Please post your comments below!

One way that home prices can increase, is to have Canadians assume larger debt. Although, as mentioned above Canadians are approaching all-time levels of debt, and the only way to assume more debt is to increase their incomes. Increasing incomes during global financial turmoil and a period of high inflation is meek at best. Perhaps salaries of government employees and some private sector jobs will rise, but most jobs wont and will probably stagnate. This situation is clearly unlikely to provide strength for home price increases.

Another way for a home price increases, can be done by further decreasing interest rates. Interest rates as of today from Bank of Canada are 1%. Yes interest rates can go marginally lower, however, this policy would be artificial and would require government intervention in the markets. While we can follow suit of this situation, as the Americans have. The long –term effects of low interest rates will undermine the economy with its malinvestments from an artificially low rate and will only “kick the can down the road” as rates return back to normal.

A third way that they can increase home prices, is to create easier credit with the aid of federal and provincial corporation i.e. CMHC. Although, the current minimum requirements for CMHC insured mortgage is 5% down. We can technically lower this to 0%, however, I believe that this will backfire and will create political suicide. If they want to try expanding the Canadian Housing Bubble, they must do covertly without anybody noticing it. This situation to lower credit terms again is unlikely.

A last way the housing bubble can remain on track would be to increase foreign capital into the Canadian Housing Market. For instance, Asian’s has greatly influenced the Canadian Market, especially in Vancouver where home prices are roughly 11 times average household income. Similar to Hong Kong and Sydney. Can this trend continue with additional foreign capital entering into the Canadian market? Yes, however, if there is a slowdown in Asia, we can see this foreign demand dry up.
Please tell me what your thoughts are below.

How far up did Canadian Real-Estate market go?

The Canadian Real Estate Association, issued new figures on Monday showing that Canadian home sales rose 2.5 per cent in March, and the average Canadian home sold for $369,677 last month. For a more indepth look at Canadian home price evaluation see here. That means the average Canadian home price increased 130% since 2000. On the south side of the border, the average home price at its peak increased to approximately 65% from year 2000. The Canadian housing market price average actually increased double the amount when we compare it to the United States.

Who is responsible for this increase?

I would argue, Freddie, Fannie in the US and Canadian Government-owned CMHC. Also, other local programs like Access Condo from SHDM. CMHC alone, insured $541 billion in mortgages as of Sept. 30, an amount equal to 31 percent of Canada’s annual gross domestic output, as home prices climb and construction expands. According to Bloomberg, In 2006, when U.S. home prices peaked, their equivalent ratio was third of their economy.
Other factors contributing to the price increase

China and other wealthy Asians have also increased the price evaluations of real-estate in Canada, as shown on my earlier post Purchasing Canadian Real estate by Helicopter. However, this investment is far more based on speculation than on fundamentals. If an Asian slowdown were to happen, an important factor contributing to Canadian real-estate would also be unfilled.

Result of the Home Price Increase in Canada

According to the globe and mail, Canadians now have a debt-income level ratio of 151%, similar to one the United Stated has before their crash. The artificial low borrowing cost and easy credit through federal and provincial programs much incentives this boom in the Canadian real estate market, and now Canadian are at an all-time high in terms of debt.

Will the housing bubble burst in Canada? Please post your comments below.

When interest rates are low, money is cheap.  Cheap money provides incentive for speculation and punishes people who save. For instance, low interest rates provide the incentive and the means for people to purchase a new home because their mortgage would now be much cheaper than before. This puts extra demand in the real estate market and pushes evaluation up.

What is so difficult to grasp is that this growth is artificial; it emerges from a suppression of low rates by central banks. This policy is a boldly inflationary and this “new” growth is caused at the expense of savers who experience a great reduction in purchasing power. In other words, there is subtle transfer of wealth from the savers to the debtors.

Remember that there is nevertheless a temporary increase in activity in some sectors when interest rates are lowered–predictably, in construction and real-estate. This cheap money is used to expand their business operations or for individuals to buy a house. Since we live in a world with finite resources, interest rates cannot be lowered indefinitely. Something has got to give, and the longer that interest rates are artificially held down, the more inflation is created. The result? The need to increase interest rates much higher at a later date, or suffer hyper-inflation.

Another point revolves around currency appreciation. When a currency starts to appreciate against the U.S. dollar, this causes tension for the later local economy, due to setbacks in their higher exports prices. If exports cost more, this will hurt the local economy: production will decline, an eventual repercussion of which is a loss of jobs. To alleviate this situation, central banks lower rates to help devaluate their currency against another currency to make exports cheaper and to therefore stay in business. By central banks playing this self-serving game, currencies become a race to the bottom. In this scenario, the saver is again the loser by the inflationary policies caused by central banks.

