[james4beach]

I think Kyle Bass does some very nice analyses, and in this recent talk he references Canada, in particular real estate. He thinks Canadian real estate is unsustainable, and a slowdown in China is going to hit us hard in the next 12 months. Skip to 35:30

http://www.youtube.com/watch?v=VBPZ58dzjfE

Transcript below. Emphasis is mine

China is slowing down much faster than people think it is ... One of the potential butterfly effects of China is Canada. Everyone thinks Canada is a nation that is extremely prudent in their lending practices, and that it's very natural resource rich and doesn't carry many debts. Canadian household debt to income is now 100%. It's higher than the US. Canadian home prices are now, on a median, 9 times median income. Does anybody know where US housing prices got (median home price to median income) at the height of the subprime bubble? It hit 7.

Where Canadian housing sits today is completely unsustainable. The question is, if China slows down, what happens to the resource areas of Canada? One is mining, one is energy. You look at the forward curve for energy. The crude curve is so backwardated ...

All the prescriptions for a problem in Canadian housing are out there. We're starting to see inventories build very rapidly. When you look at these equations the brokers put out, they give months of inventory. Two variables, one is inventory, two is the velocity. So you can't look just at the months, you have to look at the aggregate inventory and how long it's taking you to sell them.

It sure looks to me like all of a sudden, Canada is coming to a halt. Volumes are drying up. 9 times median income. I don't know when Canadian housing breaks, but if we're right about China, in the next 12 months it's going to be a real problem. There are similar scenarios to the US housing problem that exist in Canada. They're not all the same, but there are some similarities that are worth paying attention to. If you're looking at Canada, I advise you to be extremely cautious.

 

[Just a Guy]

If we keep predicting a correction, which I think we all agree is coming, sooner or later we'll be right.

 

[james4beach]

I fear that people under-estimate the impact this would have on the broader economy, and the banks.

 

[peterk]

What effect would a housing collapse have on the dollar?

 

[Rusty O'Toole]

Is this the Canadian real estate crash the American experts have been predicting for the last 7 years, or is it a new one?

Is he still betting on a collapse of the Japanese economy? 5 years ago he predicted it could not last 2 more years.

 

[james4beach]

Just because a theme takes longer to play out than you think, doesn't mean you're wrong. Yes it's true that many analysts have believed Canadian real estate is unsustainable for many years now. It doesn't mean they're wrong.

And yes Bass has been bearish on Japan for many years and continues to be. More specifically, he's bearish on JGBs and the Yen

 

[dogcom]

If the world slows and everyone notices or interest rates rise significantly then the correction will be deep. If this occurs the stock market will also crumble unless the money gets turned on again in a very big way. If this happens we could be in for more rising prices as the money finds its way back into the stock market and real estate market.

If there was no interventions since 2008 then houses and stocks would have found their own levels at much lower prices as the system cleans itself out.

 

[Just a Guy]

The other thing to consider is, if the taps are turned on, and we get strong, if not hyper inflation then people who own real estate will actually owe less...the price of the loan doesn't change, they may correct the prices by inflating away the debt.

Not a good solution, and difficult to achieve if you overpaid to begin with but, if you paid a reasonable amount, could be very beneficial in the long run.

 

[martin15]

The other thing to consider is, if the taps are turned on, and we get strong, if not hyper inflation then people who own real estate will actually owe less...the price of the loan doesn't change, they may correct the prices by inflating away the debt.

Not a good solution, and difficult to achieve if you overpaid to begin with but, if you paid a reasonable amount, could be very beneficial in the long run.

You're assuming salaries will rise with inflation, and interest rates will remain low.

If both happen, only savers get hurt.
If neither happen, it will be a disaster.

 

[rossco12]

Is this the Canadian real estate crash the American experts have been predicting for the last 7 years, or is it a new one?

Is he still betting on a collapse of the Japanese economy? 5 years ago he predicted it could not last 2 more years.

I wouldn't bet against the collapse of the Japanese economy. Look at the debt to gdp ratio. 2/1!! That is a HUGE hole to climb out of.

 

[rossco12]

You're assuming salaries will rise with inflation, and interest rates will remain low.

If both happen, only savers get hurt.
If neither happen, it will be a disaster.

I think he's assuming more that one will be able to raise the rent proportionally to inflation. This is the theory Robert Kiyosaki uses to justify high debt levels. As long ad it's cash flow positive, who cares about the amount of fiat money he owes when the Fed can print 85 billion a month. When the dollar is worthless, he will pay it off with gold. It's effectively short selling the US dollar. He is of course betting that the dollar is beyond salvage, and interest rates won't be raised in the process.

 

[Just a Guy]

I'm reading The Downfall of money, which examines Germany between the wars, and the hyperinflation than ensued.

Realistically, if a loaf of bread costs $5 today, but due to inflation now costs $50... Then wages have to increase or people starve and die...

