Industry and media wants us to keep this current downturn in perspective. We're told by the BoC that this will be a short and steep dip, followed by a fairly quick recovery. We're told by the real estate experts that this is a crisis of confidence, not a crisis of fundamentals being out of line.
In the 1970s, after a period of stagflation, governments rapidly expanded monetary policy, that is, they dumped money into the system to stimulate their economies. It was a developed-world wide phenomena that led to a quick and dirty uptick in household spending, and also spending on houses. When their monetary policies led to crazy inflation levels, they did what all governments do, and jacked up interest rates by almost double in just two short years.
Fast forward 32 years and they did it all again. Economic demand sucked after the dot com explosion and 9/11. Greenspan and then Bernanke, and by proxy, David Dodge and then Carney, opened the monetary taps in the US and Canada. The money supply became so cheap it was almost free. Kind of like it still is today. House prices soared, people racked up debt like kids collect candy on Halloween. And no one understood what was happening nor why.
The situations are very similar. However, the volumes are very different. Take a look.
Here's the US Fed's monetary expansion policy over the past 100 years or so:
Here's the period 1970 to 1985:
And here's the last thirteen years (1995 to 2008):
We've expanded the money supply, so fast, and so far that we've outstripped the 1980s S&L crisis and yet Obama is still looking for almost this much money to be dumped in again. If the BoC is right, and we recover relatively quickly from this downturn, then interest rates will have to climb in order to absorb the excess cash to keep inflation in check. How far up will they go and what will be the impact on local house prices?