There is much talk these days about whether we are headed for deflation, or inflation.  In fact, just the other day a friend approached me and said “are you for inflation or deflation” which I thought was an odd question coming from this friend, specifically because our relationship doesn’t generally involve these type of questions.  So I think my main point is that this topic is making it to main street and sadly either way you look at it the result is not positive.

Ok so let’s address it.  First, my answer is that I think as I have repeatedly said, we are headed for inflation, and in fact it could be hyper-inflation which would likely be as bad as deflation, except of course if you are a real estate speculator.

Why, do you ask?  Well the main reason is, and I have been steadfast in this assertion, through the recession the governments across the world, but specifically in the USA, have been printing money at a breakneck pace.  With all that excess money in the economy the only plausible result will be inflation.  When?  As soon as that money starts to flow into the economy.  Yes, the tail end of a recession will always make people and more importantly institutions (banks) hoard their money. But hold on and fasten your seat belts when that money starts flowing.

Would you like to have the inside track on when inflation will trend up?  Book mark this page and return periodically to track  the M1 money multiplier graph.  The money multiplier measures how much money is circulating in the economy, and as you can see it has fallen steadily since the 80’s but fell off a cliff at the beginning of our severe recession.  Note: the Grey bars are all the past recessions.

Economists like Benjamin Tal have repeatedly reminded us of this law of economics, when money supply rises, which it has significantly, then inflation will follow.  Look for the M1 money multiplier to rise in the next 12-18 months will bring inflation.

Now, for all you people who have an insatiable appetite for real estate speculation, please don’t use this post to justify more real estate speculation.  To be clear, there is much to much risk in today’s inflated market to be involved in speculation.

Finally, and this from Peter Schiff, if you don’t know who he is you should.  Peter is one of the only experts who called the real estate disaster in the U.S.  He is currently saying that gold will hit $5,000 an ounce, due to what he believes to not only be inflation, but hyperinflation.  Why?  Because in is mind he thinks Bernanke, the federal reserve chairman, is keeping interest rates artificially low, to continue to save the housing and stock markets, at the expense of long term pain for the entire economy in hyper-inflation.

Where do we go from here?

1) Watch the M1 graph.

2) Buy any big ticket items you want (i.e. a house) now, as inflation will drive up both the prices, and the interest rates, which brings a net effect of substantially reducing affordability.

3) If you are tight on your budget, lock in your existing mortgage Tuesday.  Rates WILL rise, and likely will continue to do so, for some time.

Much talk this week likely spurred on by Mark Carney and his proclamation that the recession is over.  Many clients and business partners have asked me whether this can be true or if he has another agenda.  Certainly the contrarians out there like Garth Turner and his blog dogs have taken particular exception to Mr. Carney’s words.

Today I read an economic summary from Avery Shenfeld which I thought was interesting and topical to this ongoing debate as to whether we are in a recovery.

He essentially believes that whether we are in a recovery or not depends on who you are.  For instance if you are a stock market investor then the recovery is when you are starting to get your money back, and that happened essentially in March.  With typical corrections obviously still to come the investor will still see gains continue for some time.  This makes sense from another perspective as historically stock markets are a leading indicator of both entering and exiting a recession.

However, if you are an economist, and this is where Mr. Carney is, then you will not call a recovery until positive GDP growth starts to happen, and not just for one quarter but that there is a trend.  In the US it is largely accepted that we will cross that line this summer.  Before the contrarians out there jump on this saying it is impossible to see growth absent of any real increase in demand, you must factor in that the first half of this year so massive cuts to production, which resulted in significant depleted inventories.  Even with marginal demand increase there will be marginal positive growth.  Canada will see growth then as US company ramp up stocking the shelves and warehouses then Canadian exporters will see their order basket fill up.

Finally, according to Shenfeld the average Joe Canadian will not declare we are in a recovery until they start getting their jobs back. Shenfeld then goes on to predict that this is a longer road then we would like.  Even if GDP growth bounces back as we predicted above.  He contends that US and Canadian consumers are still licking their wounds from earlier wealth losses and will take some time to unlock their wallets.  As well businesses are horading cash instead of buying equipment etc.

