Thursday, June 30, 2011

Capital Economics Predicts 25% Decline in Canadian Prices

Capital Economics (report subscription only) released a sobering report that predicts a 25% decline in Canadian house prices over 3 years.

Canada's bubble about to burst, research firm argues
By 2010, the average price for a two-storey home on a national basis hit $314,000, which was roughly five times the $58,347 average disposable income per person.

That is well above the long-term historical average of prices equalling 3.5 times average disposable income.

Basically, all the usual reasons. Growth in prices exceeds growth in all other measures, to record levels unmatched -- except at the peak of the last bubble, right before it burst.

Soft landing smackdown:
"In theory, the house-price-toincome ratio could adjust through a long period of stagnant house prices coupled with continued income growth," Paul Ashworth, a Capital Economics' economist wrote in a note to The Sun. "But when the ratio gets this out of whack, that's not how it happens in practice."
I gotta wonder what the question from the reporter was that triggered that. Heh. "Yeah, but we'll have a soft landing, right??"

"The world population is seven billion, climbing to 10 billion, and the planet isn't growing," Pastrick said.

"Something has to give," he added, which is the price of land.

Over the long run, Pastrick said he expects people will have to spend larger portions of their income for shelter in an increasingly crowded world.
News flash, Canada is running out of land. How can these people be taken seriously?

That will be the end of the rest of the economy then, Mr. Pastrick. Think about what you are saying for just a half a second, for once. If everyone sinks all their money into housing because their isn't enough land, then they are already spending that money on food because there will already be a shortage of that, and there will be no resources left for business development, so the entire economy will have to adjust downward on every measure of quality of life. Based on your logic, one would predict Bangladesh to have the most expensive housing in the world.

Fortunately for Canada, and the U.S. too, there is no shortage of land. There are periods of excess credit growth, however. That alone drives house prices. Want more affordable housing? . . . cut down the credit growth. The housing bubble is merely a manifestation of the credit bubble. Period.

Shortage of land. Aye.

Note, the article closed with the shortage of land yahoo. Not an accident, that.

1 comment:

Tina said...

I always wanted to ask how & if Economists invest & what their portfolio is like. What's their ROI like? If a weather man can't predict the weather accurately for more than 7 days with all the technology, what makes those guys able to predict ANYTHING for years to come. 3/4 of their prediction never accurate. Many of them don't even know what is happening in another part of the world because they simply never been there. Australian Foreign Minister is going to quit his job when his post up at the end of Aug & decide to stay in China as a biz consultant. Macdonald is rich not becuz of selling their burger. They simply own real estate. I never like a single entity dominate anything cuz it is dangerous but when China n India has the most population in the world. Try to compete with them simply something the Western world is not capable to do. All countries leader around the world would like to protect their own residents but at the same time, it's also nice to have foreign money to invest in the local economy. Can't have the pie & eat it too! There will never be a perfect solution...

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