When a mortgage is issued, money is injected into the economy from… nowhere.
Most people don’t realize this. Most think that mortgages come from money that originated in the real economy that is actually deposited in the bank, but that is most definitely not where mortgages come from. This ignorance is very widespread… poll intelligent people you know… you will find that most do not understand that commercial banks have the power to create new money. (A recent survey of UK Members of Parliament showed that the majority of them (85% !!) did not understand the source of mortgages… stunning information).
If somebody borrows $2 Million from a Canadian bank to buy a $4 Million Vancouver home, that $2 Million is created from nowhere. Nobody earned that money; the economy gets an artificial boost unrelated to any actual economic productivity within our society.
Vancouver has seemed to do well economically over the last 15+ years, largely because of the issuance of new debt. Vancouver has ‘imported’ money… from foreign sources, yes, but also from fresh air (and the latter source is greater and more important).
RE and closely related economic activity makes up 25% of BC’s GDP (2016). Construction is by far the largest new job generator in BC. Our economy has become highly dependent on an ever expanding RE sector (and ever increasing prices).
There were $38.4 Billion mortgage loan approvals in BC in 2010 on new and existing residential properties. (At 4.7 Million population this is $8,170 per capita per annum). We’d imagine more recent figures are considerably higher.*
BC has a GDP of $250 Billion (2015), so GDP per capita is $53,250.
Some of the newly issued mortgage debt must lead to the retiring of some old mortgage debt (when a sale completes) but we do not have figures regarding net new mortgage debt, which would be interesting (any readers have that?). That figure would represent the actual amount of newly created money released into the society from mortgages.*
When one considers that the ‘new money’, now in the hands of the seller, can then be used to be invested back into local RE (and leveraged again with more mortgage debt), one starts seeing how the RE ponzi can expand so malignantly.
Furthermore, if even a fraction of the new money is spent in other areas of the local economy, this makes our economy even more dependent on RE debt issuance. Add to this the ‘wealth effect’ of RE owners saving less and spending more because they believe their home is worth more and more, and one sees how dependence on RE price-expansion can spread deeply and broadly into an economy.
We don’t see any evidence that any real economic engines supporting Vancouver RE prices have fundamentally changed. There has not been growth in non-RE local economic activity anywhere near commensurate with the increases in RE prices. All evidence is that RE prices are still in a speculative bubble, fueled by debt.
This last year has seen a stalling in detached home prices and a 25% blow-off in attached prices.
If prices blink and lenders pull in their horns (with or without rising interest rates), the superficially virtuous cycle of a speculative debt-fueled bubble will implode, prices will plummet, mortgage debt will remain, and the cycle will become very vicious.
With Vancouver’s economy so overdependent on RE, we expect the inevitable reconciliation to lead to a deep local recession and many consequent adverse stresses on our society. Let’s hope we can weather the storm.
*PS: we’d welcome any updated figures from readers, especially info re net new money from mortgages.
Chart above from Ben Rabidoux.
hat-tip to El Ninja for links to these images: