Categorized | Housing Bubble

The Ponzi Scheme in Canada’s Housing Bubble

Canadian mortgage requirements tightened in recent weeks from a maximum amortization period of 30 years to 25 years, the consequences of which will serve to undermine the currently bloated real-estate market as less buyers will be able to enter into the market as mortgages become more expensive (assuming a same down payment).

How is this market doomed?

The current real estate bubble can best be analogized with a ponzi scheme. Although ponzi schemes are notorious for security investments (think Bernie Madoff), in this case it can also be associated with real-estate: this market is fueled on perpetually new debt (see: “Fractional Reserve Banking” to see how debt serves as ‘fuel’). This debt is fueled by additional people entering into the market to increase total national mortgage debt.

If total mortgage debt is not expanding, it is contracting. This contraction in total debt decreases the supply of available new credit and, therefore, can restrict liquidity for banks to create loans and mortgages, in turn affecting real-estate prices (in this case, downwards).

Much of Canadians purchasing a home today is participating in a nation-wide ponzi scheme based on ever increasing debt. Today, real estate is traded like a financial asset as its price is based on the ability to get a mortgage.  Take away the mortgage market and home prices will crash. If prices were based on real savings in a bank then this would be very different. But just as Bernie Madoff victimized many investors and ended up in jail for his financial schemes, the Canadian taxpayer will, as a whole, eventually suffer the consequences of falling home prices. Yet they won’t have the luxury of expiating their frustration on a Madoff or an Earl Jones; there will be no one in particular on which they can place the blame.

Who is responsible for this ponzi scheme?

Those in government and central banks, responsible for our laws and money. It appears, unfortunately, that most are oblivious to what is going on and have adopted failed Keynesian economics, a philosophy which benefits only the few.

When the fruits of this government ponzi scheme finally come home to roost, the very same people who created it will say that it was impossible to see it coming. They will blame it on speculators and maybe even the European debt crisis.

Post your thoughts below!

  • Matt

    Im with you man, but Ive been waiting for prices to plunge since about 2006, what do you see as a catalyst for collapse? What is going to push interest rates up enough to put people underwater?

    • Chris Ferreira

      There are many possible scenarios that can trigger higher interest rates. They are being suppressed right now, much like a soccer ball submerged in water. The longer the suppression of the rates, the more Mal-investments and distortions are created in the market, and thus the greater the impact of the bust.

      Im leaning towards high inflation from their money printing as a catalyst for higher rates. What do you think?

      • Tony

        I think interest rates will be suppressed indefinitely. Really there is only one base international currency: the USD and the FED can and does control its interest rates by monetizing US T-bills (and has signaled and shown it will do so with no limitation).

        The USD’s value is sustained by its link to oil on the international market and so will continue as long as there is demand for that essential modern commodity: trade imbalances will not force higher interest rates.

        The link between the USD and oil is maintained via unassailable military force and intervention in key oil-producing regions, so it will not go away through economic factors alone.

        So the only thing that can break this pattern will be full systemic breakdown. I.e. it will continue indefinitely (along with the necessary low interest rates to prevent financial collapse) until it simply can’t anymore.

        • economicreason

          You make a valid point. The US does maintain its power via a dollar hegemony from an imperialistic foreign policy.

          The only reason the US can keep their interest rate low is by foreigners purchasing US bonds, however, the Fed stepped in and increased their purchases as “spender of last resort” as foreigners are decreasing their purchases. What will happen when the Fed continues their money printing while foreigners refuse to buy any US debt? How can you increase debt exponentially with compounded interest interest in a finite world?

          thinking that the fed will continue printing money forever is not only false it is linear thinking. A country throughout history has never dominated the world for more than 80-100 years.

          • Tony

            I completely agree that the USD-oil-military connection which allows virtually unlimited USD printing while interest rates remain suppressed and unnaturally low cannot go on forever. The linear path will indeed meet a discontinuity, I have little doubt. It’s just that, the way the system is configured and locked in, I cannot see normal economic principles forcing interest rates higher (though they should be much, much higher); I can only see some sort of systemic crisis forcing the issue… but I actually hope I’m wrong.

          • economicreason

            I think you are right on the money. Thanks for your comments. If you have any other question let me know.

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