An Economic Boom “In All The Wrong Places”

The Bank of Canada is keeping its key interest rate unchanged at 0.5 per cent as it weighs the clashing forces of falling inflation and a surprising burst of economic growth.
But the central bank warned Wednesday that both factors may be temporary.
The torrid growth in the first quarter – now on a pace to hit 4.7 per cent annual rate – will be followed by “some moderation” in the April-to-June quarter, the bank said in a statement. In April, the bank had forecast 3.8 per cent GDP growth in the first quarter.

Wednesday’s decision marked the 15th consecutive time since July 2015 that the central bank has left its key rate unchanged. Most economists don’t expect the bank to begin raising rates until at least early 2018.

“The main message is that the bank now clearly sees the balance leaning more to the side of raising rates, rather than cutting them,” Bank of Montreal chief economist Douglas Porter said.

The bank also acknowledged the hot Ontario and B.C. housing markets, noting that recent government efforts to stop speculation and risky borrowing “have yet to have a substantial cooling effect.”

“The Bank of Canada sees an economic boom in all the wrong places,” CIBC economist Avery Shenfeld said in a research note.
– from Bank of Canada holds rates amid boom ‘in all the wrong places’, G&M, 24 May 2017

Three-quarters of Canadian mortgage holders would be unable to manage a modest increase in interest rates.
Three. Quarters.

– El Ninja, on VREAA, citing this Vancouver Sun report

I’ll just leave this here:
An economic analysis released on May 4 by the Desjardins Group predicted that the central bank may increase its benchmark rate by 0.5 percent per year starting in 2019, bringing it to about 2.5 percent by 2021. According to the Desjardins paper, that could mean a two-percent increase in variable and five-year fixed mortgages.
“It will make it even more unaffordable to buy a property,” Kadi said about the prospect of higher interest rates.”

– BlaMmO, on VREAA, citing this Georgia Straight article

—-

Cheap money plus good story leads to housing bubbles.
Looks great on the way up, everybody loves it, especially the banks and the politicians. And owners, RE ‘investors’, Home Depot, kids with new trucks drywalling, [any poor value local item dependent on wealth effects].
‘Wealth’ is created out of thin air with every mortgage created. (Free money!)
Bonus extra level of juice if you’re importing some of the downpayments.
However, all pretty much a ponzi, and when you run out of air, what then?
The whole process in reverse really, really sucks.
– vreaa

34 responses to “An Economic Boom “In All The Wrong Places”

  1. “Kids with new trucks drywalling.”

    Vreaa says it all.

  2. You could say the same thing about fiat money, bonds, stocks, derivatives, commodities, etc, etc, etc…

    The world is doomed!

    • Actually, no, you can’t say the same thing about all those other ‘investments’.
      (Which isn’t to say there isn’t BS going on in other markets.. general stockmarkets are currently very overvalued, for instance..).

      RE is unique in that there is massive leverage that is so casually available to regular citizens (people who don’t realize that they are taking cowboy-size speculative bets).
      Try buying stocks with 1:4 or 1:9 leverage (that’s 20% down or 10% down). Your bank will laugh at you.
      (Sure, you can buy options or leveraged etfs, but the banks will largely only let you play those with your own money. And what percentage of citizens do that?).

    • Space-case claims (incorrectly) that other investments are equally problematic, therefore RE should be excused. A logically fallacious deflection.

  3. VREAA hits all the nails on all the heads. As usual.

    20:1 speculation by the uninformed unwashed. Using borrowed money and wisdom they got from their shoe shine boy. What could go wrong.

    Lubricant and froth contributed by the HAM zeitgeist and a small amount of short-term money laundering.

    If it was a reasonable risk, every hedge fund and bank would be up to their ears in residential real estate.

    Instead, because they know better, they let the Proles take the risk and profit from the transactions instead.

