Thursday, July 12, 2007

Sometimes I Just Can't Help Myself


Regular readers know I'm a bit of a pundit. I try to leave politics out of economics/RE most of the time, but then I read Sh$t like this and I can't help myself.

Some regular readers may know my origins don't lie in this town we collectively view as paradise within Canada. I'm actually a prairie-boy with ties to a certain City of Champions which still holds my sports allegiances (Go Oilers!). Regardless, when I read this kind of pick-on-the-West that has been long constitutionalized within our great, united [sic] nation, I can't help but think back to the great slogan that characterized the Trudeau/Lougheed battle of the early 1980s: "Let those Eastern Bastards Freeze in the Dark!"

Let's highlight some of the main points of this Ottawa-centric author, shall we?
  • when the Bank of Canada raises interest rates to reduce inflation, it works by deflating the whole economy — fewer people find jobs, families have a harder time paying mortgages and car loans, businesses invest less because it costs more to borrow capital. In short, there are real costs to higher interest rates
  • in Canada, inflation is higher than the bank's target of 2 per cent, but that average disguises a lot. In both Ontario and Quebec, the year-over-year all-items price increase is below 2 per cent
  • Alberta's is 5 per cent
  • When David Dodge raises interest rates, it is to slow down the Alberta economy. The rest of Canada is collateral damage (How 'bout BC?)
  • Because Alberta has permitted uncontrolled exploitation of its oil and gas resources, there is a shortage of almost everything in that province... This inevitably drives prices sky high. So the bank acts to bring price increases down by raising interest rates until it hurts
  • In the early 1990s, as the Bank of Canada took interest rates through the ceiling, Ottawa and the provinces continued borrowing money to stimulate the economy (Actually, Alberta didn't. They [under Klein] got their fiscal house in order by making significant cuts to government spending, unlike every other province, including BC)
  • Governments cannot spend their way out of the negative effects of higher interest rates, doing so only causes the bank to raise rates higher
  • Today, we have an analogous situation in Alberta, but this time it is caused by the super-stimulation of high oil prices and the fevered search to exploit every possible hydrocarbon resource all at the same time (Please, Mr. Mendelson, ignore HELOCs and rising RE values along with lower interest rates across all of Canada in your "let's just blame the West" argument)
  • Higher interest rates will eventually throw a wet blanket over these economic fires
  • But the blanket will cover all of Canada, not just Alberta. And with the higher loonie that interest-rate hikes will reinforce, the rest of Canada's economy will already be at a snail's pace. Higher interest rates are a not a good solution.
  • This Wild West of exploitation needs to be inhibited by a government policy of moderate restraint, such as a moratorium on new leases for exploration; the discouragement of any further oil-sands projects at least until the infrastructure to house and feed workers has caught up; the investment of excess government revenue outside of Alberta and even outside of Canada; a fair increase in royalties in the oil sands, at least to international norms; and much more careful assessment of the environmental costs of projects against their economic benefits
  • The question for the rest of us is how much we are going to have to pay if Alberta continues in its unrestrained ways
Sometimes I could just scream. Look, I'm all for a housing market correction. I'm all for re-investment of government funds into universal social programs that benefit everyone--healthcare, education, environment--but I'll be cod-walloped if I'm going to sit here and read how central-Canada need not take responsibility for their excessive consumer-spending ways fueled not by increased resource-royalty revenue, but by artificially low interest rates created by past central government overspending and subsequent belt-tightening monetary policy.

OK. I apologize profusely if my argument has become too political and left you scratching your heads thinking "what the F#$& has this to do with RE in Victoria?" Simply put it goes something like this: our markets are interconnected. That old adage of "location, location, location" is just marketing. Monetary policy--the amounts governments spend, save and borrow--has everything to do with your home's actual value.

Loose monetary policy (really low interest rates) has the effect of artificially raising values. Hence today. Some call that inflation. What's a government to do. Nothing. It's why we have an arms-length central bank. They get to wear the repercussions of belt-tightening (interest rate hikes).