Whether the purpose of central banks lowering interest rates is to increase economic activity, boost exports, or to lower their own borrowing costs, the end result is inflation. In inflationary periods, savers become losers as they end up paying for this artificial stimulation through a loss of purchasing power. Governments prefer this rout of inflation due to the fact that it will get them re-elected, while, if they would do the right thing, by increasing the interest rates to reward the savers, this would be political suicide and cause major economic setbacks and probably mass deleveraging, during deflation. Although, this deleveraging would be the cure to a sick economy, as it sets prices back to equilibrium, and removes any froth from an excess economy.

Let’s look at the Canadian province of Quebec: in order to work in the construction industry in Quebec, you must be unionized and have your trade association cards to prove your work competencies. In other parts of Canada or in the United States, because no union membership is necessary to work in construction, there is clear, direct translation in the price evaluation of real estate, something not visible in Quebec.

Home prices are significantly lower in Montreal than the rest of western Canada, notwithstanding the fact that Montreal is the second most populated city in Canada.

The more government regulatory bodies that exist to control the industry, the more of a burden it is for the taxpayer to support; as such, high taxes are needed to sustain its continuity. Increased taxes directly translates into less disposable income–income that could potentially flow into the real estate sector. More tax outlays also means less for rent payments. The apartment rental market is a free-market: people choose where they want to live, and the most basic consideration is rent. There are, therefore, limits to the amount that a landlord can charge in rent, and therefore, there are limits on property evaluations.

Montreal also has the lowest income levels among the above-mentioned the cities; again, this is mainly due to the city’s excessive regulations and size of government. The typical Montreal taxpayer foots the bill for countless government jobs that are either inefficient in purpose or, less subtly, simply provide little or no real value.

One such example is the role of the union administrators. Are their functions intrinsic to the successful running of the Quebec construction industry? No–and nor do they exist in the rest of the Canadian constriction industry. How about for the workers themselves–do unions positively affect their salaries? A popular anecdote of the past decades is of the many men who have gone to Alberta for construction work in order to pay off their debts.  It would seem as though even the workers’ salaries are buoyed by a lack of unions.

The extra costs that investors and home owners must pay to cover the charges for the benefits of the construction worker come out directly through real-estate price valuations. The price of a home or income property in a given place will be affected by whether it was created by unionized or non-unionized labor. The more unions involved in an industry, the higher the taxes and dues that must be paid to support it, and therefore the lower the amounts people can outlay for their homes. In the end the local economy as a whole suffers from excess government inefficient jobs that taxpayers have to support.

Depending on the current environment, fundamental factors, and market sentiment, bull markets can be created in many different asset classes, ranging from real estate, equities, commodities, and so on. Money is always flowing somewhere, and will never change. If money would stop flowing then economies would stop growing, as new capital is not providing the means for new production. There were times in history where real –estate did not move for decades, while other asset classes had enormous returns. You have to be on the ball with the investment game and never lose sight of what the environment is like to make smart financial decisions. Increasing your education in economics and finance, can help you have a better feel what is most likely going to do well as an investment for the decades to come.

What I also leant is that energy also follows that path of least resistance. When interest rates where lowered in 2001 after the tech bubble crash, money started flowing into Real- estate. Real estate is a tangible investment that most people understand and know the business with little effort. Real –estate is real and is an asset that you can touch. What also lit the explosion of new money entering into the system besides low interest rates was aided by government corporation (Freddie Mae, Freddie Mac) and in Canada: CMHC. These corporation, with the purpose of lending unqualified home-buyers liquidity to purchases homes. In this event, extra demand was in the market chasing a supply that could not keep up with the extra demand created from government corporations. When governments get involved in a investment market, to entice more people to enter the market this create artificial demand and therefore, bubbles. Bubbles like balloons have a limit to their elasticity. When they pop the consequences are disastrous as home values drop to more realistic valuations. A lot of money can be made by investing in bubbles, however, a lot of money can be lost as well. People that make the most money in bubbles are the ones with insider information.

On the other hand, bull markets are formed when the fundamentals for a given asset improve. Although, there may be some short term corrections which shake out the weak investors. Ultimately, short correction are out-lived and bull market continues, especially if fundamentals improve. For instance, gold has been in bull market since 2001. It began in 2001 at $250/oz and now in 2012 it is hovering above $1700/oz, close to a 600% gain. In other words, if your wealth was tied up into gold for the past decade, you would have seen a 6 fold increase. The irony, is that most bank advisors and mainstream nullifies this investment and regarding it as a bubble. As we seen above inorder for it to be a buble, we must see mass panic and/or artificial government stimulus. He have neither in this market.

