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Nov 27, 2008

Over-building to meet speculative demand during boom years is not a recent phenomenon. In the boom years of 1881-82, the Winnipeg construction industry was on a tear, building hundreds of new homes and commercial establishments. During the boom, thousands of people flooded into the city to take advantage of high wages, numerous jobs and the prospect of their share of the riches they saw others accumulating. As one writer described the period, it was “one continuous joy-ride.” 

“Going, gone,” began one article in the Winnipeg Daily Sun on November 3, 1881, relating the tale of “an hour in an auction room” at the height of the most spectacular land speculation boom in Manitoba’s history.

Following a visit to Winnipeg in the fall of 1881, a St. Louis Republican reporter wrote that between 900 and 1,000 new homes were in the process of being erected,” but many were still living in tents. Houses were often built in the space of just 24 hours, while another 3,000 people “find homes in the different hotels ... In the great majority of cases it was learned that one bed is occupied by two persons; many had rooms containing two or three beds, and some as many as four or five.”

Boardinghouses sprang up across the city and were filled with mostly males such as “carpenters smelling strongly of shavings, mill hands smelling of sawdust and oil, teamsters smelling of horse, plasterers fragrant with lime, roofers odorous with tar, railway laborers smelling of whiskey ...”

The problem with the 1881-82 boom in Winnipeg and across Manitoba and wherever the CPR laid its tracks was that it was based solely on speculation.

“Thousands of dollars were made by operators in a few minutes,” wrote John Macoun in his book, Manitoba and the Great Northwest, published in 1882.

Another writer of the period was more pessimistic and called Winnipeg a “fool’s paradise.”

“The boom was purely speculative,” said MP Alexander Ross, who made a fortune during the boom (he was one of the few who didn’t go bust).

The result was that “honest and good” men were turned out of their homes and their goods sold off by the sheriff.

“Banks and other financial institutions which had encouraged and fostered the reckless inflation of boom days,” wrote the Winnipeg Board of Trade in its 1884 report, “were now mercilessly exacting in their demands, and many a man, who in (a) more confident state of trade could have weathered the pressure with honour was forced into insolvency.”

While many stayed in Winnipeg, many also left never to return — broke and despondent.

Sound familiar? It should. What happened so long ago in Winnipeg is now happening in the United States and Europe. As in Winnipeg’s case, it was greed that drove the market. Mortgage lenders in the United States took on suspect customers, simply on the speculation that real estate would continue its upward climb in value. With easy money available, Americans began to speculate in real estate, mortgaging their first home to purchase another home on “spec” with the idea to cash in on the boom.

The problem as we now know — why has no one learned the lessons of the past? — is that the “good times” do not roll along indefinitely when they are held up by the thinnest of threads.

During the 1881-82 boom, Eastern bank executives warned their branch managers in Winnipeg to avoid investing in properties as long as speculation was the sole basis for increased property values. In the U.S., some were warning that the housing bubble was about to burst, but their cries of caution were ignored. As long as greed dominated and was accepted wholeheartedly by the American financial sector, which initially thrived on high-risk sub-prime mortgages, there was no stopping the speculation. When the house of cåards toppled, it was the financial sector, responsible for fueling the speculative market, that had to be bailed out. In numerous cases, the announced government bailout was too late, leading to the end of some of America’s longest-running financial services such as Lehman Brothers.

In Europe, Ireland, the so-called Celtic Tiger — the former darling of all right-wing economic pundits — joined the Americans in a speculative housing market, but when the “housing correction” came the nation was unprepared. Houses prices are now down 30 per cent from their peak, homeowners are deeply indebted — a staggering 265 per cent of GDP — no one is buying homes and housing construction has virtually stopped. On the same continent, Iceland is bankrupt and England is reeling in a financial morass. As in the case of the U.S., the European Commission has been forced to launch what it calls a “significant” two-year stimulus campaign to jolt member countries’ economies out of the present recession.

Writing after the boom, Ross said the “future of real estate is all right. We shall have another boom in central Winnipeg property. It will not be speculative, but a genuine boom. The city will continue to grow, and demand will overtake the boom.”

Thankfully, Ross was right. The housing boom of recent years was never speculative and the local economy is still vibrant. Actually, the local housing market never reached the exorbitant level of other major Canadian cities that now have seen housing prices significantly drop. What is happening locally are modest expectations in the wake of a more balanced market.

But that doesn’t mean there won’t be some bumps in the road — no one will escape what is becoming a world-wide  downturn — as many local companies and businesses rely upon exports to the Americans who are importing fewer commodities and goods from Canada. Still, the signs are good that due to its diverse economy Manitoba is in a good position to weather the economic storm. The province is also benefiting from sounder lending practices exercised by Canadian banks which follow the sage government regulations that are now the envy of other nations.

Winnipeg learned the lessons of 1881-82, growth over the years has been relatively modest, and as Ross predicted, the real estate market is now “all right.” Essentially, unlike Europe and the U.S., we have avoided the “fool’s paradise” of speculation.