However, if I lock in a mortgage at $100k for 5 years (for arguement's sake let's say the place is "worth" 100k as the down payment was eaten up by lawyers, realtors, and bank fees), neither the interest rate, nor the value of the mortgage changes for that period. When I go to renew, the "value" of the loan is now 1/10 of what it was originally or the "equivalent" of $10,000 in today's money.

So, in the future, housing doesn't increase along with inflation because it was overpriced and suffers a 50% correction...I can only sell the place for $500k now (a 50% reduction in buying power! but still an overall increase). My loan will still be close to $100k, but I've significantly reduced my debt load due to inflation from 100% to 20%...the bank would probably be content in letting me keep the place. So, your house value, adjusted for today's dollar went from $100K down to $50k, but your initial costs, adjusted to today's value, was reduced by 90% from $100k down to $10k, giving you a 500% ROI, even with a correction.

If these are rentals, there's even more news...Even if rents didn't increase lockstep along with inflation, let's say only by 50%, my rent may have gone from $1000/month to $5000/month...if it did keep up with inflation (and it should as it's an inflationary element) I could be making $10,000/month and could probably easily afford to pay down the mortgage quickly if required.

Now, remember, these numbers are exaggerated....and don't take into consideration other factors...it was designed to illustrate how hyperinflation can correct the housing market, while still increasing your investment and make you money.

Oh, and if the government creates a new currency, to replace the devalued one, the scenario basically remains the same as far as buying power and the loans are concerned the numbers just become lower...

 

[andrewf]

The difference between Canada and the US is mortgage terms. In the US, 30 year mortgage terms are common. In Canada, 5 year terms are the standard. There would be significant refinancing risk in the event of sustained high inflation.

That said, I think expecting high inflation (never mind hyperinflation) is to misread the situation. If anything, we're experiencing Japanese-style deflation/stagnation.

 

[financialuproar]

I agree with andrewf. Stagflation is the risk going forward, not hyperinflation. Investors that invest hoping for hyperinflation have traditionally underperformed, and I think will continue to do so.

As for Bass, he did call the U.S. housing meltdown and then Greece's bankruptcy. I agree with his Japan thesis, and everyone who follows me knows that I'm a big Canadian housing bear - even going as far as selling my house and renting. Bass has been bearish on Japan for a couple of years now. Those types of calls are tough since you have to get both the investment thesis and the timing right. I remember reading about a U.S. hedge fund that started shorting U.S. housing in 2003. It was gone by 2006.

 

[Just a Guy]

Don't get me wrong, I wasn't advising this as an investment strategy, I was merely explaining a hypothetical scenario.

From the looks of things, I'd say we're already in stagflation.

 

[james4beach]

I was a US housing and banking bear as far back as 2005. So I know what it's like to be early, but be correct on your thesis and see it play out. "The market can remain irrational longer than you can stay solvent". So true! But man oh man is it thrilling to see it all play out like you expect.

Kyle's explanations, the numbers, and his logic make sense to me (regarding Japan). So I agree with him that Japan will, eventually, have a steep decline in the Yen and JGBs

But I wouldn't start making trades based on what Kyle thinks.

 

[HaroldCrump]

Kyle's explanations, the numbers, and his logic make sense to me (regarding Japan). So I agree with him that Japan will, eventually, have a steep decline in the Yen and JGBs

The Japanese central bank (under instruction from Abe) has made it clear that it wants a cheaper Yen, and increase yields on JGBs.
They are in the process of unleashing a tsunami of Q/E in order to achieve this goal.
I don't think we need an expert economist to tell us that - the country's own central bank and Prime Minister are openly admitting this.

 

[james4beach]

Well yes that's true. And if there's one thing central banksters love to do, it's to wreck their country's currency.

Race to the bottom! Who wants to be poorest? Me, me, me, me!

 

[Just a Guy]

Personally, I'm a Canadian real estate bear...but that doesn't stop me from picking up cheap properties if they become available and will cash flow.

I just picked up a 1000 sq.ft. 2 bedroom today for 85k (found out today) get possession in 30 days, have a renter lined up for 1125/month. Similar units have sold in the place for $125k+, so I'm pricing in a decline and getting good cash flow. Figure I could survive a fairly aggressive correction with it.

Real estate is much more of a local than global market...that's why Vancouver will always remain high...even in a downturn.

 

[financialuproar]

Personally, I'm a Canadian real estate bear...but that doesn't stop me from picking up cheap properties if they become available and will cash flow.

I just picked up a 1000 sq.ft. 2 bedroom today for 85k (found out today) get possession in 30 days, have a renter lined up for 1125/month. Similar units have sold in the place for $125k+, so I'm pricing in a decline and getting good cash flow. Figure I could survive a fairly aggressive correction with it.

Real estate is much more of a local than global market...that's why Vancouver will always remain high...even in a downturn.

That's a pretty good deal. Where are you buying?