So what's a consumer to do (us)? Nothing. Except make our finances ship-shape, wait for the others to panic, and do well in the investment markets (both RE and equities) by doing what everyone else isn't: as in buying when they are selling, saving when they are spending, and selling when they are buying. How's that working out for those who do it? Don't take it from me. But I tend to trust the world's (now) third richest man, Warren Buffet, who's made a lot of people extremely rich by employing that strategy and grumbling at silly, politically-driven monetary policy like that which Mr. Mendelson suggests would be prudent for Ottawa to implement so that he can run for public office sometime in the not so distant future...

23 comments:

vg said...

Typical eastern conservative bullshit. How about the basics that raising interest rates eventually contain inflation at some point and if it werent for peoples high spending ways and the lowering of interest rates to insane low levels in the first place we would not be in this over inflated real estate market.

I am sure the writer here isnt whining about how much his house is now worth and how he can afford a summer condo in Victoria and would hate to see a correction back to reality so he slags Alberta as the root cause. Sounds like he wants it both ways,maintain his profits but not have to pay the piper for flagrant consumer spending the past 6 years.

hhv said...

vg,

unfortunately (or fortunately depending on your political slants), the author is from the Caledon Institute of Social Policy... which bills itself as progressive. That's a Canadianism for socialist.

I tend to think of economics from a more Keynsian perspective leaning towards Adam Smith. Regardless, Ottawa-centric econobabble like this can't go uncommented, in my view it's more dangerous to people's livelihoods than unchecked inflation.

JMK said...

I'm not clear. If inflation is only 2% everywhere, and 5% in Alberta, do you still think interest rates should go up? Why?

hhv said...

I don't believe for one minute that inflation is 2% everywhere and 5% in Alberta. Inflation is higher than that everywhere. That author doesn't cite his sources... he's just making an argument that central Canada is suffering at the hands of Alberta's prosperity. How 'bout the prosperity of NS and NFLD? Or BC and Saskatchewan. Sure some industries are suffering in Ontario and Quebec, specifically in the manufacturing sector. But so are industries in the West like forestry. The economy is less contained and more integrated than he admits. So yes, rates should climb.

vg said...

Dodge says inflation is in the 2's and going to 3 so who is to not believe here ? Victoria is more expensive then Alberta so maybe the real inflation is 5% here too.Numbers are always manipulated.

And rates should go up so me,mine and your children may someday be able to afford a home in our hometown,is your LOC rate increase concerning you jmk ?

JMK said...

I'm not sure what LOC stands for, so I guess I'm not worried about it.

I doubt raising interest rates will have much effect on Victoria prices in the long run. Victoria has outstripped inflation by on-average 2% from 78 to 2001. That means your $500k home in 2007 cost $275k in 2007 dollars back in the day. Thats ignoring the current run up. The market has set that affordability, not federal fiscal policy.

I don't think that erosion of affordability is going to go away anytime soon. Either your kids earn more money, or they accept that in order to live in their hometown they'll have to move into something smaller than the 3000 sqft rancher on the treed lot that the median family could afford "way out" in Gordon Head in the mid 70s. Or they could move to the burbs. Or live somewhere edgier. Over the long term, Victoria is densifying and spreading out. To live in the core you either pay the money or buy something small.

Anonymous said...

Line of credit

vg said...

"I'm not sure what LOC stands for, so I guess I'm not worried about it. "

Very suprised that such a numbers guy wouldnt know that.


"I doubt raising interest rates will have much effect on Victoria prices in the long run. "


hmmm, didn't have any effect in 1981 did it....interest rates started going up when house prices reached peaks comparable to todays prices,prices went down,wages had several years to allow a catch up to affordability,not brain surgery here jmk. You definitley have a very strange way of interperting affordability in the real world.

greg said...

jmk will not listen to reason, he appears to have been tasked by someone to drop by here and offer counter arguments no matter how fallacious or ridiculous.

Is jmk a paid blogger? Maybe not, but he's acting like one.

After all, he supposedly owns a place in Victoria he paid top dollar for, after moving here from San Diego, after living here in the 80s, interesting details, but he never says why he cares about a non MSM viewpoint being expressed on real estate. why should people expressing views that discourage real estate speculation concern him, yet he keeps coming back for more.