Yes you can make money in real-estate and other investments; however, in general over the last decade you have lost money in terms of gold if you were not invested in this market. Historically, when gold is in a bull market the Dow Jones/gold ratio meets at 1:1. We are far from this.

Also, our governments may decide to create another round of stimulus during the first half of 2012, to counter-act these negative forces in the markets. However, In hindsight the negative market should be embraced as assets prices retract back to their equilibrium from the excess liquidity.

A second reason for the prediction of another quantitative easing package is due to the American 2012 elections this November. As a policy to create optimism and regain some consumer confidence in the markets, money printing will be created. This policy essentially pushes the can down the road again, and creates an even bigger problem when it comes due. If this event does occur, interest rates will remain low, and therefore, most assets prices will continue to inflate i.e. stocks, real-estate and commodities due to money being cheap. On the other hand, currencies (paper money) will re-trace their long-term downwards trajectory towards to the bottom. In this situation, the presidents are looked upon as favourable candidates as he helped move asset prices up (at the expense of a weaker dollar) and to the majority of the people will take this as favourable as most can-not see the direct impact to their savings in the bank.

So what does this translate in the markets?

1. Gold will continue to be an attractive investment, I expect gold to re-test its 2011 high of $1895/oz and consolidate. I also expect an upward move to $2000/oz, although, it will be faced as a majour pshycological barrior. However, I do expect gold to be hovering above $2000/oz by the end of 2012.
2. Silver will also be an attractive investment, and I do expect silver to be the one of the best preforming assets of 2012. Silver should out-perform gold in 2012. Silver will most likely re-test its high of $48/oz and consolidate. I expect silver to be hovering above $50/oz by the end of year 2012.
3. Oil I believe will do marginally good this year, however, nothing like in 2011. I expect a final oil price to be at approximately $110A barrel.
4. Dow Jones I expect this index to make a comeback this year 2012. However, in terms of gold it will still lose. I expect the DJ/gold ratio to continue to decline and possible reach 7:1, therefore, may reach 14000 by the end of the year.
5. Other Commodities should also do good in 2012, expect for natural gas.
6. Currencies I expect them to continue their downwards trend. However, commodity countries i.e. Australia, Canada, Brazil, should do ok.
7. Bonds  will probably be net losers after inflation.
8. Real estate(rental properties)  Should also do marginally ok as an asset (in general) However, I expect real estate to perform better in commodity rich areas.

At the end of my predictions, the only asset that I personally do not want to be in is cash or bonds. 2012 will not be a year of “cash is king” please refer to my previous article about fiat currencies for more info about paper money. As inflation wipes out the saving of most, people that are in the know should safeguard their investments in tangible asset that are inflationary hedged, and this will most likely preserve their wealth. As there are no guarantees, and the above predictions are made according to some kind of stimulus package, if the reverse where to happen, we would most likely see the risk off trade (bonds, cash etc.)

The destructive nature of quantitative easing programs are clear at the macro level. At the micro level, however, such programs clearly do benefit some portions of society, and largely at the taxpayer’s expense. The burden of extra money in circulation is left on the taxpayer as extra debt is assumed. Precisely because this debt needs to be payed back with interest, additional revenue from the government must be created in order to offset the higher interest payments. The result: government must grow and the private sector must shrink accordingly. Real growth in an economy requires the elimination of superfluous government programs and unnecessary taxes. Let the free-market decide where capital should be invested, as it is a proven source of sound money and efficient economics.

When the allocation of capital is left largely in the hands of government, great tragedies occur. Let us examine one instance of how a set of government programs and policies can undermine an entire economy: the example of education. Government corporations like “Sallie Mae” (SLM) have given the carte blanche to banks to loan money to students, qualified or not, because the government provides a kind of insurance policy should these very students prove unable to repay their loans.

Through Sallie Mae, the government has created a situation where students, who should never have been given such sums of money based on their probable inability to repay their loans within a reasonable timeframe, were lent money; these very loans are insured by the government, so that Sallie Mae takes little risk. With this ‘free’ money, students can continue to attend the universities of their picking. With such a constant flow of eager freshmen every year, the universities feel no need to take a closer look at their overinflated tuition rates; in other words, these new loans pave the way for artificial stimulation into college tuitions. The stimulation which, if these government corporations did not exist, could never have been.

The real-estate bubble has bursted; the college tuition bubble is next. Many victims of this government-insured scheme in America are mostly young Americans who have graduated with debt levels almost unimaginable and largely unrepayable for a multitude of reasons.

