Good Timing! Financial Times Affirms the Canadian Real-Estate Bust
By Anthony Wile - January 18, 2014

Looks like we interviewed Seth Daniels at just the right time.

Since his comments on Austrian economics and the coming Canadian real estate bust, several other articles have come out making similar and even more emphatic points. Below, I'll present some of them.

You can see Seth's interview here: Seth Daniels on Austrian Economics, Central Bank Disasters and the Coming Housing Bottom.

The Canadian housing market is headed for a significant bust, in my view. People will lose a lot of money. But those who understand and are properly positioned may gain fortunes.

It's going to be a repeat of the 2008 mortgage bubble deflation. Only it's happening to the north.

This is just what happened in the 1970s. During that decade-long golden bull, housing prices went up and down before going down hard as interest rates rose. We're still in a golden bull market, no matter what anyone says. Just as in the 1970s, this gold and silver bull market needs to run its course. But that hasn't happened yet.

Some say it won't, but the modern bubble economy is punctuated by blow-offs. Gold and silver never blew off. They went down due to manipulation, some say. That sounds close to the mark to me, though certainly gold was due for a correction after such an extraordinary rise.

In any event, the distortions of this market are manifest. The cycle hasn't turned but the top elite bankers running the central bank money machine are trying to pretend it has.

They are trying to set up an additional Wall Street Party to take the stock market even higher. Through excessive money printing, changing the configuration of regulations to make pre-IPO advertising more prevalent and even depressing the price of gold, these elites seem determined to keep stock prices headed up.

But you can't fool mother market. Here at The Daily Bell, we've pioneered VESTS, an investment strategy that seeks to analyze the dominant social themes of the elite within the context of free-market economics. Using VESTS, it's obvious that the Canadian housing market is overbought and heading for a significant crash.

The ebullience of the Canadian housing market is part of a larger phenomenon of asset inflation that we've been reporting about under the guise of the Wall Street Party. Banking elites are inflating around the world and packing the IPO pipeline with "green" offerings as part of an effort to get the global warming promotion back on track.

But that has had a spillover effect on the art market, on commodities and, of course, on housing – especially in Canada where there are already a number of asset bubbles.

We're not done with this golden bull cycle, in my estimation, though the elites attempting to control this business cycle have certainly done what they can to crush it. Instead, they've just extended it.

As we have written previously, Austrians don't believe in technocratic forecasting, but business cycles are in a sense predictable because the entire economic environment is structured via central bank money printing.

It is this artificiality that makes Austrian economic forecasting viable – that and broad, historical patterns. Housing is volatile and as we saw back in 2007 and 2008, its deflation can precede a stock market crash or even precipitate one.

Even more interestingly, the 1970s show us that in a golden bull, housing prices can go up fast and then come down just as fast, especially when interest rates start to climb. It is more difficult to figure out the timing of a turning market. However, this golden bull started early in the 2000s and will eventually create an asset mania that can only be punctured by raising interest rates.

I'm not alone in perceiving this. We recently interviewed Seth Daniels who has set up a hedge fund to take advantage of the eventual implosion of Canadian housing prices. Daniels was just quoted in an article about the Canadian real estate bubble – and its eventual demise – posted at the Financial Times.

You might be surprised that such an "insider" newspaper would cover the doom and gloom of a housing bust. But to me, that's a telling sign. The establishment will cover negative economic trends, but only when they are seemingly unavoidable. The Financial Times coverage can be seen as a kind of confirmation that things are pretty bad.

Here's Daniels's quote in the article:

"The US has been printing money since 2009 and it has helped set off a series of echo housing bubbles around the world – Canada is only one of the echo housing bubbles," says Seth Daniels, adviser to a new short-focused fund in Toronto. "If the US tapers QE, it could set the process in reverse and trigger the collapse of these echo credit bubbles, including Canada."

I'd go a step farther and say that it doesn't matter whether or not the US "tapers." Sooner or later, the current asset bubbles are going to collapse. The question is twofold: "When?" and "How far?" We can't answer the "when" exactly – but we can certainly speculate when it comes to the Canadian housing market that the "how far" may be deep indeed.

That's because crashes often reflect the inverse of the ascent. And the Canadian housing market has climbed very far. Here's more:

It is easy to see why hedge funds are licking their chops. In the past five years, while other big developed economies have been suffering through the financial crisis, the average Canadian home price has risen 38 per cent to C$389,119 (US$355,000), according to data from the Canadian Real Estate Association.

This has been driven in part by Toronto, where a condominium boom has driven prices to record highs. At the same time, Canadian households have been on a debt binge fuelled by easy bank lending, low interest rates and government-insured mortgages.

The household debt-to-income ratio rose to a record 163.7 per cent in the third quarter, close to the US peak of about 165 per cent on an adjusted basis. Many of the investors and economists sounding the alarm about Canada's housing market are veterans of the US subprime crisis.

They include Mr Hanson, the analyst, Steve Eisman, an investor, and Nouriel Roubini and Robert Shiller, the economists. Whether they will be right a second time is the source of a heated debate on both sides of the border.

