Today, we’re not just going to focus on the housing market.
We’re going to take a look at a bigger picture of our whole economy.
And we’ll discuss the top 3 issues on both the supply and demand side of things.
In basic economics, when supply matches demand, then we’re in equilibrium.
And prices should stay pretty much the same, other than the normal 1 to 2 % inflation.
Prices would start to move when there’s an imbalance of supply and demand.
Here’s what the pandemic has done.
It significantly disrupted our supply chain and at the same time it created a lot of unexpected demand.
Let’s start with the top 3 reasons why there’s so much unexpected demand.
#1 Too Much Cash
Canadian households are sitting on over $100 billion dollars in extra savings due to the pandemic.
You see, recreation, culture, leisure and travel accommodation spendings were all eliminated.
And who spends the most on these items?
Households with income above $70,000 accounted for 57% of those spendings, according to data in 2019.
This group also represents the majority of people with jobs unaffected by the pandemic.
So essentially they are making the same amount of money but have nowhere to spend that money.
It’s normal for people to save more money during a crisis because of fear and uncertainty.
To put things in perspective, let’s take a look at the savings during the financial crisis in 2008.
Savings rate went up from around 1% to 5% when we were at the peak of the crisis.
As we headed into recovery, people naturally started to spend some of that savings.
With this current pandemic, savings rate shot up from the usual 1% to 27.5%, that’s 5 times more than the peak of the financial crisis.
#2 People Are Bored
Everyone is fatigue and frustrated about lockdowns and quarantines.
When people are bored, sitting at home with excess cash, they are going to spend some money to entertain themselves.
They can’t spend it on services, so they spend it on durable goods.
You see, car, smartphone, PC, tablet and TV companies all underestimated what consumers would want.
This leads to a huge semiconductor shortage that we’re going to talk about shortly.
And when people spend a lot more time at home than they ever did before, some people would start thinking about home improvement projects and some would start looking for a bigger or better home.
This again created unexpectedly high demands on housing related products and services.
Let’s say you have a swimming pool in your backyard that you haven’t used for years and now you want a contractor to come reopen it so you can use it again.
Do you know how long you need to wait?
A shocking 2 years.
Yup, contractors are all booked up, you’ll need to wait till spring 2023 to be able to use your swimming pool again.
#3 Government Relief Programs
There are pandemic emergency programs, economic response plans, relief packages and so on.
Essentially they all mean that the government is printing money and pumping it into the economy.
Let me give you some numbers from a CIBC report.
In the second quarter of 2020, labour income plummeted by a seasonally adjusted annual rate of just over $100 billion dollars.
But the government has transferred around $376 billion dollars through its relief programs.
Now, people are going to spend that money to buy food or whatever they need.
And that means more demand for goods and services.
So we see where the demands are coming from, let’s take a look at the supply side of things.
Other than a surge in demand, factory shutdowns due to the virus, transportation delays all add to the supply challenges.
#1 Computer Chip Shortage
The computer chip is the brain in every electronic device, from cars, to phones, to refrigerators.
Initially, the problem was only a temporary delay in supplies because of factory shutdowns.
Then came the surge in demand that we talked about earlier, the shortage of computer chips is now reaching a crisis point.
Car makers have been especially hard hit by this. They reduced their order for computer chips because they thought the demand for cars was going to drop.
Apparently, they were completely wrong. And now they end up in serious shortages because of the surge in demand.
Ford recently cancelled shifts at two car plants and said profits could be hit by up to $2.5 billion dollars this year due to chip shortages.
Nissan is idling output at plants in Mexico and the US.
General Motors said it could face a $2 billion dollar profit hit.
In the coming months, it’s not going to be easy finding the car you want and you better be prepared to pay more.
Let’s take a look at Samsung. It sells all kinds of electronic products like mobile phones, laptops, TVs and home appliances.
It’s also the world’s second largest producer of chips, after TSMC.
Samsung sells $56 billion dollars of semiconductors to others and consumes $36 billion dollars of them itself.
A few weeks ago, Samsung came out and said they might have to postpone the launch of its high end smartphone due to chip shortage.
That really tells you how serious the shortage is when the chipmaker itself needs to delay its own product launch.
The Intel CEO has also come out to say that the chip shortage is expected to last for a couple years as demand far outstrips supply.
So I think it’s not hard for us to predict that cars are going to cost more, phones are going to cost more and so on.
This year’s iPhone is not going to be cheaper than last year.
#2 Lumber & Steel Shortage
Similar to the chip shortage situation, initially, the sawmills for cutting logs into lumber were shut down due to the pandemic.
Then came the surge in demand when people wanted to build a fence or a deck for their backyard or renovate their basement.
And builders require large quantities of lumber for new home constructions.
So the result is a shortage in lumber and a sky-rocketing price.
Lumber price is up 193% from one year ago and is expected to spike even higher.
Let’s suppose you plan to build a 25 by 30 foot deck in your backyard.
Last year, you would be paying around $3,000 for the lumber itself.
This year, you would be paying $6,000.
In addition to lumber, we may be facing similar issues in steel.
In Ontario, the price for steel products used in construction has increased by about 80% since last June.
You see, lumber and steel are raw materials in home construction.
So that means home construction costs are going way up.
Similar to the iPhone, this year’s home prices are not going to be cheaper than last year.
#3 Shipping Container Shortage
Have you experienced long shipping delays when you order stuff online during the pandemic?
I certainly did.
In the normal world prior to the pandemic, China would ship stuff to us in a bunch of containers.
Then after we unload, we would fill the containers with our exports and ship to some other countries in the world.
There were about 180 million containers circulating around the world.
Then of course the pandemic hit and disrupted everything.
Some ships were stuck because of the 14 day quarantine.
Empty containers were also stuck because the ports were not operating due to the lockdowns.
You see, the flow is completely screwed up.
Countries who need the containers don’t get them while empty containers are just sitting idle in some other countries.
This turns into a critical shortage of containers.
Companies are desperate waiting weeks for the containers and are willing to pay premium rates to get them.
And so, shipping costs skyrocketed by more than 300%.
The usual price of a container was around $1,200 US dollars and now it can go up to $6,000 US dollars.
You see, all these shortages are going to have a ripple effect through our economy and it’s not hard to see that just about everything is going to get more expensive in 2021.
If you do nothing, then your purchasing power naturally keeps decreasing day by day just because things are getting more and more expensive.
Let’s take a look at the price of a Big Mac.
Why Big Mac?
First of all, it’s a down to earth item.
And just like most consumer goods, it must take into account local costs of raw materials, labour, taxes and business premises.
So it’s often considered as a pretty good indicator of local economic purchasing power, makes perfect sense, right?
Today, the price of a Big Mac is $5.69.
10 years ago, the price was $4.12.
That means generally speaking, the price of things have increased 38% over the course of 10 years.
Let’s suppose you had $1 million dollars cash 10 years ago, and you did nothing, today, your purchasing power is automatically reduced to only $720,000 dollars.
On the other hand, if you invested that one million dollar into Toronto real estate, even with just 50% leverage on mortgages, you would have more than $3 million dollars today.
See the difference?
And that happened without all the unusual surge in demand and supply shortages caused by the pandemic.
Of course, there are always risks involved with investing.
But in light of this unprecedented imbalance of supply and demand, I would say that the risk of NOT investing is much bigger than investing.
Don’t you agree?
If you also believe that you need to build your wealth through investing, then you can schedule a call with me at the link below.