Inflation and deflation now both in play

Stimulus, regional differences create “parallel universe” of runaway inflation and crushing deflation

By
Western Investor
April 21, 2016





ozzie jurock
Ozzie Jurock, publisher of the Jurock Real Estate Insider and author of Real Estate Action, published this spring

This is drawn from real estate consultant and author Ozzie Jurock’s address to the Jurock Land Rush Conference this April in Vancouver.

We are now operating in a parallel universe where runaway inflation and crushing deflation not only coexist in the same environment but feed off each other in an unprecedented and unsettling economic whirlpool, Jurock explained.

The 70 per cent plunge in oil prices over the past 18 months, a 50 per cent drop in steel prices in two years, the overall global collapse in commodity values, stagnant wages, a swooning loonie and near-negative lending rates are strong and frightening deflationary signals. Yet, the price of a Vancouver bungalow is 25 per cent higher than a year ago, luxury real estate prices around the globe are soaring and more Rolls Royces are being sold on the streets of Moscow and Beijing that at any time in history.

We have preached for years on the prospect of runaway inflation and now, right now in 2016, we are seeing its true face. It is due, of course, to the increasingly reliance on government stimulus and money printing.

Our new federal government first proposed to go $10 billion deep in deficit spending; now it is $30 billion and rising. The Alberta government has released a $10 billion deficit budget of its own and, like the feds and Ontario, have made no promises to reach a balanced budget. Ever.

With hyper-charged printing presses churning out money – remember the global government stimulus started seven years ago – and central banks offering money at near zero, even negative, lending rates, runaway inflation is the result.

An East Vancouver bungalow is now selling for 72 per cent more than it was just before the great recession when the stimulus spending started: it is not because of lipstick renovations and a new kitchen that it is now worth $1.1 million. It is because the dollar is worth so much less.

Real estate, especially residential real estate, is now virtually the only bulwark standing between the average Canadian and the twin tsunamis of inflation and deflation. The stock market is too vulnerable; the price of gold has fallen by $200 in the last two years. No shelter there.

But real estate investors have to be more savvy and selective than ever. Buy in Calgary, Edmonton or Saskatoon and the price may not budge for years, the result of deflation in resource industries. But Chilliwack, B.C. average house prices are up 20 per cent from last spring; and they are up 29 per cent in Langley and more than 14 per cent higher in Kelowna and Nanaimo.

In Vancouver, of course, the typical house has made more cash in the past six months than the average annual household income.

And you have to make a decision quickly.Stricter, much harsher, regulations are coming to restrict mortgage lending. In Hong Kong, a 20 per cent tax is being levied on homes purchased by investors, and we could see a similar move here. Government need taxes to fuel their spending.

This year Italy will be the next big fat Greek financial domino, followed by France, which has not had a balanced budget in decades, and then Spain, as runaway inflation and unstoppable deflation combine to crush those overly-stimulated, under producing economies. Russia is on the ropes and Japan, with debt at 240 per cent of GDP, is staring into the abyss. China’s economy is being shaken by the boots of potentially billions of unemployed workers.

But the rich – who are getting much richer - don’t need to worry. They are getting their money out fast to real estate and land in safe, stable destinations. Like Canada. Like Toronto. And especially Vancouver, where the foreign real estate money is here to stay, parked permanently in the most livable city in the world.

For Canadian real estate investors, this is a year of economic volatility in which fortunes are being made. Be careful, but also be quick.

 

– Vancouver-based Ozzie Jurock is publisher of the Jurock Real Estate Insider and author of Real Estate Action, published this spring. 


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