Wednesday, May 14, 2014

The Canadian Real Estate Bubble

In my book I talk about all the reasons I'm not invested in income properties right now.  I talk about how asset prices for income producing properties are related to interest rates and since those can't get any lower, the likelihood of continued increases in income property prices is unlikely.

There is, however, a much bigger problem for real estate in Canada.  People are maxed out and if interest rates rise people will start to find their homes un-affordable, especially those who haven't locked in a rate.

This means there is a potential 'correction' for the market.  People who can't afford their new mortgage payment will try to sell the house, more supply and reduced demand because of the same rate increases will lead to lower home prices.

I don't expect a big nominal price crash in places like Moncton, but I think people in Toronto may be in for a big surprise over the next few years.  Also, a drop of as little as 10% will wipe out all the equity of most buyers who bought in the last couple of years.  This turns these people into little more than debt-serfs to the banks as they'll be paying on a mortgage that's worth more than the home its secured against.

What I've seen in my own neighbourhood is that home prices have been stagnant over the last 18 months or so and more 'for sale' signs are appearing all the time.

Whenever the price of one of your assets remains constant, you are actually losing value.  This is because of inflation.  Depending on how you measure inflation, this means that houses in my neighbourhood have actually lost between 2.85% and 9% over the last year.  (Read the inflation chapter in my book to understand how we're all in a race against new money creation by central banks.)

Banks make money by making mortgages and collecting interest and so they often 'talk their book' by trying to tell everyone how great things are.

I found this recent YouTube video by Patrick Doyle to be pretty funny.  I especially like when he satirizes CIBC economist Benjamin Tal as a 16th century Dutch Tulip Analyst.

Take a look:

Also, just for fun, type 'Canadian Real Estate Bubble' into Google or YouTube.  A lot of people are talking about this.

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