Canada's Housing Bubble

Mar 01, 2010 Garth Turner greaterfool.ca

One day after the Olympics, guess which of the following happened? (a) Air Canada laid off 1,000 mechanics, or a third of its entire technical workforce, (b) a Vancouver developer announced it sold seven condos during the games worth forty mil, (c) the country’s biggest city, mired in deficit, readies to sell off public parks, and (d) the feds announced the economy’s smokin’ hot.

And the answer is: All of them. And more to come.

As I’ve been telling you for a while, this is a time of volatility and change. The old order (houses, GICs, consumer debt) is ending, while the new order (liquidity, commodities, equities) is being born. This is when things get better and worse at the same time. More people lose their jobs amid rising prices and speculation. The economy expands, but incomes fester. Government expands and contracts at the same time. And most people chase yesterday’s winners – which is why this is the time you absolutely want to be a contrarian.

To repeat from the last post, this is a false economy. It’s pumped on political stimulus, yet creating no jobs, no income gains, but record debt. Hardly the time to be spending millions on glass boxes overlooking (ironically) False Creek.

Now, let’s chat about this latest economic report for a minute. StatsCan says growth was a blistering 5% in the last few months of 2009, above expectations. You can be sure F will be yodelling about it in his budget speech on Thursday.

And where did all this surprising strength come from? Yup, government stimulus, and the housing market – two sturdy economic pillars built of debt. Ottawa’s billions came from borrowed money, forming part of the worst-ever deficit, while the real estate bubble was gassed up on record clouds of mortgage debt.

The government debt, of course, will have to be repaid with higher taxes on consumers, investors and corporations. The orgy of new mortgages – many of them representing 95% of the price of houses recently bought – will represent a semi-permanent drag on consumer incomes, especially because of what comes next.

And that is an end to cheap money. Every economist worth quoting is now saying the same thing: this economic ‘rebound’ will give the Bank of Canada every justification it needs to start in on a string of interest rate increases, starting in about 100 days.

“It raises the probability of advancing a tightening in policy,” says a Royal Bank economist, speaking in a strange tongue.

“This report shouts strength,” said a BeeMo economist, “and increases the odds the Bank of Canada will begin to hike interest rates in July and stay on that path in the following decisions.”

Damn straight. I’d say Carney will be hiking every chance he gets, since he totally gets the fact absurdly-low rates can blow up a perfectly good country. As I mentioned a day or two ago, that’s just what Alan Greenspan managed to do, ushering in a low-rate-induced real estate bubble which ate the American middle class and half the western world with it. And while Carney still maintains we do not have a gaseous, bloated, inflated, elephantine housing market here, he’s ready to pour on the Pepto.

So, back to the day’s news.

The economy grows leading to inflation, taxes and higher rates. Yet incomes stagger, guys who keep airplanes up lose their jobs and cities sell parks.

Look around you. Do the opposite.