-5. We then had a perfect drop to 2001-2. Finally we had a peak in 2008 exactly where you would expect it and then....??!!??

Has the seven year formula failed us? Has it just been delayed by zero rates?

I am moving more towards a 5 wave structure. The third waves are the most violent up-moves.

We have that from 2001-2008. Then we get a 4th wave drop and finally the last 5 wave to top the pattern. No-body knows where and when fifth waves top.

Like I said before, the stage is set for the start of the drop this year. We have listed the reasons a million times, the same crazy number that the average detached house sells for in this crazy town.

TIMBER!

OK - this post isn't what you think. Housing is not ready for the big drop yet.

This coast used to be known for it's old growth of gigantic Douglas fir. They rose high into the sky, as far as the eye could see. They looked like they touched the sky.

To log one of these trees required great expertise and courage. Loggers were veritable mechanical engineers, able to judge what type of cut would bring down this huge edifice where they wanted it, without harming themselves or others.

It required a complex series of cuts first on the side that the tree was to be felled and then on other side.

Loggers actually stood on stakes driven into the tree to help them. The tree was solid and would not fall despite being cut nearly half way through on one side and nearly a third on the other. Suddenly, with one more chop, it would happen! The weight would shift towards the fell side and the tree would start splintering and like a colloses it would crash to the ground.

It could get caught in another tree, but often this was just temporary. It would often bring that tree down with it too.

So we go in RE.

The cuts have been made. Incredible lack of affordability. All time lows in rates. CHMC changes. We are waiting to see when the tree will be felled.

Think 2007/2008.

We had a gradually worsening economy..no big deal. We had the bankruptcy of one the US'd largest investment companies..our RE hits new highs. We had the US in a full-scale RE collapse...yawn.

Then we had a rising inventory...hmm. Price changes out-numbering sales..sweaty arm-pits. MOI started to sky-rocket into the double digits and then over a year..nausea time. Then it suddenly fell.

Dropping 15% or so in a matter of months.

The CHMC shenanigans, the zero interest rates and the boom in Chinese RE were the tree that snagged it up and kept it from having a good roll-over. These are breaking down.

All eyes on inventory, MOI and price changes.

Once Upon a Time...

There was a beautiful little country with delusions
of grandeur.

It decided to host a magnificent Olympic games. It spent Billions on security and festivities and managed to keep the poor and dirty out of sight. Despite a few small glitches, everyone agreed that they had put on a great spectacle which would never be forgotten. The leaders got to feel very important and everyone felt very proud.

Then the costs started to come in for building the huge edifices and for all the security, and they were ruinously high.

Especially for a country which already spent so much on a safety-net, and social issues like health and education.

"Don't worry, we can afford it" Their leaders told them.

Some people made fortunes from Olympic contracts. Five years later the country was in economic turmoil. Six years later it was bankrupt and there was rioting and deaths in the street.

That country is Greece. Can you recall the year of the Olympics without counting backwards?

Not that memorable, and certainly not worth the cost.

Unprecedented

I have never seen so many banks come out with warnings about one asset class.

One by one the economics departments of the big banks are coming to same conclusion that we came to on the blogosphere...that RE is in a bubble and is not sustainable.

Here is the latest from TD (via Reuters and then Yahoo). By the way I think they are optimistic with their forecasts. An asset class that has gone up sooo much doesn't usually just correct gently- unless of course the government interferes again.


Canadian home prices to fall in 2011: TD report
Wed May 5, 1:46 PM


(Reuters)TORONTO (Reuters) - Canadian home prices will likely fall modestly in 2011 as rising interest rates reduce people's ability to buy, Toronto-Dominion Bank said on Wednesday.

The bank's economics group said the outlook for next year has reversed course from earlier forecasts for rising prices, partly because government bond yields have risen faster than expected. Also, markets now expect the Bank of Canada to start raising interest rates in June rather than July.

It said listings this year have been stronger than it had thought, and market balance, as a result, will be "somewhat softer" next year.

In its previous forecast, TD said it expected home prices to rise 10 percent this year, and a small bump in of 1.6 percent in 2011.

TD's forecast for 2010 is largely unchanged at 475,000 transactions with an average price of about C$350,000 ($339,806).

Its updated view for 2011 calls for a modest pullback of 2.7 percent to C$339,700, with seven out of 10 provinces experiencing lower prices. Nationally, sales of existing homes are expected to slip in 2011 to 420,000 units.

British Columbia and Ontario are expected to have the steepest declines, down 3.4 percent and 3 percent, respectively. The three Prairie provinces may have small increases of between 0.5 percent and 1.2 percent, TD said.

($1=$1.03 Canadian)

(Reporting by Ka Yan Ng; editing by Peter Galloway

Worth reading this fellow

Hussman is one the smartest money managers in the US. He will not throw investors' money at the latest fad, even it means he under performs the market. On the other hand, he wont lose his investors wads of dough like most did in 2008.

He has been very leery of the current stock market. He measures everything...stocks, bonds any assets on the ability of that asset to throw off cash flow in the future.

He provides excellent weekly analyses here:

http://www.hussmanfunds.com/

His latest piece is about Greek bonds and the stock market. HOWEVER just substitute Vancouver RE in the following statement.

"..the price of a security can be anything investors like. However arbitrary that price is, investors may be able to keep the asset on an upward path for some period of time, but the price will gradually bear less and less relation to the actual cash flows that will be delivered. At some point, the only reason to hold the asset will be the expectation of selling it to somebody else, even though it won't be delivering enough payments to justify the price. "

"An increasingly large portion of the asset price represents real money that is being paid for a "phantom asset" in the distant future, that bears no cash flows, and yet gets assigned positive value because investors assume they'll be able to sell it to a greater fool. Every asset bubble fundamentally reflects this error in thinking."

Unfortunately I have not been able to find any way to invest in Hussman's funds from Canada or he would have a large chunk of my money.