Although I agree with Shenfeld technically, I disagree that consumers, as a whole, will take longer to get out and feel confident again.  Employment participation, especially in Alberta where it tops the nation, is still very high and even if unemployment sadly tops 9% nationally there is still a significant number of people employed.  Secondly, as Avery’s colleague Benjamin Tal pointed out in his recent road show across the country in this nasty recession we saw an interesting but significant difference from any previous recession and that is the number of business bankruptcies were barely a blip and the significant number of women in the workforce.

His theory was that in past recessions unemployment was more damaging as employers “went out of business” in this recession most just were “laid off”.  Therefore the hypotheses suggests that it will be easier for businesses to callback their employees then it would be to start the business all over again.

The theory behind more women in the workforce this time around was that in many situations when one spouse lost their job the other was still working, which although difficult made it manageable for many people to weather the storm, and thus will make it quicker for them to rebound.

There is a silver lining in Shenfelds theory if you want to believe it.  If the recovery takes longer to grab hold of the average Joe, then count on more government stimulus to prod them, and for certain a delay in interest rate hikes from the bank of Canada.  Mr. Carney can NOT hike rates until the average Canadian is out spending again.  This bodes well for the real estate market, and particularly in Alberta.  Why?  because of the blessing in Western Canada of natural resources which will be the number one demand item in the global recovery.

Comments?

Bob Truman posted a good guest post on his blog.  It is a month old but I think still has some great info. Be sure to read his comments as well for further insight.

Also read the next post as it gives the other side from Garth Turner. Remember always read the comments that is where the good information to support the ongoing conversation is.

I have been reading Garth Turners blog for quite some time and today I actually got a brief glimpse at what it is like to monitor comments from rude, ignorant, people who largely are so far in the extreme of their ideas they are not prepared to listen to others views.  Garth, seriously dude, hats off.

Anyway although I may not agree with many of Garth Turners views, or his motives, which I am actually not sure what they are beyond selling books, I try to keep my rebuttals respectful, so here we go again.

The most recurring cheap shot was that I was lieing when I discussed the base of our Inflation Hedge Mortgage Strategy which is to protect people from future payment shock of certain higher interest rates in the future.

In the video here are the

ASSUMPTIONS:

Purchase Price: $450,000

Down payment: $45,000 (10%)

Mortgage Insurance: $8,100 (2%)

Amortization: 25 Years

Term: Five Years

Starting Interest Rate Today: 4.39%

Here are the FACTS:

Mortgage Payment Today = $2,261.20

Balance at the end of the term = $362,885.07

THEREFORE to calculate the payments at the END of five years you would take the NEW balance of $362,885.07 and do a new schedule based on 20 years remaining.

New payment at the start of YEAR 6 = $3,366.26

Difference in payments between the Year 6 payment and the year one payment (payment shock) = $920.89

By the way if the client takes our Inflation Hedge Mortgage Strategy they would owe $288,892.47 after five years and have ZERO payment shock. That is a saving of $73,992.60 over five years.

Please Note: This is corrected math from what was presented in the video. I said in the video that it was approximately $600 and that was incorrect.

Our philosophy is to ensure that people who are going to buy a home do it responsibly and understand all the financial repercussions they are facing.  We design a mortgage strategy that will fit into their overall financial wellness, particularly ensuring that they can truly afford the house they are contemplating and to protect them against inflation, which will lead to higher interest rates in the future and the dreaded payment shock. Garth Turner’s job is to tell people not to buy homes, my job is to ensure those that are going to, do it carefully and with a well thought out plan.

This morning I had my first Live broadcast for the Mortgage and Real Estate Show for my good friends at Royal Lepage Foothills Real Estate here in Calgary.

Today’s topics include a discussion around all this negative talk on the blogosphere, particularly led by the likes of Garth Turner about an impending housing shock, when people buying homes today have to renew their mortgages in five years time, you will be shocked at the results.

As well we have a discussion about the effect the recovery will have on Calgary Real Estate and the Calgary mortgage market.