These sorts of numbers have placed Canada in a kind of investment red zone. In fact, the article goes on to explain that once [Canadian] banks start to show credit deterioration, short-selling funds will "pile in," turning a credit decline into a credit catastrophe that is part reality and part self-fulfilling prophecy.

The article points out that one has to make these bets while there is still some level of uncertainty.

"That usually means that your price opportunity is gone. You need to act before things are entirely 100 per cent certain," Says Vijai Mohan, fund manager at Hyphen Fund Management in San Francisco.


And the article inform us that, "One of the biggest concerns is the duration of Canadian mortgages because Canadians refinance once every five years instead of once every 20. There is little doubt that Canadians who borrowed in the past few years of low rates will pay more at their next refinancing … At some point interest rates are going to have to rise and it's going to be a shock to a lot of Canadians."

During our interview with Seth Daniels we heard much the same kind of talk.

Daniels is a Managing Partner at JKD Capital, LLC in Boston, which is providing analysis and research on the Canadian market for Spartan's Libertas Real Asset Opportunities, a fund allowing Canadian investors to hedge against a housing slump.

Here's an excerpt from one of his comments:

When the credit bubble pops, Austrian theory implies that it will have widespread fallout as the malinvestments are cleared – even to those areas that did not see significant home price appreciation. In the U.S., it was frequently argued by non-Austrians that "real estate is local", and that a national housing bubble was therefore an impossibility. I frequently hear the same argument about Canada today.

Many parts of the United States did not see a significant rise in house prices. But the areas that did have a bubble – the coasts, Arizona, Las Vegas, etc. – were sufficient to nearly collapse the global financial system. … Canadian home ownership rates, housing unaffordability, household debt and use of HELOCs meet or exceed that of the US at its peak in 2006-2007 … At the same time, the Canadian regulators are now reining in credit availability: The B-20 rules governing mortgage underwriting were revised to be more stringent over the summer,

CMHC will begin levying a "risk fee" and CMHC is approaching its statutory balance sheet limit. If banks were forced to underwrite mortgages without government insurance via CMHC, mortgage rates would rise to reflect their true risk. The foregoing and future policy actions should decrease the pool of potential new buyers on the margin, which will cause asset prices to begin to fall as credit becomes less available, and the entire process goes into reverse – the bust phase of Austrian business cycle theory during which time the market clears the prior malinvestments.

Even without pinpointing the actual mechanism, it is certainly true that sooner or later the current boom – as all other booms – will subside, probably more violently than not.

Independent analyst Pater Tenenbrarum, writing at Acting Man, recently covered just this point in an overview entitled, "Carney's Legacy: Canada's Credit and Housing Bubble: How Long Before it Bursts?"

Current BoE chairman Mark Carney is widely hailed as some sort of central banking superhero due to the fact that Canada did not sink beneath the waves during his tenure. We say he was nothing but an unmitigated inflationist, whose legacy is one of the biggest housing and consumer credit bubbles in history (global history that is, not just Canada's).

The result of this will be a bust of similarly historic proportions, the only question that is open is the timing, which cannot be foreseen with any degree of certainty. What is certain is that this house of cards will eventually implode.

This is not just some wild assertion that cannot be backed up. The proof, as they say, is in the pudding. Of course, Carney was no different from other Canadian central bank governors in that respect, but money supply growth was significant during his reign (and credit growth along with it).

What is not obvious to us is in what respect he was deemed to be 'better' than his predecessors. He simply continued to aid and abet more monetary inflation.

Tenenbrarum helps put the tremendous growth of Canada's asset (not just its housing bubble) into perspective:

In conjunction with this explosive money supply growth, mortgage credit, housing prices and consumer debt have shot up to never before seen levels, both in absolute terms and relative to various benchmarks such as Canada's economic output and personal incomes.

Real estate prices in particular have risen enormously relative to rents, which is always a sure sign that one is looking at a significant bubble. In fact, when measured by this yardstick, Canada's housing bubble is now by far the biggest in the world …

If all these bright people can see what's going on, why can't the upper echelon of Canada's economic class, including bankers, economists and realtors? These pundits once again – as 2014 stretches ahead of us – are populating the airwaves with assurances that Canada's housing market will continue to boom.

"In Canada, there is currently a lot of misguided optimism about the housing bubble's durability, no doubt due to the fact that it has kept growing with nary an interruption for so long." Tenenbrarum explains. He cites an enthusiastic prediction from the Canadian Real Estate Association right after it was reported that house prices reached a new record high.

"They confidently predicted a strong year in 2014 … [But] if 2014 indeed turns out to be a strong year, the same prediction will be made about 2015, and this will continue until the crash."

While this may seem a somewhat negative assessment, Tenenbrarum is correct. Trees never grow to the sky, as Jimmy Rogers is fond of saying, and booms inevitably give way to busts.

It may be a little difficult to predict the "when" of the Canadian housing implosion, but I can say with some certainty that, given the coverage its been getting, our instinct in raising the issue was timed correctly, and we'll continue to cover it.

There's a lot of money at stake and sooner or later these asset deflations are going to make some speculators wealthy indeed.

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