Are you a paid Victoria real estate booster? I mean, why do you care? are you worried about the resale value of your housing purchase?

When jmk comes on this blog or Victoria's Truth to argue Victoria is safer and more hygienic than in the 80s, it almost spells out "I WORK FOR CHAMBER OF COMMERCE" or "I WORK FOR TOURISM MINISTRY", or "I WORK FOR VREB" in sky high letters.

What's in it for you jmk? Why can't you just let the bears alone if you are so satisfied with your investment? Why do you care if we buy or not, or suggest it might not be the best time to buy, if you have no self-interest in the matter?

Credibility of someone who argues at a market peak that housing will continue to outstrip inflation indefinitely is nil.

So in terms of motivation, again, I look at something like this on Wikipedia. Is that more like it?

If not, how about once and for all letting us know what you do for a living, or why you should care about the expression of bearish real estate sentiment, or valid observations about social ills?

JMK said...

Greg,

Even if I was a paid shill or worked in real-estate or tourism, if my arguments are "fallacious" and "ridiculous" they should be easy to refute politely and factually without resorting to ad-hominem attacks on my credibility.

I appreciate a non-MSM version of real-estate news and thought being put out there. Folks shouldn't be panicked into "buying now", and watching the market critically is fun. But I think it should be based on facts. If someone on a public discussion forum says "the US market is tanking by over 20% and it will here too!" then I think that person should be willing to supply facts backing their statement up. Otherwise it is just rumour-mongering.

I started posting here while researching our housing decision because a lot of the statements being made here didn't accord with the research I'd already done. If HHV or PB put up a "Bears Only - No Dissenters Allowed" sign, then I'll happily stop posting. But so far they haven't done so, and when it stays on topic I think some interesting discussions have ensued.

An irrefutable fact is that average house prices in Victoria have outstripped inflation by more than 2% over the last 30 years. Will they continue to do so any given year? Of course not, some years they will do much better, some much worse. But in the long term my bet is that housing here will continue to get more expensive in real dollars.

vg said...

"But I think it should be based on facts. If someone on a public discussion forum says "the US market is tanking by over 20% and it will here too!" then I think that person should be willing to supply facts backing their statement up. Otherwise it is just rumour-mongering. "


People here have posted many facts why it will correct here too,you're just too ignorant to look at the anecdotal evidence that is what exactly happened in the US a year ago before their correction started. As I posted the other day CNN a year ago was a total pump machine ignoring the cracks that were showing and didn't acknowledge them til the fall til they had no choice.

If you took off your blinders jmk you would see the same excessive debt levels,borrowing to the max on easy credit,price reductions showing up on a regular basis or houses disapearing from MLS cause no one wants to pay an arm and a leg for a piece of shit is exactly what began in the US one year ago.

Did you not see the media articles and on BNNTV on the Canadian Credit rep who explained in major detail how Canadians are wracking up debt in major numbers and not being able to handle it ? I guess you call this rumour mongering ?


If you are waiting for all the stats to prove you wrong jmk then you will be the fool who is late to the game and out alot of money. Those who open their mind and look for the obvious clues are the ones who are ahead of what may be one very nasty crash coming.
Since you were in diapers at the time you should do some real research on economics of past corrections and you may learn something besides the numbers that are usually too late to save you tens of thousands of dollars.

greg said...

Even if I was a paid shill or worked in real-estate or tourism

Exactly.

This constant pump job about doing well 'cause people did well in the last 30 years displays the same tremendous flaw you accuse the bears of - ie, when a bear says look at patterns that predict pending real estate collapses, you argue the patterns are irrelevant -- yet you simultaneously argue that past arbitrary price performance predicts future asset appreciation.

You can't have it both ways, Mr logical. Or you can - Mr Inconsistent.

I have already exhaustively deconstructed this argument. Jmk conveniently and repeatedly ignores the fact that buying in the trough and buying at the crest of a cycle, while one person may do okay by the time 30 years have gone by, he will never do as well as the person who bought in the trough of the market cycle.

