Friday, November 18, 2011

 

THE BURST BUBBLING UNDER THE SURFACE

Unrealistic mortgage rates and super-inflated home prices imploded the American economy in 2008, and despite what the politicians would want us to believe, it's an economic disaster from which the United-States (now saddled with a $15-Trillion national debt) may never recover.

Now, as the Euro-Zone's economic Titanic sinks below the water-line, a cynic from 'across the pond' remarked sarcastically this week that the only thing keeping the U.S. economy afloat these days is that it's owned by China: Alas! I digress.
Handyman fixer-upper - Not cheap!

I note with a certain level of of dread and apprehension the monthly (October) report of the Canadian Real Estate Association which now pegs the average price of a Canadian home listed and subsequently sold on the MLS service at $362,899 - an increase of almost 6% since October of 2010 - Clearly we too north of the border are being lulled by unrealistically cheap credit which is bloating housing prices substantially beyond their "real" value. And as (inevitably) that wave of bad credit and worthless debt from overseas eventually crashes upon our shores; credit rates will rise, over leveraged mortgage holders will fold, housing prices will collapse - Well...just look south of the 49th parallel for the rest of the story.

The international Organization for Economic Co-Operation and Development (OECD) has already singled-out Canada as a country facing significant challenges from our steady climb in consumer debt. Experts note that with the Canadian and U.S. economies so closely linked to one another, what happens in the United-States has a significant impact in Canada.

Recently, OECD's concerns motivated Pacifica Partners, a Capital Management business based in Surrey, B.C.,  to take another look at the "Misery Index", a tool which faded from the political discourse during the economic halcyon days of the 1980' and 90's.  In the 1960's, an adviser to U.S. President Lyndon Johnson came up with the idea to measure the general economic hardships felt by the masses. The "Misery Index" is calculated by adding the unemployment rate to the inflation rate.  Pacifica Partners believes that..."with rising inflationary rates and stubbornly high unemployment rates in both Canada and the the US, this index may be more relevant than ever." - The "index" calculated currently for ordinary Canadians isn't anywhere near the "gleeful experience" we have been told by bankers and (especially) politicians that we are experiencing.

Pacifica Partners concludes that the Canadian Misery Index..."has stealthily marched higher after hitting a low in the first quarter of 2008." Fueled by unemployment, inflation and cost of living,  "misery" has risen sharply to levels above the psychological level of 10%. South of the border, Wall Street's recovery may have brought back the market for mansions in the Hamptons, on Long Island, and for luxury co-ops in New York City. The "real" reality Canadian homeowners could be about to face is pretty much that with which middle-class Americans have been dealing for almost 5 years.

In the housing market inhabited by most Americans, prices have fallen 30% or more since 2007. That is a steeper decline than during the Great Depression. Some people have had their homes on the market for over a year without a single offer. Almost a quarter of American homeowners owe more on their house than it's worth. Another quarter have less that 20% equity and about half of all U.S. homeowners could not get a mortgage if they applied for one today.

Not very pretty, but a reality far too many over-leveraged and mortgaged Canadians may be about to encounter.

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