Canada's Housing Bubble

Boomer dynamics

Two more thoughts should be added to the 2011 outlook.  Shortly after posting my predictions, Leith over at the Unconventional Economist reminded me that 2011 is the year when the first boomer turns 65.

“Remember also that the first of the baby boomers turns 65 this year. So 2011 marks the end of the ‘demographic sweet spot’ whereby, for the past 25 years, dependency ratios have been held low in most western countries. Now western countries’ dependency ratios will rise year-on-year as the baby boomers gradually exit the workforce. This will squeeze consumption, growth and asset prices going forward.”

Great point!  Leith’s site delves into many of the same issues we look into here at Financial Insights.  Though we’re separated by half a world, the economic issues facing Leith’s home country of Australia and my beloved Canada are quite analogous:  Housing/credit bubble set to rupture, over-reliance on commodity exports to China, similar demographics, consumer debt burden at extreme levels, etc.  His site is well worth the read.

At the same time, Alex made the following comment which nicely highlights the growing tension between a boomer demographic expecting entitlements and the younger crowd awakening to the realization that the means are simply not there to honour these entitlements without a substantial reduction of living standards via higher taxes, less government spending, and lower future entitlements.  I’m not pointing a finger here, and I’m not interested in starting inter-generational strife.  But let’s at least acknowledge the facts and recognize that the current state of affairs all but guarantees future tensions.  Over to Alex:

“I share many of your concerns and worry most about the impact of all these attempts at saving the Boomers from themselves on future generations. The greatest generation didn’t teach their children the meaning of sacrifice it had to be forced on them. They are in power now and to protect their own they’ll tax until they can’t tax no more. They’ll tax to protect the illusory lifestyle of unsustainable consumption the feel is their right, never realizing that in this belief were sewn the seeds of their own demise. The hippies finally grew up, just a little to late and with not enough cab fare to get them home and true to form their thumbs are out for a free ride.”

Ouch!  Whether you agree with that sentiment or not, let’s at least acknowledge that there will be a rising tide of unrest until we figure out how to honour the promises made to ‘the Greatest Generation’ without leaving their kids and grand kids with a crippling bill.

Finally, the Financial Post ran a story on this same topic.

Welcome to old age, Boomers

“…More than 1,000 (Canadians) will reach official old age each and every day for almost 20 years”

In the US, that number is 10,000 per DAY!

“Boomers, retirees and others worried about funding older age must somehow fund retirement and try to preserve capital at the same time. Many will not be able to do that, having not saved enough in the first place and having no defined-benefits pension plan.”

I’ve suggested that this will put downward pressure on housing prices, particularly for the large ‘McMansions’ that many will seek to downsize from.

The next decade will be marked by rising tensions in most developed nations over these very issues.  I fear that if people aren’t willing to meet in the middle and at least acknowledge the problems, the stage will be set for extreme political parties to gain a foothold by catering to the disillusioned from generation X and Y.

“It’s only a matter of time before China’s housing bubble bursts“

That’s the title of an interesting article courtesy of the Shanghai Daily.  Thanks to Don for emailing this article to me.  It’s also discussed over at Leith’s site.

“With farm land disappearing around cities, vegetables and other food are more expensive; conflicts – many bloody and even deadly – are escalating between demolition teams and home owners.”

“The latest buzzword is “rigid demand” for homes, meaning demand is endless considering the huge population and booming economy….There seems to be a “China Myth.” Is that true?”

“A study of the Japanese property bubble may be helpful.  In the heyday of Japanese prosperity, the land value of Tokyo alone exceeded that of the entire US.  Japanese tycoons were considering buying up America. What happened later is history.”

“Wandering around newly completed residential areas near my home in Shenzhen – stacked with gleaming apartments, I find 80 per cent of the units are still unoccupied one year after completion. The same is true in Beijing.”

“Prices have made ownership impossible for most buyers. So, it’s a matter of time before the bubble bursts.”

The immutable laws of real estate valuations apply equally in all parts of the world.  Be it the US, Canada, China, or Australia, when the average person can no longer afford the average home, the market is set to correct.  Price momentum and government antics can prolong the dislocation, but it does nothing but amplify the ultimate realignment.  The miracle growth in China does not exempt their property markets from the market forces at work everywhere else.  It’s not different.

-Ben