  4. @VREAA – I used to do 100% pure leverage investments and the banks are perfectly fine with it. It’s not as hard as you think. In fact, I think CI Financial or some other outfits like it used to regularly promote a $100K stock investment loan, to be manged by itself off course, to regular average joe.

    • Huh?
      Please explain. What are “100% pure leveraged investments”, and what is a “$100K stock investment loan”?
      Details/specifics, please. Examples please.

      • You borrow say $100K and invest the market. If you use a margin account, you can further leverage up another 50% on that $100K. What’s so hard to understand?

        As for the $100K stock loan program, it used to be run by one of the independent investment / mutual fund companies in Vancouver. I think it’s CI Financial but can’t remember, it’s a few years back now.

        The basic premise is that the firm will lend you the investor a $100K loan which you can put into the various funds run by the firm. An investment “advisor” will monitor your portfolio for you and basically your income will pay the interest, and since the stock market will constantly go up, you are basically making free money. One of my co-workers at the time went to a “consultation” / “financial review” session given by one of his acquaintances working for that investment firm and got a fancy glossy handout and everything. I talked him out of it.

      • Where you get the initial $100K is a moot point, whether it is a deposit on RE or a stake for the stock-market.

        Then, notice that the margin stock account allows you a ‘mere’ 1:1.5 leverage (the 50% you mention), whereas gambling on RE would allow you to leverage that $100K 1:9 or even 1:19 (the equivalent of borrowing 900% to 1900% on your initial stake).

        Besides, what percentage of the population are currently borrowing money to play the stockmarkets? (Compared with those doing the same to play RE?)

      • Space’s “nothing-to-see-here” false equivalency has just been called out.

  5. @El Ninja – oh El Ninja, so you would be so cute if you aren’t so annoying. You missed the point completely, but whatever…..You have only been wrong for the last decade, I’m sure another decade isn’t going to matter much to you.

    • “Cute”. Kinda weird, but I’ll take the compliment. Brian might be jealous.

      As for who is wrong and who is right. You cannot be right about a fluke.

  6. 3605 27th Ave E: new listing, not. Previous rodent listed it for months without a sale. Now it’s in the hands of a brand new agent. New price? No. Anything different? No. Just the timing is better for this nothing seventies Van Spec Dreck on a small lot flanking an alleyway. Still at $300K over last assessed, that’s a dry pill to swallow.

  7. A week off and a lot has happened.

    I love how Ninja and vreaa are commenting on the difference between real estate and the stock market. So here is a fun fact, what do you think is the average P/E Ratio of the S&P 500 in the post 2000’s era versus the pre 2000’s era. When I started investing in stocks in 2000, the rule of thumb was P/E of 10:1. There was a reason for that. If you looked at the pre-2000 markets, the standard S&P P/E average was 10:1. The standard P/E now is about 20:1 taking out years when economic growth was terrible when it shot to about 30:1 or above. But what do you think fueled this change? Did a bunch of professionals all of a sudden went screw it with the PE or did money supply all of a sudden become greater. So essentially PE ratio doubled in the S&P. Similarly, in Canadian Real Estate, the price to rent ratio or the closest thing we have in PE went up, I am not sure if it is double, most likely not. But regardless, if you think housing will tank with less supply of money, so will stocks. The amount of leverage in the stock market is as large as housing. It is true though that the leverage is not done by the average person but it is done by institutions.

    Speaking of these institutions. I love how all of a sudden Ninja and vreaa gives more credit to professional traders when they keep on discrediting space even though he has a CFA. What do you think caused the financial crisis? Let’s see, bank lending standards, and oh… there was this little thing called a CDO and the rating agencies went to shits. Guess who they were, the professionals. So essentially the professionals, not the average joe setup a way to sell sub standard leveraged securities using underlying crap mortgages as collateral. Hmm.. food for thought.. guess we really should give credit to them because they sure know what they were doing. Never screwed that one up before. If professional traders were always right, then you should never see stock market crashes because things should always be correctly valued.

