A Picture of Modern Hyperinflation - Zimbabwe

Zimbabwe (1999 - present)

NY Times Article

The Rhodesian dollar (R$), adopted in 1970, following decimalization and the replacement of the pound as the currency, was set at a rate of 2 Rhodesian dollars = 1 pound (R$ 0.71 = USD $1.00). At the time of independence in 1980, one Zimbabwean dollar (of 100 cents) was worth US$1.50.

Since then, rampant inflation and the collapse of the economy have severely devalued the currency, with many organizations using the US dollar instead.

On 16 February 2006, the governor of the Reserve Bank of Zimbabwe, Dr Gideon Gono, announced that the government had printed ZWD 21 trillion in order to buy foreign currency to pay off IMF arrears.

In early May 2006, Zimbabwe's government began rolling the printing presses (once again) to produce about 60 trillion Zimbabwean dollars. The additional currency was required to finance the recent 300% increase in salaries for soldiers and policemen and 200% for other civil servants.

In August 2006, the Zimbabwean government issued new currency and asked citizens to turn in old notes; the new currency (issued by the central bank of Zimbabwe) had three zeroes slashed from it.

In February 2007, the central bank of Zimbabwe declared inflation "illegal" and outlawed any raise in prices on certain commodities between March 1 and June 30, 2007. Officials have arrested executives of some Zimbabwean companies for increasing prices on their products.

CMHC September Starts and Completions

CMHC released data on Vancouver CMA Starts and Completions today and not surprisingly, starts are staying at high levels. With building homes being such a remarkably profitable business right now in the Vancouver area even with land costs and labour shortages it is no surprise to see builders wanting to build as much supply as possible at these prices. Construction on 2157 new homes was started last month in the Vancouver CMA. Get those presale contracts signed - suckers.

Completions are a different story with skilled labour shortages, red tape and transportation issues burdening the region. Completions still aren't keeping up with starts and the level of units under construction is ballooning to new record levels.

Fiat Money?

A friend told me about this video so I'm posting it here. I haven't watched it yet but it looks interesting, controversial, and it is strangely (for a video about finances) the most popular video on Google Video.

FYI - I'm not a "gold bug" by any means and I'm not necessarily advocating every point of view postulated in this video but I think it is wise, from time to time, to raise questions about the status quo and think in a historical and critical perspective about our current situation.

Friday - Odds and Ends

A few things for today.

I added a new link under the "Useful Links" section called the "Stingy Investor." It is a great site with some interesting investing ideas and other investing information.

Reader 'wombatos' sent me this link to a CBC article on how many Canadians are not preparing for retirement, are DEEP into debt, and do no saving. Scary stuff but it isn't news to me. Unfortunately I meet people everyday who have failed to prepare and are living the Kraft Dinner retirement.

"The survey commissioned by CGA-Canada found that a quarter of those who answered didn't think an interest rate hike would hurt them financially. The survey also found that about a quarter of Canadians don't save any money at all, even for retirement. So it came as little surprise that about one in five said they wouldn't be able to handle an unforeseen expenditure of $5,000. The accounting group said Canadians are increasingly relying on borrowed money to finance day-to-day living expenses."


On a personal financial planning note, the deadline is November 1st to put in your T1213 form to have less tax witheld at source. This is important if you are a salaried employee and make RRSP contributions, pay spousal/child support, and/or make charitable contributions among other things. My mentality is that we shouldn't give the Federal government an interest free loan by overpaying our taxes on every paycheque so fill out the form and get it in before November 1. The CRA will reply with a letter which you will need to give to your employer. You will get your tax return all year long!

Bank of Canada releases Monetary Policy Report

OTTAWA – The Bank of Canada today released its October Monetary Policy Report, which discusses current economic and financial trends in the context of Canada's inflation-control strategy.

