Policymakers and economies face a similar challenge globally. After the 2008 meltdown, short-term rates were intentionally suppressed to incentivize credit growth and consumption at the expense of savers and productivity-improving investments. Now, we are paying the longer-term costs of those short-term focused choices.
As debt and unaffordability weigh on spending and employment, excess capacity and supply increasingly weigh on inflated prices. Central banks have started easing, but changes take a couple of years to filter through the economy.
In the meantime, risk assets, including real estate and equities, typically decline while policymakers do everything possible to ease financial conditions. Historically, the harshest recessions and job loss cycles have been led by downturns in real estate. Word to the wise.
Vancouver’s real estate market is overrun with high-end condos partly due to the collapse of China’s housing market and a lack of foreign investors looking to buy in Canada because of additional taxes on investment properties. Here is a direct video link.
Building hundreds of thousands of homes annually is one of Ontario’s most pressing priorities, however, the construction industry has been in a slump – thanks to a perfect storm. Here is a direct video link.
And while long-always capital has been rotating out of big tech into financials this month, that trade’s likely to prove less defensive than many think. Losses in the banking system are yet to be accounted for as lenders move through the messy and expensive process of eviction, collection and write-offs. See Here’s how Canadians could walk away from their homes if house prices fall:
While mortgage rules in Canada differ by province, all are full recourse with the sole exceptions being Alberta and Saskatchewan in situations where borrowers have not purchased mortgage default insurance (such as from CMHC). Where full recourse rules apply across Canada, lenders are entitled to pursue mortgage shortfalls in civil court under normal lawsuit provisions. So lenders file a statement of claim against a delinquent borrower, obtain a judgment, and then get an execution order to enforce the judgement to recover their losses. Case closed, lender made as whole as possible.
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