GLOBAL TRANSFER OF WEALTH

The global recession has hit the world economy in an unforgiving way.  Its effect has been headline news in newspapers and other media for a couple years now.  We in Toronto have been relatively insulated from the wealth destruction thanks to our diverse economy.  However, the truth is, that what we are experiencing is not a recession of a business cycle.  The recession is merely a symptom.  What the world is experiencing is a dynamic unprecedented shift of power and wealth from North America to Asia.  This long-term change cannot be ignored, and will eventually be felt here in Toronto.  The result will translate into a loss in value of real estate in the GTA that we have up until now managed to avoid.

Since November 2007, the world is a changed place. The United States consumer is not strong enough to drive our economy any more, and probably will not be in a position to do so for several years.  Canada will have to start selling to the Chinese consumer. However, in China, they have different priorities.  In the U.S. the consumer is not spending because they have to pay back the vast sums of money they owe; the Chinese consumer is not spending because they are saving their money.  Either way the result is the same, sales are not easily found.

Another change was the eradication of the investment bank in the United States.  These banks through securitization held and traded titles to real estate assets in order to make their profit. They were never regulated the same way a conventional bank was to prevent a run on the bank from bankrupting the company.  When times got difficult, the equivalent of a run on the bank trapped them.  They either went bankrupt or had to convert themselves into a conventional bank.  Every last one of these giant banks are now gone, and securitization is a minute fraction of the industry it was.  These banks were the institutions that drove the growth of the U.S. economy from 2002.  We will not see the U.S. economy return to those heights again until investment banks are able to return, and the government regulates them to prevent failure. That is, if securitization truly is a wealth generating enterprise, or is it just a big shell game? We really did not get the chance to get that well acquainted with it and no real decision can be definitively given, I believe.

In North America and elsewhere, we now have to content ourselves with many years of very slow growth.  The growth is so slow, and has been so for so long, that much of the equipment such as cranes, bulldozers etc. we needed to support our economy has sat idle, not being used.  The owners of this equipment have had to sell it to foreign nations. This is damaging to the economy, because if the economy does pick up, there will be a lag to support it again because we have to re-acquire the equipment.

The effect of the global recession will soon be felt here in Toronto, once the government is no longer able to renew their cash injections into the economy by way of stimulus.  The Bank of Canada has said they will try to hold interest rates at their current level until June 2010.  Once interest rates rise, and people are not able to work as long as hours as they need to, then it is only a matter of time before real estate prices will start to fall.  What will house prices look like two or three years from now?  No one knows.  However, I have a suspicion they will be lower, and so will demand.  Real estate will resemble more like Europe or Latin America, where if your home sells in 8-10 months you were very lucky.  If it sells in a couple years, you were still lucky that is sold at all. Most of the time, you abandoned your home and just let nature or the bank have their way with it.

If you have your own ideas what will happen, or comments on this article, please write them below.