Here are some highlights:

Implementing Monetary Policy: Targeting the Overnight Rate
The Bank of Canada’s monetary policy implementation framework centres on keeping the overnight rate close to its target.1 The Bank’s primary influence on the overnight rate is through the 50-basis-point operating band, reinforced through its standing facilities for loans and deposits. In order to reinforce the target when the overnight rate deviates from it, the Bank uses open market buyback operations and changes in the level of settlement balances provided to the financial system. If the overnight rate is generally trading above the target rate, the Bank will intervene with special purchase and resale agreements (SPRAs). If the overnight rate is generally trading below the target rate, the Bank will intervene with sale and repurchase agreements (SRAs). In addition, to influence the overnight rate, the Bank can adjust the targeted level of settlement balances higher or lower than the typical $25 million setting. SPRAs are routinely conducted around month-, quarter-, and year-end periods, and when large payment flows are going through the system. The Bank used SPRAs, SRAs, and adjustments to settlement balances, as appropriate, during episodes in 1999, during the transition to the Large Value Transfer System (LVTS), and in early 2006, when there was persistent downward pressure on the overnight rate.

Since early August, the Bank has again been using these tools to counter upward pressure on the overnight rate and keep it close to target.


The Cost and Availability of Credit in Canada
Credit conditions in Canada have tightened since late July, reflecting a repricing of risk as investors have become less willing to hold a wide variety of private sector securities, most notably asset-backed commercial paper (ABCP). The degree of tightening in terms of changes in the availability and cost of financing for financial institutions, firms, and households is difficult to estimate. Since the situation is still evolving, estimates are subject to a high degree of uncertainty. But what is clear is that the costs of borrowing from the market or from banks has increased, and credit conditions have tightened.

The cost of funding for Canadian banks through various market instruments has risen 10 to 35 basis points relative to the rates observed at the end of July. Increases in the costs of deposits have been more modest. Some borrowing rates posted by financial institutions have increased over the past few months. Effective borrowing rates for both business and consumers have also increased as the extent to which discounts on posted rates offered to households and businesses, such as the prime rate, have diminished. In addition, some financial institutions have increased covenants on new loans, and others have indicated some reduction in new loan originations. All told, the effective costs of household and business loans from financial institutions are estimated to have increased by about 20 to 35 basis points.

Businesses’ cost of borrowing through financial markets has also increased somewhat since July. The overall cost of issuing short-term market debt is estimated to have increased by roughly 20 to 30 basis points. Based on observed prices, the cost of long-term debt is estimated to have remained largely unchanged, but the actual amount of issuance has been relatively small and remains limited to investment-grade borrowers.1 As a result, observed prices likely do not fully reflect actual borrowing conditions. When the different components of bank and market borrowing are aggregated, the weighted average cost of borrowing for non-financial firms has increased by at least 15 to 25 basis points.

Overall, the cost of borrowing for households and businesses is estimated to be about 25 basis points higher, relative to the overnight rate, than it was prior to the summer developments, and availability and terms of credit have tightened modestly.

City of Vancouver MLS Listings Data - UPDATED

Here is some updated data from our 'anona-poster.'

Vancouver West Apartments.


Vancouver East Apartments

West Vancouver Townhouses

East Vancouver Townhouses.

West Vancouver Houses

East Vancouver Houses

I received this wonderful email yesterday from a regular reader. Clearly there are some technically gifted individuals out there.

I'm a regular reader of your blog; haven't posted, but I really enjoy your writing. I'm writing to you on e-mail because I don't know how to post attachments to your blog.

Recently I wrote a program to grab all the current listings in the Vancouver area (City of Vancouver only so far) from the MLS site, including price, lot size, number of bedrooms, bathrooms, and house age. As of October 13, there were 3196 listings in the CoV.

I've attached a summary figure, which you're welcome to post on your blog, which shows the distribution of list prices (as of Oct 13, 07) by sub area. Its in the format of a box plot, which divides list prices in each MLS sub-area into quartiles, and shows the median list price. Outliers are also shown as open circles. The "whiskers"outside of each box show the distance to the closest outlier (defined as a point that is at least one and a half times the size of the full box away from the median).