    In reality, I would argue that you have seen far less housing market crashes than stock market crashes. This is two folds. One, as I said, the leverage in the market is more than the leverage in the housing market, look at the bank’s withholding ratios, it’s something like 20:1. It means for every dollar you deposit in the bank, the bank can leverage 20 times that for their own use. How many properties in Vancouver have a 20:1 leverage? The second reason is that the average Joe actually learns from their past mistakes a lot better than the professionals do. Or else you shouldn’t see the stock market crash once every ten years like it does.

    No Ninja, Space is not talking about a false equivalency, it is absolutely both related to the same thing.

  8. @VREAA – Really? You mean it doesn’t matter if you took $100K cash you have to invest in stock market, or borrow $100K to invest? Seriously?

    Btw, even if you buy stocks with cash you have, you are assuming leverage. If you buy RBC with cash, that rock solid Canadian bank that just had another record earnings season, you are actually assuming pretty big leverage. Frankly, you will be surprise how much leverage there is in the financial market. Again, I would recommend you actually educate yourself on financial markets.

    Relatively speaking, RE is no worse or better than stock market. However, in general, more people have become wealthier due to RE than investing.

  9. Lyin’ Brian:

    – Claims that the market’s pre-2000 PE ratio was 10. In truth, the median PE ratio on the S&P before 2000 was 15. Off by a mere 50%.

    – Confuses investing in bank stocks with investing in the stock market as a whole. In truth, financials account for just 14% of the S&P 500.

    – Attempts to shut down debate with false claims that space is a CFA charterholder. In truth, CFAs understand the difference between 1.5:1 and 19:1 leverage. Heck, children understand the difference.

    – Says stock market crashes more often, implying undesirability as asset class. In truth, despite downturns stock market has, over time, outperformed real estate by a factor of roughly three.

    #MommyBrianToTheRescue
    #FakeCFA

    • “Confuses investing in bank stocks with investing in the stock market “, err… you must not know how to read. I said that how you got leverage into the market in part has to do with bank withholding ratios. Banks’ assets, many of which are leveraged investments come from the fact that they have a small withholding ratio. Remember the CDOs? In reality, if you argue that the underlying product, ie. housing market is in danger because the people who hold it are leveraged. Then by that logic the underlying product, ie. stocks, are in just as much danger because there is just as much leverage on these investments. And if this leverage unwinds then the underlying product will be just as screwed. The difference is one leverage is held by professionals and the other is held by the average person.

      Btw, I like how you keep on bringing up the stock market performance as if no one here knows. Umm… one question, stocks have vastly outperformed gic’s also, is that saying stocks is a better investment? What is the measurement of investment performance? Space might be able to comment better but I thought it was return versus volatility. What do you reckon have a higher vix, stocks or real estate? In reality, what I was arguing was really this point, that stocks are much more volatile. So before we start slogging the average folk and say that professionals are less likely to cause issues with leverage, let’s not forget that the vix in the stock market is far more than the real estate market.

      I love how you are accusing me of shutting down debate… err… you are the one using simple platitudes about how everyone else sucks at economics other than someone who has been wrong for a decade.

      Nice attempt at accusing me of being mommy. But family life must be fun at your household for you to be here everyday on a weekend:

      #marriedtoaserialblogger
      #sundaymorningfunatvreaa
      #fridaynightfamilyfunatvreaa
      #fakeSEMIretirement

      • Wifey ban you from the internet, did she Brian?

      • Sure, why not? There are better things to do with my family than chatting here with you. For your sake, I honestly hope you can say the same about yours. Cause man, being here on friday night, saturday morning, sunday morning says something about your family life in case you haven’t noticed.

      • #whipped

      • Sure, I am whipped, that’s fine with me btw.
        #feelbadforyourwife

  10. How is it possible that Madoff perpetrated the biggest financial fraud in history over three decades without being caught by supposedly astute analysts. Three decades, thousands of investors, billions of dollars.

