Leo's Notes:Random

From Leo's Notes
This page was last edited on 11 August 2017, at 06:29.

Canadian Real Estate Market

In summary, prices in the Canadian real estate market has risen too much too fast due to artificially low interest rates.

The housing market, like any other market (such as the stock market), runs on debt with only a small percentage of real wealth; the rest is fictional. Similar to how the stock market runs on margins, the real estate runs on banks lending lots of easy money to people.

Real estate prices have gone up because of artificially and historically low interest rates (citation) resulting in more money being pumped into the market. With low interest rates, people have less incentive to save and more incentive to borrow more and more with the mentality that with a small percentage now, they think they own it, when in actuality the bank/lender actually owns it.

This has been made worse with foreign national buyer laws such as BC's 15% foreign buyer's tax in an attempt to reduce the heated housing prices in Vancouver. Ontario also implemented a similar tax. The result of such a tax is that prices are now hidden with the cost of the house as builders and real estate companies now try and cover the taxes, resulting in an overall higher housing price.

As housing prices rise year after year due to low interest rates, eventually the housing price will fall as the market corrects itself (why??). A drop in housing prices will result in many people having their wealth wiped out simply because all their wealth is tied to the debt associated with their home. The reduction of wealth will also exacerbate the slow economy.

To avoid slowing the economy, the government and bank of Canada will try reducing the interest rates or making it negative. However, this will result in higher and higher housing prices. Eventually, something will break (why? What are the consequences of perpetually artificially low interest rates?)

In a free market, interest rates are determined by the market: During booms, interest rates will go down as there is more money readily available in the economy. During busts, interest rates go up when there is less money available.

If the interest rates rises, the housing prices will drop even more significantly when people are forced to refinance their home and cannot afford it.

Free Market

In a free market, the government does not monopolize or control currency. There used to be competing currencies from different banks (eg. by issuing their own checks) and is fundamental to a free market. There is nothing magical about money, it's just a medium of exchange/transport of goods - it's a good or a commodity that you use.

Government monopolizing and controlling currency is the most fundamental violation of property since it is forcing everyone to use their fiat/paper currency and using violence to prevent people from competing in a legitimate sphere of economic activity (ie. creating a medium of exchange). Anytime government is in control of currency, massive theft is happening whether it is through printing (inflation, eroding savings, lessen incentive of having savings, which lessens the accumulation of capital, which slows down and destroys economic growth). Inflation is a crushing tax on the poor since the poor has the highest proportion of fixed expenses vs their income.

Since the creation of the federal reserve, the US dollar has lost 95% of its value (is this still accurate?)

Interest Rates

Things that have a value has a price. Money's price is its interest rate. Interest rates exist because we are mortal and we want things now rather than later. Interest rates are fundamentally intrinsic to the productive operation of a free market. It's a signal to how economic resources should be allocated.

Fundamentally, interest rates are determined by how much available capital is around:

  • If people are saving lots of money, the price of money goes down. Companies will take advantage of cheaper money to expand and also because people are saving to spend later.
  • If people are spending a lot of money and not saving, the price of money goes up. Companies will not expand, should consolidate, or contract. (why?)

Printing Money

When government starts printing money, in a free market, interest rates should rise. The reason for an increase is because with more currency in circulation, the currency will lose its value over time. When taking a loan, the dollars you pay back in the future are going to be worth less than the dollars you are borrowing now and the interest rate will reflect that to cover the difference.

For example, if the interest rate is 5%, but the currency is losing 10% over the next year, the interest rate will immediately be 15%.

Without controlling the interest rate, printing money will not make the government that much since the economy will be at a standstill (right?). It's for this reason when government starts printing money, they also immediately take control and cap interest rates so that others will pay for it down the road.