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
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
3 Responses to “High End Real Estate in Canada in Frenzied Bubble Blow-Off”
Most read in the last 20 days:
- End of an Era: The Rise and Fall of the Petrodollar System
The Transition “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
- Writing on the Wall
Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so. It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
- A Fully Automated Stock Market Blow-Off?
Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals. The bots keep buying... Illustration via...
- The Central Planning Virus Mutates
Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination. A...
- Destination Mars
Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks. If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical. But, in certain economies, this is now standard operating procedure. The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
- America Has Become a “Parasitocracy”
Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to. Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
- Fat People for Trump!
Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot. The protest vote attractor with the funny hair. Image credit: Liberty Maniacs Trigger warning: In the following ramble, we make fun of...
- Long Term Market Perspectives
Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world. Ye olde bristlecone Photo credit: Kosta Konstantinidis You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
- EU Sends Obsolete Industries Mission to China
“Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”) and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
- Gold is not Going to $10,000
One Cannot Trade Based on the Endgame The prices of the metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322! All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...
- The Real Reason the “Rich Get Richer”
Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs. Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...
- Unsound Money Has Destroyed the Middle Class
Duped and Distorted DUBLIN – When you start thinking about what money is and how it works, you face isolation, shunning, and possible incarceration. The subject is so slippery – like a bead of mercury on a granite countertop – you become frustrated... and then... maniacal. What thinking about money can do to you Illustration by Jhonen Vasquez You begin talking to yourself, because no one else will listen to you. If you are not careful, you may be locked up among...