Brian Ripley's "Plunge-O-Meter" records Vancouver's price peak in April - for single family dwellings (SFDs) - at $818,403. It records the price three months later at $793,193, a decline of $25,210. For Mr. Ripley, CEO of the Vancouver real estate firm Oakes Ripley & Associates, this modest depreciation (3.1 per cent) marks the beginning of a long deleveraging process that could take Vancouver's SFD price back down to $503,141, the level it was at five short years ago.
Vancouver's price drop, Mr. Ripley says, represents a deflation factor (calculated by dividing the price decline by the number of months since the peak) equal to $8,335 a month. This deflation process, he anticipates, will continue - by diminishing monthly increments - for 35 months. By the time the Vancouver market retracts the "ardent speculation" it has experienced since 2005, Mr. Ripley suggests, the price of a single-family dwelling will have shed $315,262 in excess valuation: 38.5 per cent.
Mr. Riley calculates the SFD deflation penalty for a number of major Canadian cities. In Calgary, he says, the price peaked in July, 2007, at $505,920; it is now $464,655, a decline of $41,265 (8.2 per cent). The deflation penalty so far equals $1,145 a month.
It is self-evident that tax increases at this time would make things more difficult than necessary
In Edmonton, the price peaked one month earlier than Calgary - and has declined the most, both in percentage terms and in absolute dollars. From $426,028 at the peak to $378,979 now, the price has dropped by $47,049 (11 per cent). The deflation penalty so far equals $1,237 a month.
In Toronto, the price peaked in May at $446,593; it is now $420,482, a decline of $26,111 (5.8 per cent). The deflation penalty so far equals $13,020 a month. In Ottawa, the price peaked in May as well; it has fallen from $333,408 to $326,572, a reversal of $6,836 (2.1 per cent). The deflation penalty so far equals $6,836 a month. Of the country's major cities, only Montreal has yet to document a decline in price - though, from Plunge-O-Meter numbers, it appears ready for reversal as well.
Mr. Riley's calculation of a deflation factor in the price decline of single-family dwellings is unconventional - but astute. We will probably encounter many comparable calculations in the months ahead. Notwithstanding global manipulation by the world's biggest central banks, the fact is this: The world confronts a period, presumably prolonged, of deflation: a period of a general decline in prices and wages.
Who says? For one (among many), James Bullard, president of the Federal Reserve Bank of St. Louis, who "raised the spectre," as reported by The Washington Post in July, "of Japanese-style deflation." (The phrase "Japanese-style" means "prolonged.") In its decision last week to further suppress interest rates, the Fed itself officially concurred with Mr. Bullard's warning.
In Canada, the evidence remains marginally equivocal - although any significant deflationary decline in people's real estate assets will surely end all argument. Seasonally adjusted, however, we're already almost there. Canada's Consumer Price Index fell by 0.2 per cent in May, 0.2 per cent in June. This index (excluding energy) has been on a downward trajectory toward zero throughout the past year.
In the most recent six months, U.S. core inflation has fallen to 0.4 per cent. In Europe, it has fallen to 0.8 per cent. Spain's inflation rate is 0.1 per cent. Ireland's is minus 2.7 per cent. Japan's is minus 1.7 per cent. By year's end, says U.S. economist John H. Makin (a visiting scholar at the American Enterprise Institute): "Inflation will become deflation globally in short order."
It is self-evident that tax increases at this time would make things more difficult than necessary - by reducing people's incomes when they should be paying down debt. In Canada, the federal Conservative government has affirmed many times that it will not increase taxes and will, indeed, lower corporate taxes in each of the next two years. The opposition parties have promised to resist and reverse all such tax cuts. Prime Minister Stephen Harper must not let this marvellous moment pass.
Two weeks ago, the Conference Board of Canada reported that the government was running ahead of schedule in meeting its fiscal targets - as much as $10-billion ahead. This success makes it possible for the government to eliminate its deficit in 2014, a full year ahead of expectations. More productively, however, it enables the government to deliver another $10-billion in personal and corporate tax cuts.
Americans paid off $9-billion (4.5 per cent) in consumer debt in June, the 20th consecutive month they have done so. These folk are prepping for deflation. Here in Canada, we have things reversed. Consumer debt hovers at a record high. Add the tax increases inherent in provincial mismanagement. Add the reduction in net worth (and the prospective loss of capital gains) inherent in people's homes. Add deflation, however modest.
Mr. Harper should now let the country decide: more tax cuts - or less.
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