My position on Real Estate in BC, Canada and globally has not changed. I spent the last 2 years trying to warn people about this time coming. And here we are.
The major headwinds I tried to impart on friends who should have either
A) Taken the money and ran B) Not put in the money and waited or C) Not use the ‘money’ they ‘earned’ since they bought there house via Home Lines of Credit.
Fact of the matter is that most pay no attention to market forces. The major force in BC real estate in particular is China. I am sure some will want to play the ‘race’ card as they did for some time. This is not a race issue, nor a country issue. This is, above all else a human issue.
Rich, middle class and poor Chinese have been watching a steady devaluation of the Yuan. They have also heard and seen every attempt by the government to lower the value of the Yuan. There has been nothing said or done to say this won’t continue. Technically this helps with trade (exporting) and also with making debt cheaper or ‘printing away’ the debt. China has been very active in this area. The Humans that live there, which happen to be Chinese have recognized this and done what anyone else would have done and have done in the past… get their money out! I am sure I don’t need to tell you where it ended up.
Some people had some interesting comments about the Trump article I wrote. Now, we are seeing what is either rhetoric and ‘pre-bargaining, bargaining’ or the beginnings of trade wars, tariff wars and likely outright war. This is very troubling.
We will leave the fact that commodity prices are very low right now, so a weaker currency is not that bad for China on the import side. We will also leave off the table the fact that if there were to be a time that comes (and it is coming) that regional or global powers will have to pick sides, they will. China with Iran and Russia and Canada, like it or not, with the USA. It is said without Clinton getting in, we avoided a war with Russia. I don’t think so. A conflict with China or Iran or Syria pulls them into the mix.
The odds of this happening are about 95%.
Let’s leave aside that the #1 and #2 economies might choke themselves off from each other. Let’s also leave aside the #1 Military power might have to face off against #2 and #3.
We are talking about Real Estate. That said, the above matters and also the domestic issue of… RISING RATES.
So, if China takes a side it will not be with us. We will immediately lose that ‘hungry Asian markets’ which is already less hungry on the demand/demographics side, but also less hungry in the where is this money that is leaving going? As in, is it better to buy Russian and Iranian oil or US and Canadian Oil? We are literally going to build pipelines to nowhere and LNG Tankers to nowhere, the Carbon Tax is the back stop in case this plan fails (it already is) and it will be used to try and make our products more competitive, but it will not increase demand globally.
We have seen a massive pivot by the billions of people/dollars in that region away from places like Saudi Arabia, Canada etc. simply because the Oil/Gas is cheaper, easier to obtain and there are little to no hostilities.
Why on earth does this matter?
The Great Wall of China
No, not the one long ago built, but the one being built right now and for the last few months. Those in China that brought money here to get both ends of the trade (Rapidly rising real estate prices and rapidly declining Yuan) are now being cut off. Most believe Clark’s ‘tax’ is the cause. Here is the reality. That tax, like most other taxes to ‘fix’ whatever issue, often just come at the top. Some call it animal spirits, some call it cycles, it doesn’t matter, it just happens.
Our governments ARE DEAD BROKE. They needed to let this money in to get the transfer taxes and to hold on to the one pillar they could: Real Estate and Finance as the energy and commodity sector got hammered into the ground. They never cared about all this ‘hot money’ posing as a ‘strong economy’ so long as it filled the coffers. They were even so desperate they matched the desperation of the Chinese to get money out. They let it all in and Chinese investors for ‘residency’ programs bought NO INTEREST government bonds, to be held for 5 years in exchange for the right to invest in Canadian Real Estate!
I’ll just ever so gently touch on it again: WE ARE DEAD BROKE. So this scheme was the prop for Canadian Real Estate. There was no demand and prices were way to high for most people. Now with rates set to rise, the pain is coming. Already we see in the USA more ‘wait and see’ from Chinese investors. This is also because the USD IS SET TO GO ON A TEAR and while this would help them on Returns when they sell, this will not help with demand, hence little price action.
They are FULLY AWARE that returns will be in USD and US Stocks and this will be liquid vs having to sell a house. This is where Trump is in trouble for he will blame the Chinese for ‘currency manipulation’ and the people will buy it, when they are not capable of looking at the USD rising against ALL currencies, thus, the Chinese could easily say the same about the USD rise being ‘manipulation’ when neither is true.
So the wall becomes cutting off capital outflows from China. They have taken many measures on this, including reducing insane Merger and Acquisition deals whose sole purpose was to get money out ‘legally’. Insurance schemes and now of course bit coin crackdowns. There are more in the works. Be Ready.
If things get ugly with the USA (and they will since Trump will need a scapegoat when his tax cut plan does not work because the rise in the USD will still make US goods too costly) China will simply put up the electronic wall and 30-50% of the money that was propping the USA/CAD real estate market will disappear at the EXACT TIME rates are rising, and commodities are seeing lack of demand. I am not saying that commodity prices won’t rise, the odds of that are likely as money shifts out of bonds into? Anything but bonds.
This will also be at the exact time that AI will begin to replace workers, who would work for jobs to pay for houses and we have Sub-Prime Auto and Student loans being exposed to a rising rate environment.
I call this the Weapon of Financial Destruction. For years I warned that I think the Chinese government is letting the money out to cause inflation everywhere, then, when it is conducive to them, they will pull it all back in. And here we are. This allows all other countries to be Lehmans, and it will hurt Chinese exports but they watched the US model of exporting debt, hit F12 on the computer to create a few TRILLION and let it leave.
