If there was an Olympic event of bear market predictions I do believe Nicole Foss would win some gold. Have you ever heard anyone predicting 90% off house prices?
The topic is Canada, and its enormous property bubble. Human beings are notorious for not being able to recognize a bubble when they are in one, and Canadians are no exception. We are a rationalizing species, not a rational one, and there are always rationalizations for why it’s different this time – for why this time those outrageous valuations are justified. Well, its never different this time.
Bubbles create virtual wealth through speculation. People simply agree that something should be worth more (and more, and more) than it was before, although the underlying value has not changed at all. They will part with any sum in chasing momentum, because they think there will always be a Greater Fool who will pay more. Often they do this with borrowed money, leveraging their exposure to risk.
Eventually, the Greatest Fool, Biggest Sucker or Most Aggressive Speculator has been found and fleeced. Then there is nothing to support prices at anywhere near the stratospheric levels they have reached on the back of easy credit. People will then simply agree that the asset which has been the focus of speculation should be worth less (and less, and less) than it was before, as the asset bubble bursts. The virtual wealth component will eventually be more than wiped out, as all asset bubbles undershoot when they implode. For those who had been speculating with borrowed money, and for those who had been carrying the risk of that lending, the result is being wiped out. The leverage that seems to magically defy gravity on the way up will magnify the losses on the way down.
You can read the full thing over at The Automatic Earth, and you can view the Keiser Report interview with her over on YouTube (starts at the 13:40 mark).
A 90% market crash is a pretty outrageous prediction, you don’t see that kind of drop in real estate very often. It happened in Tokyo and in some individual cases in US bubble markets, but here in the best place on earth? Pshaw! Believe it when I see it.
Though that would be one hell of a rollercoaster ride.