With data on other attributes of each listing, I was also able to conduct a cross-sectional regression to determine "normalized" house prices in each area. Based on these regressions, I produced some estimates for several types of houses in both East and West Vancouver (i.e., a quality-corrected index):

For a 25 year old 3 bedroom house,
in Vancouver West - $1,373,455
in Vancouver East - $747,221

For a new 4 bedroom house,
in Vancouver West - $1,475,377
in Vancouver East - $849,142

For a 10 year old 2 bedroom apartment
in Vancouver West - $866,183
in Vancouver East - $239,049

...
Anyway, I've automated this, so should be able to produce a quality adjusted estimate of the change in list prices month on month. Thought I'd share it :)

The Story Hasn't Changed - - - Yet

Why the housing slump isn't over yet - By Charles Zentay at thinkinvest.blogspot.com
Bold is mine.

For years, I bored my friends with talk that housing was in for a downturn. No one believed me, and people urged me to buy in before I was shut out of the market. Despite the obvious slowdown in housing, I continue to sing the same tune. I've been doing a lot of reading this weekend about the housing market, and I've concluded that we still have a long way to go before housing reaches bottom. I have been on this soapbox since early-2005 and although the market has not changed in Vancouver yet I still maintain that the market is headed for a drastic downturn. The longer we go without a correction the bigger the correction will be.

Why? The main reason is that in spite of all the whining and moaning about the housing slowdown, prices haven't come down that much (maybe 10%) and affordability is still very low by historical standards.

Here are some other reasons to be wary of housing:
- There is a ton supply out there (supply is at a record, and 2x its normal rate over the last several years). It has just skyrocketed and it is not going down. This is becoming true in our local markets just as it was in the United States.
- Affordability for new home buyers is still at lows.- More people own houses than ever before (meaning fewer buyers out there). Vancouver has THE WORST affordability in North America.
- The Fed will have trouble lowering interest rates in the face of $85 oil and a Euro of 1.42. Can you say INFLATION?
- Credit standards are tightening, meaning fewer mortgages and therefore fewer buyers. This is also true in the Vancouver market although to a lesser extent.
- A large amount of ARMs are still resetting, with a tremendous amount due to reset in the second half of 2008. ARM resets are leading to more foreclosures, and therefore even more supply. British Columbia has the highest product adoption of variable rate mortgages in Canada, with many mortgagees having a negative amortization now.
- Homebuilders are under enormous pressure with debt coming due and therefore will be willing to dramatically lower their prices. Vancouver has a tremendous amount of new home supply coming available in the next 12 - 24 months and demand that is drying up. Developers will cut prices when they realize that nobody is buying.
- The economy seems to be softening, with economists raising the chances of a recession. If you think that the Vancouver economy can sustain itself and is immune to external shocks you are deeply deluded. The high CDN$ is hurting exports (lumber, manufactured goods, technology, etc), film-making (Hollywood north anyone), and tourism (the supposed golden egg of 2010).
- Cap Rates (the income from rents) are still very low, making housing an unattractive investment. Duh! Real estate is about the worst investment possible right now - if you don't believe me get a calculator, paper and pencil and DO THE MATH.
- All of the above is leading to a change in the mentality towards housing. It is going from something people want to own to something to be wary of. This change in attitude towards housing can take a long time to set in and have a tremendously negative effect on pricing. Apparently Vancouverites are still in lala-land when it comes to this psychology shift but it will come swift and sure.

Frankly, the only bright spot I see in housing is that the weak dollar is leading to more foreign buying of U.S. real estate (in places like New York), but the effect of this buying is minimal compared to the other negatives. I just don't see other positives.I think owners are stubborn and resistant to lower prices. Therefore, the market is not correcting itself quickly. The slowdown is likely to last several years.

Until Cap Rates are higher than Mortgages Rates (meaning it actually pays to be a landlord), I think the market will continue to head down. Unfortunately, we're not even close to having attractive Cap Rates. I wouldn't be surprised if a major homebuilder declares bankruptcy in the next 6-12 months. I also wouldn't be surprised if homebuilders and banks start to move to more aggressively clear inventory, which will lead to big price declines. Look for this to happen in our area in 18-24 months.