The mantra of the last decade has been reward speculation and punish prudent behaviour. Imagine you are back in 2003 or 2004 and you are thinking of buying. Your parents taught you to be prudent and so you are quietly saving up a good down-payment, denying yourself nights out, fancy cars etc.
Meanwhile the property market is in a parabolic up-trend whether you are in Vancouver or Toronto. So you wait. Everything that goes must eventually correct. You wait patiently. But the Federal Government Ok's longer mortgages. So property takes flight at a steeper rate. You just wait, keeping your powder dry and saving your nest egg in conservative interest bearing stuff.
You see the housing bubble in the US start to burst in 2005 and by 2007 it is in full retreat.
The whole world goes into an orgy of speculation, egged on by the likes of Greenspan and Bernanke and in 2008 the orgy of debt finally bursts.
This is your moment. This is when your hard saved up pennies will finally be worth something. Wrong!
The Federal Government goes crazy- doubling the CMHC and allowing them to under-write a ruinous amount of risky mortgages. Meanwhile the Bank of Canada drops rates to near-zero. The Provincial Government backs the Credit Unions regardless of the risk on their books and the Federal Government takes car loans and second mortgages off the books of the major banks.
RESULT: RE has a tiny correction, blink and you missed it, and you are now left getting LESS than inflation on your savings. All to bail out the irresponsible.
This does two thing to the psychology of the nation.
1) It tells the buyers left, that the Government will not let RE drop.
2) it tells speculators that they will always be bailed out, no matter how over-extended they are. Once it hits the fan, the Government will load the risk onto tax-payers.
We then get a huge rebound in prices and the prudent are completely screwed. HAM money, Olympic money, Government subsidized spending etc add to the fire and prices go parabolic. All the time, interest rates are held sufficiently low, so that all savings whither away. The message is..buy something, Anything! Gold/ RE/ Stocks anything but hold savings in safe bonds.
The final play in this saga.
The graph goes STRAIGHT UP. There is panic buying. The Governor of the Bank of Canada and the Finance Minister lecture Canadians about their lack of savings and irresponsible borrowing!!
They decide to remove the most irresponsible lending but give enough lead time to allow the last push into tax-payer risk-assumed mortgages.
Possible end game
The property market finally drops under it's own weight or is driven down by inflation and higher mortgage rates. The Government panics and once more finds a way to try and bail out speculation by making mortgages tax-free, or providing direct support to banks, or printing money to pay the CMHC debts (as in the US) and finally destroys any equity the prudent may have left.
Thanks to Larry Yatter for permission to use his chart.
