Easy money, low interest rates and speculation have allowed the real estate market in the United States, Canada and elsewhere to grow exponentially. Of course, the housing market’s rise in value hasn’t been based on sound economic principles, but rather central banking interference.
In the U.S., the Federal Reserve’s monthly bond-buying initiative has created several bubbles, including in the real estate market. Therefore, it has produced a phony housing recovery that will eventually lead to another collapse for homeowners everywhere because the values will fall dramatically.
“This is a destructive poisonous monetary medicine that is being put into the system that is distorting all kinds of economic mechanisms with malinvestments on a massive scale,” said David Stockman, former budget director during the Reagan administration.
This is part of the reason why the Federal Reserve will likely taper its taper talk next year because the market relies on the monthly injections. Since the economic growth has been unsound and can’t run on its own legs and will thus continue to need stimulus from Fed Chair Janet Yellen, though it appears her mandate has been to keep interest rates low in order to create jobs as she alluded to a couple of times this month.
North of the border, in the Great White North, Pacific Investment Management forecasted earlier this month that it sees Canadian home prices dropping between 20 and 30 percent over the next five years. The organization argued that the housing market in Canada is overvalued, but it is a correction rather than a collapse.
“Canadian housing is overvalued. I would expect to see it happening at the end of this year, we’re going to start to see housing roll over,” said Ed Devlin, the London-based head of Pimco’s Canadian portfolio, in an interview with the Financial Post. “It’s not a collapse, it’s a correction. We think the Canadian economy can handle it. It’s going to be a headwind to consumption as people don’t have the same kind of wealth effect and are more anxious about their house than they have been in the past. They’ll consume less.”
Other entities have reiterated the same premise: Canada’s housing market is overvalued. Deutsche Bank listed the market as being 60 percent too high, while the International Monetary Fund (IMF) and TD economists have pegged the number at 10 percent.
Nouriel Roubini argued that one of the reasons the housing market in Canada is in a bubble is due to the fact that it’s swimming in a sea of other bubbles elsewhere, such as Australia, Germany, Switzerland, New Zealand and Sweden.
The Bank of Canada sees a soft landing, though. Many make the case that Canada is rebounding from a downward 2013. For instance, Vancouver, which is a city concurred by experts that has maintaining the biggest bubble, soared from 33 percent decline last year to a 50 percent rise to “near normal levels.”
In Toronto, approximately 53,000 new condo units are expected to be completed within the next 15 months. With record-low, near-zero interest rates it’s no wonder why developers, speculators and homeowners are buying. Once mortgage rates rise then it’s likely the housing market will dwindle.