Global monetary stimulus moves around the world, wrecking the lives of the locals who don’t keep up

I received an email from a concerned reader in Toronto. He observes the same issues in his home city that we are currently observing in Australia’s former hot real estate markets of Sydney and Melbourne.

House prices in Sydney and Melbourne are way overpriced, especially to income. Just like Toronto and Vancouver here. Half of the mortgages in Australia are interest only. The lending standards are very lax, like they where in the states back before the bust in ’08.

Australia has not been in a recession in almost 30 years. They are due for one. We here in Canada and Australia borrowed our way out of the last recession. A lot of Chinese and Iranian money helped the real estate market where a huge chunk of jobs are in.

I’m looking on Zillow for homes in Florida and Arizona, to one day get out of this frozen wasteland. A big chunk of the homes are vacant. Find that strange. You don’t see that here.

Alt financial. gloom and doom…sells $$$; Good news. Not so much.

V – Toronto, CA

Foreign QE money is drawn to cities like Toronto and Sydney

Indeed, Australia has been largely immune from all the economic turbulence over the past two to three decades. The downside is that foreign money has been drawn to Australia’s asset market with much of it going into real estate. The same can be said for Canada’s housing market as well.

Here is a link to a CNBC video, Why Australia Hasn’t Had A Recession In Decades.

Canada and Australia’s populations are much smaller than the United States. Thus in the U.S., foreign money has less impact. Australia has also benefited from its close proximity to China and Southeast Asia.

The downside of foreign money is that it is less sensitive to local supply and demand dynamics and usually just helps to drive up prices on the margin. Although foreign money may be a relatively small part of the equation, its impact is huge. Thus, in order for the local residents to keep up, the lenders are forced to develop easier loans for the locals to use when buying at these inflated prices.

Read: Is the Chinese love affair with Australian real estate over?

If I lived in Toronto, San Francisco, or Sydney, I probably would have rented or if I were a longer term homeowner, I certainly would not have levered higher. We have to live somewhere. When I lived in NYC I knew of several friends who rented in Manhattan, but bought properties outside the city either for investment or vacation. This is always a viable alternative to those who are stuck in high cost areas.

Be prepared for more global monetary stimulus
Countries with small populations are held hostage to speculative foreign QE money

We are seeing the European economies turn down once again and I do not see how their dropping GDP growth can reverse course without the re-institution of unconventional monetary policy.

When we see the major central banks begin to tear it up with new monetary stimulus, these funds will swirl around the globe, destroying the lives of the locals who will not be able to keep up. The result of QE is a wall of money that looks like locusts in a biblical plague. For those who understand and can spot opportunity they can move forward. Unfortunately, for the vast majority of humanity, they end up on the losing end.

When capitalization rates on residential real estate move lower than 3% it’s time to either unload poor performers or step aside entirely. When price to annual disposable income multiples approach 8 or 9 times, it’s time to stay away. If we can spot areas with higher cap rates and lower price/income multiples, the odds of surviving housing downturns increase greatly.

At the end of the day, when it comes to real estate, I am a long-term investor. This is how wealth is created. We just need to be sensible in our valuations. We also need to understand how fiscal deficit spending and its offsetting monetary stimulus work against the average person. Don’t be the victim.