SHIKUN & BINUI REAL ESTATE.
(photo credit: SHIKUN & BINUI REAL ESTATE)
One of the best – and certainly the least painful – ways of learning about
anything is by observing the mistakes made by others. If you are smart, you can
observe other people doing things in a stupid or inefficient way and actually
avoid getting into trouble by making the major blunders that they are making. If
you are less smart, you can at least learn from your own past mistakes. Failing
all of these, you can avoid serious trouble just by sheer good
These pearls of wisdom apply to almost every field of activity, but
let’s home in on economics and finance – and let’s be specific. There was a huge
bubble in the real estate and mortgage sectors of several countries in the
decade from 1997-2007. This was the result of bad economic policies, very lax
supervision of the banks and incredibly poor decision-making by the banks
themselves. There were other factors involved as well, with the specific mix
varying from one country to another.
But the result of these policy
mistakes, incompetence, stupidity and a large dose of criminal activity as well
was a huge real estate crash – the bigger the bubbles come, the harder they pop
and crash. In most of the countries involved, the entire banking system was made
insolvent by their excessive exposure to real estate and
However, there were a few countries in the developed world
that managed to get through the crash of 2008 without serious trouble.
good example is Canada, which had run a very sound and sensible economic policy
since the mid-1990s, and whose banks were hailed during and after the crash of
2008 as being solid, prudent and largely clean. In other words, the government,
the banking system and the general population had succeeded in avoiding the fate
of their large neighbor, the US; of their former mother country, the UK; and of
This success was achieved by learning from their own mistakes in
the past (such as running up a huge budget deficit) and from avoiding the
obvious idiocies of others. No doubt, a measure of luck was involved as well,
but luck often serves those who are well-prepared to take advantage of it. In
the wake of this singular achievement of having avoided the worst crisis in
eighty years, you might think that the Canadians would be not only proud of
themselves, but extra careful to keep their economic policy and banking system
on the straight and narrow.
In reality, things are working out rather
differently. The Canadians cut their interest rates sharply in 2008-09 along
with the rest of the developed countries, and have kept them at historically low
levels. Meanwhile, their economy has bounced back quickly, because of its
underlying strengths – and also because of the country’s wealth of natural
resources, which have benefited from the global commodity boom.
country’s currency has risen strongly, having benefited from its economic
performance and its clear superiority to the American dollar.
and strong growth have triggered a housing and mortgage boom in Canada. The
banks – the same ones being hefted for their conservative attitude and solid
performance a few years ago – have been pumping out mortgage loans as hard and
fast as they can, so that the strength of their balance sheets is rapidly being
They are in no immediate danger, but if and when interest rates
rise and their borrowers find their repayments jumping whilst the value of their
properties falls, they will suffer losses. If things carry on their present path
for much longer, the potential danger will shift from being one of a bad year or
two to a systemic crisis with massive implications for the whole
To the onlooker, this is remarkable, because it shows how easy
it is to subvert supposedly intelligent people.
Instead of drawing the
lesson that it pays to be prudent, the Canadian banks and their clients have
been seduced by the siren song of cheap money and a speculative boom in which
“everyone” is “getting rich” quickly and easily. The fact that very recently the
same scenario ended in major disaster in nearby countries makes no difference.
The herd is up and running and nothing can stand in its way.
story is not only remarkable in itself – it also sounds eerily
Israel, another country that came through the crisis with
flying colors, is charging down the same path. The same devil’s brew of cheap
money and rising prices is fuelling a mortgage and house price boom here, with
people loading up on floating- rate mortgages that are currently very
Indeed, substitute Israel for Canada in the previous
paragraphs and almost the entire description is still valid.
process will end badly is not open to question – the evidence from historical
precedents is overwhelming.
The longer it goes on, the worse the final
So far, the efforts of the Bank of Israel to stem the tide of
speculation have failed.
But after this week’s shocking GDP figures –
which were not wonderful but terrible, showing an economy rapidly overheating
and racing in the wrong direction – those efforts will have to be
The Israeli consumption and real estate boom will have to be
derailed, before it goes over the cliff, taking the banking system with it.
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