Real Estate Prices in Pincher Creek... sort of

Joe Cunningham, Columnist, Pincher Creek Voice

Joe Cunningham

     What do you think? Are housing prices in this area going to start to recover, continue to fall for a while longer and then come back up, remain at this level, or crash similarly to the United States? There is a cadre of experts out there willing to divulge the minutia of their detailed analyses; much of it well researched information, but still managing to be confusing and sometimes contradictory. You can follow the blow by blow accounts in the omnipresent news along with the predictions (couched in impressive analyses of weighted determining factors and reassuring jargon) of these experts. Of course historical analysis shows their accuracy in predicting what will happen in the short term to be, as the saying goes: as accurate as a monkey throwing darts.


     This reminds me of my own experience as an “expert”. While studying to be a psychotherapist, years ago, the wise and experienced graduate school teacher who was responsible for training psychotherapists actually intimated to her students that she no longer believed in psychotherapy! The data bears out her elderly evaluation. The most exhaustive studies of the the overall, big picture effectiveness of psychotherapy indicate that itʼs slightly more effective than, well... a monkey throwing darts. This was, in fact, my own experience working in systems and bureaucracies providing expertise based on marginal science (like, of course, economics) - experts are everywhere, dressed in finery, carrying snazzy briefcases, and gleaning respectable to obscene income for producing, essentially, nothing of intrinsic value. Of course that doesnʼt mean the individual expert may not be highly competent and from time to time actually do or say something of real value, but it must be remembered that overall value to society is a function of the average; and in the case of the “marginal science” professions getting into the program is the major hurdle to becoming a card carrying expert. Think of it this way - would you want to buy a CD from anyone who had taken four years of music lessons? No. Only one in a thousand will be truly gifted. But thatʼs essentially what youʼre doing taking advice from the cadre of market experts. You may be able to intuitively identify, roughly speaking, musical talent while being totally at sea with respect to something like economic forecasts.

     Does that mean that everything that comes out of fields like psychology or economics is suspect or valueless? Of course not. A frequently cited data collection ( by both the left and the right) of Yale economist Robert Shiller, charts the history of home values in the U.S. for the past 116 years. The data is corrected to account for inflation. You donʼt need to be a statistician to understand the chart depicted below. What makes it so valuable is that the time span it covers is long enough to get a reasonable perspective on the intrinsic value of a home. The drop between 1920 and 1940 corresponds, as the chart text points out, to the advent of mass production techniques and then fluctuates between $100,000 and $124,0000 from 1945 until 2000 (corrected for inflation). Then what happens is astounding. Between 2002 and 2006 average home “values” almost double.

(click to view enlarged version)

     Now weʼre all aware of the saga of the U.S. debt crisis and housing boom, fueled by sub-prime mortgages. What isnʼt always clearly understood is how it fits into the big picture. Bear with me for a while longer. I will get back to Pincher Creek!

     During the 80s and 90s mathematicians who had developed complicated betting strategies evolved from gambling came to dominate Wall Street investment powerhouses such as Goldman-Sachs, Morgan Stanley, Deutsche Bank and J.P. Morgan. At the core of these money making strategies lay “instruments” devised from repackaging all sorts of commodities, currencies  and collateral and referred to by such arcane terms as “derivatives” and “securitized debt”. Essentially what these money managers had discovered was a way to use computers to reach in and grab fleeting discrepancies in large scale global transactions and turn them into huge amounts of money. Many of these instruments, a result of years of de-regulation, were only permitted in high risk specialty funds such as the now notorious “hedge fund”. These funds, that still exist, are not open to you or me (not that it would do me any good) but only to large investment institutions and the super wealthy. To be blunt, it amounts to legal counterfeiting.  At whoʼs expense?...everybodyʼs.

     Of course these instruments, systems and funds became extremely popular with investment houses. To keep up with the boom investment banks needed to engage with these money making schemes to an ever increasing level. Huge amounts of money became involved. As everybody on a global level was now playing the game, profits dropped so there was a demand for new derivatives. Enter the re-packaged and “securitized” “collateralized debt obligation”. This instrument included everything from credit card debt and small consumer loans to mortgages. These were traded on a global level. Your debt and my debt, unbeknownst to us, was part of these repackaged and traded things. But it was all a giant legal ponzi scheme.  A “sub-prime” mortgage only makes sense in such a phony system. It was all fueled by a demand for more mortgages to re-package into derivatives designed to extract money for funds and investors - pure greed on the part of the super wealthy. This is what fueled the housing boom and inflated housing prices in the U.S. Now all Americans will have to pay for it. Of course, if youʼre a wealthy investor who is now losing half of the $4,000,000 you made between 2002 and 2007 thatʼs a little different than the family that bought a house for the first time at $300,000 that is really only worth $150,000.

     In Canada in recent years weʼve become rather smug at our seeming wisdom and good sense at not having become involved in such foolishness in our banking system. Well hold on a second, didnʼt we have a real estate boom here as well over approximately the same period?  Here are some eye opening long term stats from the UBC Centre for Urban Economics and Real Estate calculations of Royal Lepage in a 2008 report on Canadian historical house prices prepared by Tsur Somerville and Kitson Swann at the Sauder School of Business. They have been corrected for inflation. They have been reproduced here by CanadaBubble.com

(click images to view enlarged versions)

Originally published at canadabubble.com

     What is ominously obvious is the near perfect correspondence between the American data and and the data from the Calgary and Edmonton markets over the last thirty years. We may not be facing the debt crisis that the Americans are but we have always been tied to the American market both physically and psychologically. Their boom caused our boom. Itʼs clear - the intrinsic value of real estate in our own backyard is substantially lower than itʼs alleged “market value” over the last eight or nine years and it will eventually fall. The Pincher Creek market shadows that of our large urban neighbours. But what is more important is the bigger picture. Weʼve become a society whose questionable sense of value is not just limited to moral and cultural realms. We sanction rewards for effort not on the basis of intrinsic value, but on the basis of a game. A sick game with increasingly corrupt rules. This should be obvious to most long time inhabitants of this area. What is the real value of food (for instance) as compared to, say, advertising and marketing? Who gets the biggest reward - farmers and ranchers?

     We do have a say. If we go about our daily business with blinders off itʼs often obvious what the honest and real answers should be. We donʼt have to play the game thatʼs offered up to us by those who make the rules and always win (for now anyway). Remember, those Wall Street guys, and other “winners” (as opposed to “losers”) only need ordinary people to play the game just a bit.

Relevant links:
The Big Picture
CanadaBubble.com
Joe Cunningham's smalltimemusic.com