Monday, January 12, 2009

Economic Thoughts

Just a couple things runnning through me noggin.

Toronto housing crisis - The year end numbers came in the other day, and sales at the end of the year were around half of what they were in 2007. Total sales for the year fared better, but that's because sales were still strong in the first 1/2 - 3/4 of the year.

But the stat that I found interesting was that average prices only dropped around 0.4%. That's miniscule. So what's that say? Just idle speculation here, but I'd say that it means that houses are staying on the market longer, or being taken off the market after failing to move at prices people are willing to sell. Also, with economic concerns and the US housing crisis, people are reconsidering moving, and speculators are looking into renting their properties instead of flipping them. It's better to pull in some income until the market can bear your price again.

It also tells me that this is just the start. There will always be people who need to sell, and those too stubborn to see that they shouldn't sell. There are also those who want to sell NOW because they see a drop coming and plan to rent until the market bottoms. I figured we'd see a significant drop in 6 months - a year, but I still refuse to call a crash here. The economic foundations are just different than the US situation. Upside-down mortgages are unlikely, and those that DO happen will be a small percentage of the total market. Debunk what you will about lack of space, inherited wealth, or urban demand, but the fact remains the closest we've had to a sub-prime mortgage is a 0% down with a 40-year amortization. Both of those factors are no longer legal in the country for new deals (although cashback and 35-year amortizations still exist, so the effect is practically identical). Anything under a 20% down payment has to pay mortgage insurance, and as much as prices spiked, they didn't reach the lofty heights of the worst-hit US centres. Well, maybe in Alberta, percentage-wise... but I'm talking Toronto here.

So I see this year as a good opportunity to invest in real estate in these parts. Everyone talks about stocks at a discount these days, but with rates as low as they are and prices dropping, real estate looks like a good place to find some serious deals if you have the cash.


Obama's Jobs - I think Obama's up to pledging 4 million new jobs under his plan. He's also stated most of these won't be seen until 2010 and 2011 due to the time it takes to get these things done. That should probably cover a good chunk of the job losses for 2008-2009. Here's the rub though - these jobs will suck. In fact, because these jobs will suck, they will take away these sucky jobs from the private world. We're talking a lot of make-work positions here, guaranteed by government contracts. The claim is 90% will be in the private sector, but that means building bridges and handing the contract over to a private construction firm under the condition they hire X number of people for $X. Welcome to the Davis-Bacon world when "prevailing wages" are at all-time highs. And once those bridges and roads are built and repaired... then what? 4 million temporary government jobs. Take a look at Japan over the last 20 years to see how well that works.

There's of course talk of green jobs, and new infrastructure that utilizes modern technologies. The interstate freeway system guaranteed jobs for the life of the roads. Cross-country rail systems means jobs. So, should high-speed rail lines be built? What effect does that have the airlines and regular-speed rail? Will new roads be toll roads? How many power plants will be built?

And at the end of the day, after the government foots the bill to build all these wonderful things, will they hold on to them? Or will they be sold to the highest bidder to shore up the budget one year.

This will (mostly) end up being even more short-term planning to look like something's being done. In the end though, the taxpayer will be once again be footing the bill.

I respect that Obama continues to drive home the point that recovery will not be easy. That it will take years. That some of his promises will have to wait. But he underlies this honesty with the hope of his $750 billion stimulus plan that will very likely NOT work.

But what REALLY worries me is what could happen when it fails. Desperation could result in some rather insane ideas being tried out. Especially as Paulson refuses to let go of this "banks need to lend and people need to spend" claptrap he's constantly spouted. The entrie economic braintrust of the US (and most of the world) seems to think that creating another artificial bubble is the way to save things. It would only make them worse in the long run.

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