Of course many buyers in the herd these days are still struggling with “when is the bottom”.  I have recently video blogged about this and as I have repeatedly mentioned that although the current stats are suggesting we are leveling off one should look at other areas to be sure that they are comfortable moving forward.

So here are the top things to consider when deciding if we are at the bottom

1) Local Employment

Garth Turner in his blog has been incredibly harsh on this and continues to use this stat as the primary reason that we will see continued crashing of the market.

However in Calgary, and Canada for that matter, with the obvious exception of Ontario, the doomsayers will point to the recent rise in unemployment as suggesting that especially because it is a lag indicator that we will see continued dramatic dclines in House prices.

However according to Benjamin Tal of CIBC world markets althugh unemployment is up in Canada and will likely approach close to 10% one must consider these very important facts about the labor market that of course go unnoticed by the media and doomsayers like Turner:

1) Participation rate is at record highs.

This means that more people as a per centage of the overall available workers are in fact working.

2) Job quality is up.

This comes during the worst recession we have had since 1945, so why?  Mainly because there are more women in the workforce today then there ever was and they are in high quality jobs, that are turns out largely recession proof.  Most of the job losses are males.  In previous recessions when the male in the household lost his job then both spouses had no job, but now that is not the case, so families are managing better today with the wifes job.

3) we are closer to the end of this nast recession then the begginning.

4) The market has already factored in the dreary job numbers.  There is not news lately that seems to rock the market, because they have already accounted for the worst.

this means that the level of job losses will start to level off.

In Calgary we lead the nation in the lowest unemployment, the highest participation rate, and the highest job quality.  The short spike we are seeing in the unemployment will reverse I think quickly in the recovery of 2010.

2) Return to a normal baseline of historical sales

To understand market dynamics one must compare current results to historical averages.  The media and many other doomsayers, conveniently continue to compare our recent drops to 2008, 2007 or since the peak in 2006.  However what we have seen in Canada, again according to Mr. Tal we have now arrived at the historical average level of activity for the Canadian real estate maket.

3) Reduction of available inventory

This is a big one, especially in Calgary.  We have dropped from almost 10 months of supply to four months from September to now.  This is significant, with no real signs to a significant increase in supply, and demand edging back this will continue to lead to an improved market

4) Current values versus relacement cost

I think that this is appropriate especially in Calgary.  We have seen housing starts fall to a very low 3,000 or so annualized.  This is largely to do with the fact that prices are getting dangerously close to the actual coast of construction.  If builders can’t make a profit they will just stop building, which they have done in a relatively quick manner.

The challenge this can cause is all the people who are not buying now will pour back into the market when prices and/or interest rates start to edge back up and combined with the natural demand at that time will potentially overheat the market with the lack of supply that is being created, scheduled inflation rising, and jobs pouring back into the market in the recovery …here we go again.

HERE IS THE BOTTOM LINE…

For potential buyers today, finding bottom is less important than knowing it is near.  It is virtually impossible for anyone to accurately predict when the market is precisely at the bottom the educated buyer who understands the sins of recovery will already be settled into the opportunity of a lifetime while the rest of the herd is battling with each other over the best listings as the market rebounds and edges back up.

…you have been warned.

I only do this once in a while but for fun I will set off some predictions of where I think things will shake out in the coming months.

Recession Recovery:

The bank of Canada announced yesterday that they are dropping the bank rate by a further .25%.  The best part of all they said they will keep it at this level until June 2010!  The markets certainly will like this commitment. The bank of Canada also downgraded it’s forecast on the GDP for Canada for 2009 and 2010.  No surprise that everyone is forecasting 2010 to be a positive increase in GDP which would therefore be by definition the end of the recession.

Keep in mind what needs to happen is increased consumer spending, which is starting to happen.  We will start to see improvements in the economy for certain by next quarter and will feel the full effects of recovery s we enter 2010, we will not have to wait until well into 2010.