    • How is it possible that people ever do bad things and not get caught? Sorry, dumb questions get dumb answers.

    • [VancouverSun] – Speculators target B.C. farmland after foreign buyer tax introduced for residences

      “Sales of farmland in B.C. surged and prices jumped immediately after the provincial government announced a foreign buyer tax on residential land in July 2016, a Postmedia investigation shows.

      The surge in agricultural land sales and prices — on property that is not subject to the 15 per cent foreign buyer tax — was largely driven by record-setting sales in the Fraser Valley, South Surrey and White Rock.
      Data provided by Landcor for Postmedia’s investigation shows that in July 2016 there were 81 farmland sales in B.C., and the average price was $109,000 an acre. The B.C. Liberal government announced the new residential tax on July 25. In August, farm sales jumped to 144 across B.C., and the average price shot up to $140,000 an acre. Prices continued to rise, hitting an average of $151,000 an acre in September on 142 sales. Sales have fallen back to average levels in the following months, but prices have remained elevated.

      By looking specifically at where prices and sales have surged, and reviewing anecdotal reports from realtors, a connection can be suggested between the jump in farmland sales after July 2016 and speculation by offshore investors. The B.C. government has been tracking foreign buyers of B.C. farmland since June 2016, but does not “provide the specific number of purchases” because the data sample is not big enough, Ministry of Finance spokesman Jamie Edwardson said.

      Postmedia’s investigation suggests that a disturbing trend is accelerating. Farmland that is crucial to B.C.’s future food needs is increasingly falling into the hands of speculators and builders of luxury property, and farmers are getting priced out. Even before the introduction of the residential tax, a Metro Vancouver government investigation identified that 50 per cent of the region’s agricultural land is not being used for farming, and that many property owners are exploiting tax benefits meant for food producers.”…

      http://vancouversun.com/news/local-news/farmland

    • [VancouverSun] – Speculators target B.C. farmland after foreign buyer tax introduced for residences

      “Sales of farmland in B.C. surged and prices jumped immediately after the provincial government announced a foreign buyer tax on residential land in July 2016, a Postmedia investigation shows.

      The surge in agricultural land sales and prices — on property that is not subject to the 15 per cent foreign buyer tax — was largely driven by record-setting sales in the Fraser Valley, South Surrey and White Rock.
      Data provided by Landcor for Postmedia’s investigation shows that in July 2016 there were 81 farmland sales in B.C., and the average price was $109,000 an acre. The B.C. Liberal government announced the new residential tax on July 25. In August, farm sales jumped to 144 across B.C., and the average price shot up to $140,000 an acre. Prices continued to rise, hitting an average of $151,000 an acre in September on 142 sales. Sales have fallen back to average levels in the following months, but prices have remained elevated…

      Postmedia’s investigation suggests that a disturbing trend is accelerating. Farmland that is crucial to B.C.’s future food needs is increasingly falling into the hands of speculators and builders of luxury property, and farmers are getting priced out. Even before the introduction of the residential tax, a Metro Vancouver government investigation identified that 50 per cent of the region’s agricultural land is not being used for farming, and that many property owners are exploiting tax benefits meant for food producers.”…

      http://vancouversun.com/news/local-news/farmland

    • [VancouverSun] – Speculators target B.C. farmland after foreign buyer tax introduced for residences

      “Sales of farmland in B.C. surged and prices jumped immediately after the provincial government announced a foreign buyer tax on residential land in July 2016, a Postmedia investigation shows…

      …Postmedia’s investigation suggests that a disturbing trend is accelerating. Farmland that is crucial to B.C.’s future food needs is increasingly falling into the hands of speculators and builders of luxury property, and farmers are getting priced out. Even before the introduction of the residential tax, a Metro Vancouver government investigation identified that 50 per cent of the region’s agricultural land is not being used for farming, and that many property owners are exploiting tax benefits meant for food producers.”…

      http://vancouversun.com/news/local-news/farmland

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