Hilliard Macbeth has written a wonderful book on a distinctly unpleasant subject, the great Canadian housing bubble and how households can protect themselves against the consequences when it pops. Hilliard is revising his book now, which has lost none of its pertinence, since the bubble has gotten bigger and may have started to deflate. However, as he convincingly argues, with a bubble so large it will take house prices years to unwind, and the financial markets to adjust, so his revision will still be pertinent when it comes out.
The third chapter of Hilliard’s book discusses housing bubbles around the world in the current century. There were some problems with his overview. As he notes the Spanish bubble peaked in 2007 then rapidly deflated. However, he does not note, as he should have that the UK bubble also peaked in 2007. In the UK the price correction was completed in the first half of 2009, and then the Bank of England and the Treasury Department started blowing another bubble. This comes through more clearly if one looks at real housing prices deflated using the CPI instead of nominal prices. From peak (September 2007) to trough (March 2009), real prices fell by 22.4%. Since then they have risen steadily, but as of August 2017 had still not recovered to their September 2007 peak level. (Nominal prices surpassed their September 2007 peak as of August 2014.)
Hilliard pretty much ignores the role of monetary policy in general and the choice of inflation indicators in particular in allowing housing bubbles to develop. Both the UK and Spain had central banks with target inflation indicators that excluded housing prices, and for the same reason: the UK targeted the UK Harmonised Index of Consumer Prices, while the ECB targeted the euro area HICP, the MUICP. Eurostat itself realizes the problem and is working towards incorporating an owner-occupied housing (OOH) component based on the net acquisitions approach in Europe’s HICPs.
Oddly enough, the first official consumer price series in the world with a net acquisitions approach to OOH, excluding mortgage interest, was calculated by Statistics Canada in 1985, the NP1 series. (I know, because I was responsible for it.) I noted at the time that this was a more appropriate consumer prices for central bank purposes than the official CPI, which adopts an accounting approach to OOH. In spite of that the Bank of Canada went with the official CPI as its target indicator when it became an inflation-targeting central bank, and up to the time this book was written, had shown a dog-like loyalty to the existing approach to measuring OOH in its target inflation indicator. The Bank of Canada has never asked StatCan to update its NP1 series, which, quite bizarrely, was last updated in 2003, almost six years after the Reserve Bank of New Zealand had switched to a target inflation indicator with an OOH(NA) component, five years after the Reserve Bank of Australia had done the same thing, and a couple of years after Eurostat began its first pilot study of an OOH(NA) series for European countries. (Pace the Bank of Canada, Eurostat has NEVER had such a pilot study restricted to euro area countries.) A 2009 Bank of Canada study by Richard Dion and Patrick Sabourin looked at switching to a net acquisitions approach but endorsed the status quo. It has never been published.
So with a huge head start over all other countries in the world towards developing a target inflation indicator for central bank use that would protect against housing bubbles, Canada has fallen well behind most countries in the developed world. This should be dealt with in Hilliard’s upcoming revision.
I thought this was an awesome book. Weeks after setting it down, I still think of the one chart he had showing how the USA corrected but Canada and Australia didn't. That says it all imo.
The 2nd half of the book was just rambling but the 1st half is very interesting and he comes up with lots of valid reasons why the real estate market is overvalued.
Quite an eye-opener. I do agree with the other review that the author has a conflict of interest but I'm grateful to have read this.
Garth Turner has been beating this same Doomer drum for 6 years on his website, and since then, RE has gone up another 40-50% in some markets. Now Macbeth, who is also a shill for the 'financial services' industry, decides to jump on the bandwagon, sell some books, do the media circuit, and promote his financial version of salvation. Married to Nancy (Betkowski) Macbeth, a former Alberta politician, they clearly have a great government pension in place and a growing Boomer client list. Hilliard suggests that the only road to redemption is to hire a financial advisor such as him and get diversified. He doesn't mention the 1.5-2.5% of assets under management that many advisors charge, the rigged Ponzi game that the financial industry actually has become, and how him and his ilk gain nothing from RE investors. Sure there will be a correction at some point, but the same could be said about stocks, bonds, interest rates, or any other asset. No one can predict the future. Just ask Nancy Betkowski Macbeth, who was convinced she had the PC leadership position in the bag back in the day until Ralph snatched it away. Will there be a correction? Sure, at some point, but then again, even a broken clock tells the correct time twice a day.
the author makes a very strong case for why the Canadian real estate prices will crash. I've been calling for it for 2 years, especially the Toronto condos.
The economic consequences won't be pretty when it happens.
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