Housing Market:

Locally the housing market has already started to show excellent signs of recovery, and there is many indicators proving that we are certainly at or near the bottom of the recent 12 month decline in prices.  Couple the significant reduction in home prices with the histrically low “emergency rate” environment and we are set up for a continued stability in the Calgary real estate market. We will be fully in a balanced market by the time the April statistics are realeased.  As far as price appreciation goes, we will likely only see very moderate if at all price increases for the balance of 2009, which quite frankly is a good thing.  Remember what happens when prices rise to fast and affordability gets in the way?

Oil Prices:

China will lead the globe out of this recession.  Why?  Well for one they do not have to pass their stimulus plans through congress, or get support from any other country.  For a second thing they are the only major economy in the world with major cash reserves, and consequently very low debt.

So what will happen when China rises from the ashes?  The demand for commodities will soar.  This will start to really gather steam in 2010.  The challenge for the global economy is this significant rise in demand from China, coupled with the increased demand from the US as they recover will NOT be matched by an equivalent increase in supply, mainly in the energy sector where future capacity is being reduced at an alarming rate.  This will FOR CERTAIN lead to higher oil prices in the future.  Of course this is good for Alberta in general but most specifically for jobs to be created again, and a significant rop in unemployment in Alberta.  in 2010 Alberta will once again have the lowest unemployment in Canada.

A wild card prediction will be an increased in inter-provincial migration again for Alberta as many people who are losing their jobs in the East may once again flock to the west.  Saskatchewan, and BC will likely benefit from this as well.  If this comes to fruition then look for increased demand on housing again, and this may put upward pressure on prices depending on how supply responds to this potential increase in demand.

Mortgage Rates:

We have already seen what the bank of Canada has said for the prime lending rate which influences the variable mortgage rate.  But what about fixed rates which fell once again this week to an unheard of level of 3.69% for a five year fixed rate?  I would say through the all important spring market look for further reductions in interest rates as lenders jockey for their share of the reduced market.  The spreads on fixed rates is still historically high which means lenders have room to offer “specials” and they will continue to do that.  As well many lenders who are struggling with early refinances of their mortgages ave to replace those mortgages back in their pools to the investors and thus will be in a panic situation at times and will offer very low rates especially in a “quick-close” situation where your mortgage will close in less then 30 days.

On Wednesday, Bond Yields plunged to their lowest level since September at 1.70%.  This is of course great news for Mortgage holders.  Bond Yields lead fixed rates, so if they are headed further down, then count on mortgage rates to follow.  In fact many lenders already have dropped their posted rates, and the special wholesale broker rates are also dropping.Stay tuned for more news on this as it develops

Some good news to report from the international credit markets.  First the 30 day bankers acceptance has dropped to it’s lowest point EVER at .90%.  Given that historic yields for variable rates over bankers acceptance is 1.69% and the current spread is 2.10% it would suggest that there will be room for lenders to absorb an expected .50% drop in the overnight rate by the Bank of Canada on March 3. So this is good news for all those people who held on to their variable rate mortgages, as well as of course for those considering to jump into the housing market.

Five year bond yileds also jumped up to 2.14% whcih would also suggest that fixed rates could head lower.

Finally, maybe the best news of all is that the TED spread (this is the most telling statistic for forecasting the amount of liquidity risk global lenders have priced into their activities, which means the lower this drops the more money available in the system to lend and keep the economy going).  The TED spread continues to fal, this is great news.

Well with all the articles lately from the Bank of Canada governor which are leaning to more optimism for 2010 many economists are now predicting on March 3, Carney will only drop rates by .25%.  This guy can’t win really.  If he is too negative people will roast him, and if he is too positive people say he is not doing enough.

The truth is, he has done great things, with being the first to drop rates, and be at already an unprecedented negative interest rates (interest rates are currently lower then inflation) and most importantly injecting real usable money into the system by purchasing good mortgages from the banks, he is part of the solution.

As to predictions, I like to go against conventional wisdom sometimes and agree with the lone economist Derek Holt at Scotia Capital that we will still see a .50% cut as there are still real problems for 2009, and the bank has said repeatedly they do not fear inflation until at least 2011.