The financial leaders given credence by the media promote the continuing printing of money and produce destructive economic policies that benefit few. On one side of the coin, the positive side, students are going to college and being educated; a lofty aim, indeed. But on the flip side–and this is the side hidden from the public gaze–there is the problem of severely artificial stimulation in college tuitions, rendering it increasingly expensive for fiscally realistic students to go to college and thus, creating a vicious circle of more demand for such student loans.

In the end, these government corporations which should, theoretically, be helping students, are actually causing inefficiencies in the market, creating a massive bubble which, should recent history serve as our guide, will inevitably end in a crash.

If individuals do not have a good credit rating, they should not be lent money by the banks. Worse yet, governments should not be acting as their guarantors.

All individuals should be accountable for their mistakes and be reprimanded for irresponsible financial decisions; individuals who are not in a position to attend expensive (read: overpriced due to artificial stimulation) universities should not be given free rein to capital from government-backed loans; otherwise, this ultimately shifts the problem to the taxpayer in the event of default.

Of course, while the immediate responsibility lies with the individuals who have eagerly sunk their teeth into their piece of the university pie, the higher accountability rests with the government which, through false hopes, ephemeral illusions, and irresponsible policies, have led the believing public in such a downward spiral.

Sallie Mae is a government-made institution, designed “for” the people; and anyone who has partaken in its services was following a course set about by this higher authority, the government.

Before any polices are carried out, economic reasoning should be examined for all groups. Due to the short-sightedness of many of our leaders, however, when a policy is seemingly working for one group within society, they think that if it creates a “good” for the group that they are targeting, then it is good for the whole economy. The repercussions of their actions not only on the rest, but also on the group they are supposedly helping, are not carefully examined beforehand. This fallacy is what destroys any real economic growth and creates future problems in an economy as a whole.

In the United States, money is printed by the Federal Reserve Bank. In exchange for this newly created money, the “Fed” purchases government bonds and/or other financial assets. This allows interest rates to remain artificially low.

The Fed can also print money in order to pay off existing debt (ie. monetizing government debt) or to finance government projects. In all of the above situations this leads to inefficiencies in the market and only worsens the current situation.

Money printing increases the supply of money, which in turn lowers the value of the currency. This is the catch: since the value of your money is lower, you now have less purchasing power, and the end result is higher prices for practically everything. In other words, money printing is the root cause of inflation. The prices of goods are not technically rising; rather, it is the value of the currency that is falling, and this creates a situation whereby more paper money is needed to buy the very items that could have been bought previously with less paper money.

The news media work in tandem such that it becomes very difficult for the average person to connect the dots: most people truly believe that their governments are spending money rationally and responsibly.

At the time I’m writing this, the national debt of the United States stands at approximately 15 trillion dollars (100% of GDP). It is currently the largest debtor nation ever recorded in the history of the world. Will there be another round of economic stimulus, expanding the national debt even higher? There’s a very good chance. As the stock market typically acts as a forward indicator for the economy, the Dow Jones Industrials Index is currently down one percent (-1%) for the year 2011. The S&P Index is down seven percent (-7%). Market indices are negative for the year and they need fuelling power to stabilize and gain strength in the markets.

If stimulus money can be likened to drugs, then the drugs from QE2 are dying off, as they officially ended in June 2011. New drugs will be needed to fuel the stock market or else risk further decline along with the rest of the economy. At this stage, the markets are like a drug addict, and right now they are feeling low. The markets crave the effects of the drugs; they desire it. If more money is injected into the markets shortly, stocks will most probably stabilize and gain strength again, as the markets will feel a “high”. November and December months are historically well performing months for the stock market, although, this is not apparent in today’s markets, due to the low “drug level” at the moment.

If QE3 does happen, it would most probably happen during the beginning of the first quarter of 2012, when markets are historically weaker.

In order for a drug addict to come out clean, he must stop taking drugs, plain and simple. However, that is usually not the case, given the difficulty of such a task. The addict will need to feel the “pain” of the withdrawal and eventually he will accustom himself to a normal and healthy lifestyle. The economy, just as any another drug addict, needs to feel the “pain”: this means more jobs will be lost and the corrective recession will continue. Companies with failed business models will fail and should be taken over by companies with proven and efficient models. In this situation, sound money is restored and jobs will eventually grow in the private sector.

Every time money is printed by governments, it grows the size of government. This results in a smaller private sector and makes it much more difficult for the private sector to create jobs, and grow the economy. Again, because of how the media portrays the functioning of an economy, most people cannot connect these dots as well, and see stimulus money as the only solution to a better future, and thus, the current negative drifting markets will most likely lead to another quantitative easing package in the not so distant future.