Throwing Caution to the Wind
We have discussed the dangerous housing and consumer credit bubble in Canada in these pages on several previous occasions in some detail (see “Carney’s Legacy” and “A Tale of Two Bubbles” as examples). Since we first wrote about Canadian real estate, the bubble has continued to grow with nary a pause. Why are we calling it a bubble? The gap between incomes and house prices is widening ever more, and has been far above what is considered normal for several years already.
This decline in affordability is the result of monetary pumping and ultra-low administered interest rates imposed by Canada’s central bank. Moreover, the boom is subsidized by a giant state-owned mortgage insurer, an institution that has the potential to severely impair the government’s finances once the bubble bursts.
Vancouver skyline at night – no doubt a nice place, but a bit pricey.
Photo credit: Mohsen Kamalzadeh, imaginion.wordpress.com
The housing bubble is most pronounced in big cities like Toronto and especially Vancouver. Trophy properties are selling like hotcakes to people who evidently don’t care much about money. In fact, the frenzy proves that the demand for money has long been overwhelmed by the huge growth in its supply among the richer strata of society.
A friend has pointed us to a short video at CTV News about a recent high end property sale in Vancouver that is quite remarkable, to say the least.
A bidding frenzy breaks out over a Vancouver trophy property
Consider the background to this sale – within just 12 days of being listed, the house sold for almost 35% above the asking price and a full 55% above its recently assessed value. The bubble has evidently reached the sheer insanity stage.
“A Tudor mansion in Vancouver’s tony Shaughnessy neighbourhood has sold for millions over the asking price, fueling more fears about affordability in the city’s red hot real estate market.
The stately home at 1383 West 32nd Avenue was listed for $5.99-million on Feb. 5, and sold 12 days later for a cool $8,010,000. That’s 33 per cent more than the initial asking price. The deal was finalized two weeks ago.
According to the City of Vancouver, the property was assessed this year at $5,094,600, which means the sale was $2.9-million above the assessed value.
A March report found that the average price for a detached home in Vancouver passed the $1 million mark in both cities.
In his report, Cameron Muir, chief economist for the Greater Vancouver real estate association, says a perfect storm of rock bottom interest rates and rising consumer confidence has fueled an all-out realty frenzy.
“Many board areas are now exhibiting sellers’ market conditions with home prices advancing well above the rate of inflation,” Muir said.
At least the house is not a hovel – still, the last time it was renovated was in the 1970s, so presumably it is a bit of a fixer-upper anyway.
Canada – narrow money M1 with annual growth rate – recently money supply growth has been slowing again and is already far below the 2009/2010 growth momentum peak. A sustained decline below the 5% mark may well spark bubble trouble – click to enlarge.
The Boom Will Never End!
Toronto has seen enormous price increases as well. What is just as astonishing as the sale described above is the widespread conviction that the bubble not only represents the “new normal”, but that it will never end. A recent Vancity Credit Union report is already predicting huge price increases out to the year 2030:
Another report from Vancity Credit Union predicted that the average home price in Vancouver will exceed $2.1 million by 2030.
Vancouver isn’t the only real estate market breaking records. A report from Christie’s International Real Estate just ranked Toronto the world’s “hottest” luxury market.
The report compared Toronto’s housing market to those of Dubai, Hong Kong, London, Los Angeles, Miami, New York, Paris, San Francisco and Sydney.
An “extremely low” supply of houses in Toronto pushed prices to approximately $1.2 million for “relatively average” houses, according to Christie’s.
Needless to say, the cities that are compared with Toronto above are basically the “real estate bubble capitals” of the world. If global money supply growth slows down or anything happens that forces central banks to entertain rate hikes, it is easily imaginable that several or maybe even all of them meet their demise at once. That would undoubteldy bring back “interesting times” for the financial system.
The fact that the bubble has continued to grow to ever more absurd heights underscores how difficult it is to forecast the timing of a boom’s demise, especially when monetary policy around the world is becoming ever looser. However, experience also tells us that when buying frenzies such as the one described above are starting to break out, it is often a sign that things are about to get dicey.
High end buyers, may even regard these purchases as legitimate inflation hedges, but they will be in for a surprise if consumer price inflation should actually revive. There is a range of CPI “price inflation” that is as a rule not friendly to overpriced assets that have benefited from very low interest rates.
Canada’s administered overnight interest rate. It should be no surprise that assets like real estate have experienced insane price increases. While interest rates have remained extremely low for several years now, there can be no guarantee that this will remain the case. At some point the huge flood of money the central banks have created is likely to exert effects on consumer prices. The long lag time could well mean that the effects will turn out to be unexpectedly pronounced. The game could however also end if credit expansion comes to a halt in spite of low rates – click to enlarge.
Charts by: St. Louis Federal Reserve Research
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
3 Responses to “High End Real Estate in Canada in Frenzied Bubble Blow-Off”
Most read in the last 20 days:
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...