Anyone who thinks timing the market is irrelevant is irresponsible, foolish, deceptive, or doesn't have a clue.

As to facts, there is absolutely no question that people who bought in 1985 did far better than those who bought in 1982. The facts are here.

As to ad hominem attacks, you display your lack of logical sophistication. There is no law that suggests the presence of an ad hominem attack precludes the simultaneous presence of other logical arguments. Go read my post, then stop that continuous attempt at discrediting my arguments by saying they are unfounded in facts.

Ad hominem attacks indeed, that's like the pot calling the kettle black.

Suggesting a 20% correction is possible is not "far out", considering the 50% correction from 1982-1985.

JMK said...

Jmk conveniently and repeatedly ignores the fact that buying in the trough and buying at the crest of a cycle, while one person may do okay by the time 30 years have gone by, he will never do as well as the person who bought in the trough of the market cycle.

I don't ignore it. It is patently obvious.

In an ideal world, one should buy any investment at its trough. However, that is called market timing, and the risk of that strategy is that the next trough never reaches the present price. It was not a strategy that appealed to me for a housing decision. We could afford a place we thought was nice so we bought.

You can point to 1981 as your example. Real housing prices went up 70% in two years, and then dropped 40% over the next 4. Could happen. However, that was a very drastic run up compared to the present one - about 3-times faster.

I'll point to 1995. Previous to that there was 10 years of a bull market over which real prices doubled. We are just 6 years into this one and real prices have only gone up 75%. How is the person who bought in 1991 doing compared to the bear who bought in 2001, the next real low point? Are you willing to rent for 10 years just to claim you timed the market perfectly? I'm not.

vg said...

"Are you willing to rent for 10 years just to claim you timed the market perfectly? I'm not."

Whose' talking about 10 years ? most of us I am sure are calling the next 2-3 years max. Markets at the peak only hold the peak for so long when affordability to the average person is not possible as per 81 and 90,it is historical evidence jmk. The world markets are at an all time point of a boom,how much more evidence is needed that the party is just about over and only the alcoholics are left buying up places for nothing down and 40 years mortgages. Sounds to me like your impatience will come back to haunt you.


"However, that is called market timing, and the risk of that strategy is that the next trough never reaches the present price."

If you cant see the chart as per VHB's site called "You are here" then you best look it over again and go back to school. For all your numbers knowledge you sure can't read a basic chart,in the markets they call it a hockey stick and they correct at a 90 % probability rate.

JMK said...

in the markets they call it a hockey stick and they correct at a 90 % probability rate.

Sure, sure, but the question is "when?" and "by how much?"

In Victoria, in 1991 the chart looked exactly the same as it does today: just as sharp a hockey stick. And the market still had 3 more years of greater than 10% a year real growth in it. You had to wait until nine years, until 2001 to get to 1992's values.

So of course, there is a risk in buying now and there is a risk in waiting.

vg said...

"However, that is called market timing, and the risk of that strategy is that the next trough never reaches the present price."

One last comment on that statement,that is the most common statement made by the typical financial advisor who doesnt want to really work for his money. He says that to convince you to let him take your money and he will look after it as he knows what investments are as good as gold of making you 10% or more practically gauranteed,the reality is that he is basing all these assumptions to pump to clients on "historical averages".
It's a worn out claim full of holes,if you care about your investments you will not fall for that line,it is ALL about timing the markets,that is the #1 thing I have learned the past years. Nothing is for sure in real estate or the stock market but you can increase your odds/gains huge by studying some of the easy to use chart systems you can subsribe to and they aren't expensive either.

vg said...

"Sure, sure, but the question is "when?" and "by how much?""

When the early warning sell signals are there,and they are there now,it comes with experience see them jmk,....and by the way there is no risk in waiting when at the peak of panic buying,only a sucker would buy now like Nortel at $100.

greg said...

vg -

Regarding jmk's lack of logic:

I love how he throws around latin phrases like "ad hominem", but when you dismantle his attacks, point out he is doing the exact same thing he accuses others of, destroy his economic arguments - and what does he fall back on:

However, that is called market timing, and the risk of that strategy is that the next trough never reaches the present price.

