View in HD Download 480p Version Visit Mike Stewart’s ExposureRoom Videos Page
Stimulus packages coupled with ultra low interest rates are attempts by national governments and central banks to reflate economies around the world. If these efforts are successful (I think they will) I think inflation will be an issue in 2-3 years in Canada. I think elected politicians and to a lesser extent central bankers will find it very difficult to stop priming the pump once things improve.
I think changes in the Chinese economy will also push up inflation as we move forward. A 2007 Report by the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) has said inexpensive Chinese exports have kept inflation around the world in check. As China develops though, the cost of China’s labour becomes more expensive, pushing up costs for the huge amount of simple products it exports around the world.
How does this relate to Vancouver Real Estate?
Inflation will cause prices and rents in Vancouver to increase while fixed rate mortgages locked in before inflation hits will decline in real and nominal value at an accelerated rate. Equity will increase at an accelerated rate for those with fixed rate mortgages.
Variable rate mortgage holders would see their rates and possibly payments rise in line with Bank of Canada rate increases to combat inflation.
If inflation does re-appear it will be very interesting time in the Vancouver Real Estate Market.
I’d love to hear everyone’s thougths!
Tags: central bank, Downtown Vancouver, Downtown Vancouver Real Estate and Economics, economics, Financial Crisis, inflation, real estate, Stimulus, vancouver real estate and inflation
[...] Mike Stewart added an interesting post on Will Inflation make a Comeback and How Will it Affect Vancouver b…/bHere’s a small excerptTags: central bank, Downtown Vancouver, Downtown Vancouver bReal Estate/b and Economics, economics, Financial Crisis, inflation, breal estate/b, Stimulus, vancouver breal estate/b and inflation. This entry was posted on Wednesday, February 18th, b…/b [...]
I dont think you can directly equate inflation to an increase in vancouver housing prices since you need to have people to be able to afford to spend more then they are paying today. The current direction of the economy is south, and fast. Inflation will effect housing by making it harder to maintain a mortgage since interest rates will rise drastically and taxes will increase to combat a surge of devalued money. Stagflation is the real concern for Canada.
Housing prices will continue to drop for a long time until a new credit system is developed. Credit as we know it is over. US mortgages are getting bailed out and consolidated so the govt wants to keep people in their homes but they will need to change the way they think and do something called….. S A V E. The flip side of that is that the economy will suck. Be smart and ’save your money’ (ING DIRECT GUY)…
Hi Rod,
Thanks for commenting and disagreeing with me!
Saving all your money and not investing can be risky if there is threat of inflation a few years out. The value of money in the bank will be rapidly eroded in an inverse relationship to the rate of inflation. The nominal value of fixed rate mortgages will be eroded the same way.
Tangible assets (like houses) will see their price (nominal value) increase in value in line with inflation (or more, see below). The rents for these houses will also increase at the rate of inflation (or more, see below).
Inflation will inflate the price (not value) of everything, housing included, because Central Banks and National Governments are either giving people and businesses a huge amount of money (stimulus) to spend or making it ridiculously cheap to borrow money (rate cuts).
Governments and Central Banks are giving people today that money they will need to pay more for real estate in future.
I think in a few years time with all this money sloshing around, there will be too many dollars chasing to few assets and consumer prices (including real estate) will rise at rates not seen since the late 70’s early 80’s.
For Vancouver Real Estate, I think prices will start rising again at a rate higher than inflation because there will be virtually no new supply hitting the market for next few years.
Inflation has its own set of risks (including high interest rates to control inflation that you mention).
What are your thoughts?
Hey Mike,
I understand the basic concept of inflation and it’s effect on everything we buy, but while it might be right for bread, eggs and tvs it wont raise housing prices this time as the money you say we are getting now isn’t being saved for later when we need it to afford to pay for these houses. Unemployment will grow, bankruptcies will rise and while we will definitely have inflation, but it will be mixed with a stagnant economy (stagflation).
During the next few months we are going to see larger drops in the housing market with an increase in listings for spring time. While first time home buyers may have helped sales in February, I dont think Cameron Muir can convince the rest of us that it’s a good time to buy when we haven’t seen any kind of stability yet.
Rod =)
Hi Rod,
Good to hear from you!
What I am saying is the money being spent on stimulus is being spent and invested which will get the economy working again. Once the economy gets going again people will have more money to spend on everything including Real Estate, or potentially too much money to spend, hence my concern about inflation.
The fear I have is that once the economy gets going, the powers that be may not let up soon enough for fear of allowing the economy to falter.
My concern about inflation is based on the premise that stimulus will be a success and that inflation will be a result of this success.
Like I said above, my fear is this inflation will occur a 2-3 years out.
I don’t think inflation is going to be a concern this year or the next. The risk of deflation in Canada and the US is quite high now and I am concerned that policy makers and central banks will over shoot and prime the pump waaaay too much leading to inflation.
As you well know, I always think its a good time to buy real estate and I think this now and am not afraid to say so openly.
I agree that the consensus is prices will continue to fall this year, but they will not fall forever and they will comeback and inflation may or may not be what brings the prices back.
If we run into stagflation, what should we do?
The primary cause of inflation is the increase in the quantity of money into the economy. Mike Stewart offers his opinion on, and forecasting changes to, the Vancouver real estate market to provide his clients with information to make educated decisions on real estate purchases.
In his video blog of Feb 18, 2009 he predicts inflation within Canada in the next two to three years and discusses its effects on the Vancouver real estate market.
I agree with Mike’s forecasting for several reasons. If there is a wave of economic pessimism, the short term demand and supply falls, decreasing price levels. Therefore, there is increased unemployment as production decreases and sticky-wages mean companies must reduce staff levels. We can see this on Human Resources and Social Development Canada’s website which shows increasing unemployment rates prior to and after the September 2008 economic crash. To mitigate effects of the decreasing output and increasing unemployment, the government increases it’s spending and the Bank of Canada is reducing its overnight rate to expand the money supply to encourage investment. If there is a large increase in the money supply, demand increases for goods and services. The governments and policymakers are trying to do just that to stimulate the economy. The increased money supply increases prices, which makes each dollar less valuable. As prices increase, the Bank of Canada will increase the nominal interest rate to contract the money supply. The price increase causes the supply of goods to increase and producers will hire more staff and/or increase wages, resulting in inflation.
Currently we still see increasing unemployment and decreasing output. No one knows how long it will last, including the world’s top economists. However, U.S. Federal Reserve Chairman, Ben Bernanke, says there is “a reasonable prospect the recession that took hold in December 2007 will end this year and that 2010 will be a year of recovery.”, according to the Vancouver Sun website article, ‘Recession nearly over, Fed chairman says’, March 16, 2009. In my opinion, the Chairman fails to commit or predict any date or level of recovery anticipated and his statement is not really very valuable. However, in response to the article, Canada’s main stock index actually saw increased positive activity as people’s perceptions changed as noted in the Vancouver Sun’s subsequent web article on March 17, 2009, ‘Federal Reserve chief forecasts end of recession, markets rise in response’.
Based on the above, Mike Stewart’s prediction about inflation in approximately two to three years is reasonably accurate given the information we have to date and he’s obviously done his homework on how it affects fixed versus variable interest rates for mortgages.
Cheryl
Hi Cheryl,
Wow! Very cool! Thanks for sharing and I look forward to hearing more from you!
[...] mentioned in other blog posts that I think Inflation may to be an issue in 2-3 years because of ultra low interest rates and Stimulus packages from National Governments around the [...]