Many people site that refugees are coming to make up the demographic issues and will work moving forward. Great… where will these people work? They won’t be because everything is going AI. EVERYTHING. These are all the entry level jobs they or your kids might get. Gone. This is the pension money to keep the ponzi on the front end to pay for the back end. Gone.
This is everyone getting spooked and saying ‘Let’s not draw down on our ‘credit’ but pay off debt’ and thus all that money? Gone.
Now we have the issue to pay for the refugees which is a tremendous cost. Say what you want or take what stance that you want. This cost is astronomical. Why does this matter?
BONDS. And now we arrive at the crux of the matter, the continued belief that ‘the BOC sets rates’ Well, they do do that. But they do not determine the appetite for debt. And if previous debt was paying at 2% and new debt moving forward will pay, say 5%, that means the 2% note MUST drop in price. So it goes from 100cents on the dollar to 95, to 90, to 80 and so on. Who eats those losses? WE ALL WILL.
This is where the pension crisis hits full speed and everyone gets caught skinny dipping as the tide goes out.
For seniors, the dream of selling their nest egg gets to be a smaller nest egg. They will have most of their money in government ‘safe’ debt, and they will get creamed for it. They will be looking for people to buy their house to open up that money… but too much student debt and “I think I will wait this out’ will stop that train.
Now, it gets ugly as governments move to jack up taxes in order to make up for the transactional transfer losses and the overall decline in economic activity. If you think they are not perfectly timing Carbon Taxes BECAUSE THEY ARE DEAD BROKE then watch this unfold. Now the costs of owning (property taxes) skyrockets to pay for? Bloated pensions and lack of sales taxes, transfer taxes. This decreases disposable income for owners and renters (who get those costs passed onto them)
‘Ha, I knew this was coming so I didn’t buy’ Congratulations, you will be stuck with the bailout bill when it all implodes.
You will also be stuck with paying higher interest costs on debt for your taxes and all else.
Because we are ? ____ Broke.
I will leave it to you to investigate your Municipal Debt, starting with bloated pensions that there was no intention to pay… that hold tonnes of government debt that will be rotated out of. We will see what is happening in Texas of lump sum payouts destroying returns. We will see Calpers in California go insolvent as each home owes $93 000 ALONE to California Pensions!
You can also look at household debt, Provincial Debt, Federal Debt…and, my favourite GLOBAL DEBT. Of course, all this debt is the reason why they are ‘all on board’ (as the environmentalists like to say) with carbon taxes. Oops, forgot to mention that will also drain liquidity and thus reduce sale prices for houses, cause businesses to lay off workers and that vicious cycle (which we are told won’t happen)
The sad part is? No one is talking about this. No one. Ask yourself… What political party has even once brought this up? Locally? Provincially? Federally? Globally? None dare say it in public.
How many pensioners are talking about this? None. They also believe that ‘government can’t touch my pension’ Right, like they didn’t pass laws to walk into your bank account and bail out banks… in times like these?
Those government pensioners will be stuck between the public and mathematics. THE MONEY WILL NOT BE THERE. IT IS ALREADY GONE IN MOST CASES.
The low rates used to ‘stimulate’ the economy, crushed returns. The hope is the stock market will keep rising (and it will) to pad returns. Problem? It will rise because EVERYONE will be selling bonds and going to stocks. OR they will be taking cash and going into stocks when governments start taxing bank accounts (you thought there was another reason they are going cashless) to force people to ‘invest’ in something. But they won’t go into government defaulting debt or real estate, but stocks, and for all those thinking stocks will crash (like I have been saying for 5 years they won’t) they still won’t crash.
There is a $10 trillion USD short position that needs to unwind. This will also increase the costs of goods for importers, or in Canada’s case, the cost of food, and these aspects of inflation, further erode liquidity.
So what are you saying?
We are in a giant mess with many things all converging on one point in time. Now and the next couple years. Many of you that have homes (like you said to me in the past) will STILL believe this is all impossible, and you will watch what happens. Remember, it is not about today, but where you think it will be when you sell. REAL ESTATE IS SPECULATION.
Wait until they start shoring MBS, CDO’s AGAIN (yeah, that never stopped, just went underground a bit)
So best of luck navigating this terrain to all of you. Sure, you may apply the negative label, but is is also the reality label. Your governments have NO CLUE what is coming and if they do, they are not telling you. Neither of which are good.
Look out for China to shut off capital outflows completely, Interest Rates Rising, Taxes Rising, Pension and Bond Crisis to emerge along with uncertainty and lack of confidence in the future to emerge. This, above all else, is the cause of price rises or decreases. You are watching governments fall because of lack of trust (which will come to the bond market) and lack of confidence.
You will watch the EU absolutely implode and this will set the stage for the next couple years. I am not here to influence what you do financially, consult a professional financial advisor for any decisions you make now or later. These are opinions and should be taken as so. Consider this as such and part of your overall view of these areas, but ALWAYS do your own research.
Next time you hear ‘STRONG ECONOMY’ from Clark or watch Trudeau hand out more BILLIONS for something, you will know the truth. Next time you hear that they are “all on board for Carbon Taxes”to save the planet from Carbon, but increasing LNG, Pipelines and all else. You will know the truth.
WE ARE DEAD BROKE.
Maybe when it all blows up in our faces, the people will stop with the ‘left right’ paradigm or fall for party colours or leaders to the promise land. It ain’t happening. This system was designed to fail and we are in the final stages of that. No emotion or doom and gloom required, just some simple studying of history and a calculator.
Save this link, I am happy to be proven wrong at a later date. It would mean a lot of things that are bad did not happen in the next 5 years, but it is virtually impossible they don’t.