Puh-lease.

jmk knows knows about as much about the future of the Victoria housing market as a fortune cookie.

His credibility, rationalizations and motivations are completely transparent. So pile on the statistical fakery, then suggest that the next trough won't be as low as current prices - in other words, there will be further significant gains going forward, then toss out further nonsense like the current boom is only 7 years old - uh, no, actually, in nominal terms the current boom is 12 years old!!!

Why not suggest 20 X earnings will be the usual housing cost in the next 2 years?

Or houses will outstrip inflation by 2% a year for the next 100 years - uh, that's impossible!

etc

etc

etc

vg said...

Maybe you should look at it this way jmk. If I bought the same house in 1990 that I bought at the low of 83 then my mortgage payment would have gone up approximately 50 %. I still could have afforded it but it would have been ONE of my bi weekly paychecks to cover it. The same house today based on the same level of pay of an average union wage in the same trades job would be 100% of my monthly take home at a 10% down payment,thats ALL my take home pay. Now you tell me that affordability is not out of line ? If you can't grasp the level that we are at then you are totally out to lunch bud.

greg said...

Back in the 80s -

You can point to 1981 as your example. Real housing prices went up 70% in two years, and then dropped 40% over the next 4. Could happen. However, that was a very drastic run up compared to the present one - about 3-times faster.

Do I need to point out the inflationary environment was completely different - rising house prices in a period of high inflation and rapid wage increases is not the same as the present environment - arguably, it points to the present situation being even more out of whack.

And the correction, at a time when inflation was running well over 5% a year, was well over 50% in inflation adjusted terms.

The increase, in the same terms, was less than the nominal 70% you quote - considering inflation at the time, it was more like a 50% raise - which means, that the reversion from the peak was right back to where it started, in inflation adjusted terms.

POut that in your pipe and smoke it.

JMK said...

VG,

The same house today based on the same level of pay of an average union wage in the same trades job would be 100% of my monthly take home at a 10% down payment,thats ALL my take home pay. Now you tell me that affordability is not out of line ?

I completely agree with you up until your question. You are assuming that affordability should remain constant. This is an unfounded assumption, and easily disproved in many cities the world over.

Not least of which is Victoria, where "affordability" has been eroded by 2% a year compared to inflation since 1978 (on average). 2% a year compounded from 1990 to today is a 40% increase in the real price of a home. i.e. a 40% decrease in affordability.

As another example, my grandfather, on a good union wage, bought a house overlooking Lions Gate Bridge in Pacific Heights in West Van in the 40s. I'm guessing that isn't happening too much anymore, and probably hasn't for 40 years. Is your assumption that this is due to a 60-year credit bubble and West Van will once again become affordable?

A good question is where are these buyers are coming from, since the union bloke can't afford the median home any more. I don't know, but come they have for the last 30 years, and I expect they will continue to show up for the foreseable future. The median family will continue to move into something humbler than the median SFH or they will move to the suburbs.

JMK said...

Greg,

The numbers I quoted were real prices. You can get the CPI from Stats Can.

BTW, a 40% drop after a 70% gain means prices are back where they started before the bubble: 1.7*0.6=1.02.

then toss out further nonsense like the current boom is only 7 years old - uh, no, actually, in nominal terms the current boom is 12 years old!!!

The total nominal price change from 1995 to 2000 was $10k, for a whopping .8% a year nominal appreciation. I'm not sure most people would classify that as part of a boom, particularly as real prices were dropping.

vg said...

The median family will continue to move into something humbler than the median SFH or they will move to the suburbs.



jmk, what do you call the suburbs ? Port Renfrew ? Everywhere within 45 mins of Victoria central is the suburbs and is a gouge. Lets not compare West Van, it has always been more unafordable,then we might as well call it the Uplands, grab a brain.
Your classing yourself as one of the suckers believing prices cannot go back down to reasonable levels to justify your misjudged purchase,your arguements are weaker every day....whatever.