And no, this bubble won’t be any different.
Yesterday Macleans asked the pertinent question of whether or not it’s due time to start fretting over Canada’s looming housing bubble.
Here in Canada, we patted our backs for not falling into the same trap, and basked in the spotlight as the worldâ€™s new beacon for financial stewardship. Itâ€™s a compelling narrative that has been promoted by the federal government and the Bank of Canada as they encouraged Canadians to spend their way through global economic turmoil.
But pry through the pocketbooks and bank accounts of the average Canadian and the country looks remarkably like the America of 2005â€”or even worse by some measuresâ€”complete with record house prices and unprecedented debt. â€œOne of the really terrible narratives weâ€™ve allowed to develop in the minds of Canadians is that somehow we are better than the U.S. and so that means we have nothing to be concerned about,â€ says Ben Rabidoux, who runs The Economic Analyst website and parlayed his obsession with watching the housing market into a job with a Wall Street firm that advises institutional investors on how not to get caught up in the Canadian miracle/disaster.
What Rabidoux and others have seen is just how much Canadaâ€™s economy has come to rely on the countryâ€™s housing boomâ€”and how much consumers have been digging themselves into debt just to keep it going.
While the housing bubble burst in the United States literally brought the world economy to its knees, the suspicion over its true cause has sparked a renewed interest in the Austrian school as many considered to be within the “mainstream” of financial commentating actually had their fingers pointed at the Federal Reserve for keeping interest rates too low for too long.Â Thanks to the 2008 presidential campaign of Texas Congressman and Austrian disciple Ron Paul, the Fed has faced a degree of scrutiny unseen in its nearly century long existence.Â The public is becoming more enlightened to the fact that interest rate manipulation may yield short term gains but the cost will ultimately be paid for with recession and/or depression.Â Ludwig von Mises figured this out back in 1912 with the publication of The Theory of Money and Credit.Â Thanks to the ineptness of former Fed chairman Alan Greenspan and his fetish with printing dollars to prop up asset prices, more are catching on to Mises’ business cycle theory.
Macleans is thankfully no different in regard to Canada:
Banks themselves can only be blamed so much for offering consumers mortgages for next to nothing. The Bank of Canada has held its key interest rate at one per cent since September 2010, and most economists expect the bank to keep it there until well into next year.
Itâ€™s a dangerous game. Low interest rates might sound great for anyone looking to take out a loan, but they can have a perverse effect on an economy when they stay low for years.
Low interest rates had as much to do with the U.S. housing bubble as subprime mortgages, even working to make such lending more popular, says Stanford University economist John Taylor. He argues there never would have been a housing boom or a bust at all if the U.S. Federal Reserve and its chairman, Alan Greenspan, hadnâ€™t slashed interest rates in the wake of the 2000 dot-com bust and then held them low until 2005. Not only did low rates encourage Americans to take on larger mortgages, but they pushed banks to make more aggressive loans in search of profits and increased demand for higher-yieldingâ€”and therefore riskierâ€”debt.
Being that human action is unpredictable and the amount of variables involved within complex market economies are vast in number, isolated case studies based off methodological positivism and empirical evidence alone are impossible to conduct and apply universally within the science of economics (thymology is the appropriate term for making predictions based on axiomatic truths- as demonstrated by this post in particular).Â This doesn’t stop one from observing “after the fact” data and deducing logical interpretations.Â Up until this point, the correlation of the Bank of Canada’s low interest rate policies with the growth in household debt and home prices has been uncanny.
In a recent post at his highly popular financial blog Mish’s Global Economic Trend Analysis, Mike Shedlock provides some astounding examples of the housing bubble in what looks like the ground zero of rising prices otherwise known as Vancouver.
2119 East 3rd Ave, Vancouver
MLSÂ® Number V934050
Listing Price: $899,500
2564 East Pender Street, Vancouver
MLSÂ® Number V930595
Listing Price: $899,000
And here is my favorite
1016 East 7th Ave, Vancouver
MLSÂ® Number V930461
Listing Price: $899,000 (notice the boarded up windows!)
As I have written previously, Bank of Canada head Mark Carney has acknowledged the run up in household debt but has been reluctant to admit that the housing industry is experiencing bubble like activity.Â Like an alcoholic addicted to the slosh, Carney admitting his reliance on cheap credit to keep certain sectors of the Canadian economy afloat at the expense of an eventual asset bubble bust would start raising questions over his competence and would necessarily strike a serious blow to his legacy.Â Carney, like Alan Greenspan before him, is playing with fiat fire which will leave his, and the rest of Canada’s, hands burnt after the housing market corrects itself.Â His only hope will be resigning in time to pass the buck on to a hapless Ben Bernanke-type to pick up the pieces; thereby exacerbating the true cause of the business cycle when money printing is used as another band aid.Â And Mises’ important lesson will continue fall onto the deaf ears of central bankers believing themselves endowed with enough intelligence to dictate the prevailing borrowing interest rate for millions.
True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.
- Ludwig von Mises writing in Omnipotent Government