Investment Workshop 35: Did Canada’s Housing Crash Just Start?

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Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
Wanderer
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Hello again and welcome back to the Millennial Revolution Investment Workshop! New readers, please click here to start from the beginning.

For the last few months, we’ve been traipsing around Mexico and Central America and for the most part stopped paying much attention to what was going on back in Canada. But recently, after coming back to Toronto to visit family post our app launch, we discovered just how much could change in just a few short months.

A few months ago, when we flew out to Mexico, this was the headline in the news:

March home sales hit record high

Source: The Globe and Mail

House horny idiots were everywhere, shoving their massive boners into every real-estate orgy and hoarding properties like a fat kid hoards cake. The year to year increase was a nosebleed 30% over the previous year, and greedy specs and flippers were cackling about what geniuses they were for riding a bull market.

Fast-forward 1 month. The Ontario government decides to pour cold water over the real-estate orgy with their 16-point “Fair Housing” plan.

By punching foreign buyers in the gonads with a 15% tax, elbowing real-estate “investors” in the face with rental control, and landing a roundhouse kick to the chest on flippers with vacancy taxes and anti-flipping rules, maybe they’ll FINALLY get rid of all that housing lust.

The result?

Here’s the headline that greeted us when we came back.

Toronto House Prices Have Already Fallen 12% From Their Peak

Source: The Huffington Post

Housing sales volume in the GTA plummeted 47%, and prices (that’s PRICES, not SALES) have fallen 12%! And I know know, lots of you will say “oh it’s not so bad considering how houses went up 30% in a year”, the fact that this happened in the span of only 2 months is pretty alarming. Especially considering how, during the 2008 housing crash in the States, houses fell 25%! That means if it keeps going 13% lower, we will have had a US-style housing crash.

Those who bought years ago probably won’t be underwater, but those who bought in the last few months? They are now sitting on jumbo mortgages with a house worth less than their balance. Ditto for those who bought bigger, more expensive homes before selling their pile of bricks. Those who bought a million dollar property in April are now sitting on a $120,000 loss in just 3 months. That’s money that would take YEARS to save up. And unlike a portfolio, which continues paying you interest and dividends in market downturns, even as their equity erodes, property taxes continue going up, as does maintenance, interest rates, etc. You continue to pay for the privilege of owning that pile of bricks, no matter which way the market swings. That’s why people who only look at the upside of investing while completely ignore the downside never get rich. They always get FUCKED. And not in a good way.

On top of all this uncertainty, with interest rates hikes coming down the pike (with the market predicting a 95% possibility), and more rules to kick speculators in the nuts with bans on AirBnb on investment properties, I wouldn’t want to be a real-estate investor right now.

While landlords worry about interest rate increases, decreasing home values, and skyrocking ownership costs, renters are reaping the rewards of government’s newly enacted rent control and staying put, building up our portfolio.

Man, is it ever a good time to be a renter.

So what do you guys think? Are we finally seeing that housing crash people have been predicting for the past forever? Or is this another false start?

And I’m especially interested to hear what our American readers think. Does any of this sound familiar to y’all?

And on that note, let’s put in our regularly scheduled buys orders.

Canadian Portfolio

We begin, as always, by taking a snapshot of our portfolio after adding in the new cash.

Asset Ticker Unit Price Units Market Value Allocation Target Allocation
Canadian Bonds VAB $25.41 119 $3,023.79 37.57% 40%
Canadian Index VCN $30.67 49 $1,502.83 18.67% 20%
US Index VUN $43.33 34 $1,473.22 18.30% 20%
EAFE Index XEF $28.71 41 $1,177.11 14.62% 16%
Emerging Markets XEC $25.43 12 $305.16 3.79% 4%
Cash $1.00 567.36 $567.36 7.05% 0%

We then compare our allocations to our targets.

Asset Ticker Target Allocation Unit Price Current Market Value Target Market Value Current Units Target Units Difference
Canadian Bonds VAB 40% $25.41 $3,023.79 $3,219.79 119 126.7 7.7
Canadian Index VCN 20% $30.67 $1,502.83 $1,609.89 49 52.5 3.5
US Index VUN 20% $43.33 $1,473.22 $1,609.89 34 37.2 3.2
EAFE Index XEF 16% $28.71 $1,177.11 $1,287.92 41 44.9 3.9
Emerging Markets XEC 4% $25.43 $305.16 $321.98 12 12.7 0.7
Cash 0% $1.00 $567.36 $0.00 567.36 0.0 -567.4

And finally, we figure out our orders being careful not to go into margin.

Asset Ticker Unit Price Action Fractional Units Units Proceeds
Canadian Bonds VAB $25.41 BUY 7.7 7 $177.87
Canadian Index VCN $30.67 BUY 3.5 3 $92.01
US Index VUN $43.33 BUY 3.2 3 $129.99
EAFE Index XEF $28.71 BUY 3.9 4 $114.84
Emerging Markets XEC $25.43 BUY 0.7 1 $25.43
Total $540.14

American Portfolio

And on the American side, we also begin by adding in our cash and taking a snapshot of our portfolio…

Asset Ticker Unit Price Units Market Value Allocation Target Allocation
Bonds BND $81.66 37 $3,021.42 36.33% 40%
US Index VTI $125.42 19 $2,382.98 28.65% 30%
International Index VEU $50.67 46 $2,330.82 28.02% 30%
Cash $1.00 581.87 $581.87 7.00% 0%

We then compare our portfolio to our target allocations…

Asset Ticker Target Allocation Unit Price Current Market Value Target Market Value Current Units Target Units Difference
Bonds BND 40% $81.66 $3,021.42 $3,326.84 37 40.7 3.7
US Index VTI 30% $125.42 $2,382.98 $2,495.13 19 19.9 0.9
International Index VEU 30% $50.67 $2,330.82 $2,495.13 46 49.2 3.2
Cash 0% $1.00 $581.87 $0.00 581.87 0.0 -581.9

And finally, we generate our buy orders being careful not to go into margin.

Asset Ticker Unit Price Action Fractional Units Units Proceeds
Bonds BND $81.66 BUY 3.7 3 $244.98
US Index VTI $125.42 BUY 0.9 1 $125.42
International Index VEU $50.67 BUY 3.2 4 $202.68
Total $573.08

And with that, we are done. Thanks everyone, and see you next week!

91 thoughts on “Investment Workshop 35: Did Canada’s Housing Crash Just Start?”

  1. Did it start to crash? No. It’s just a small correction.

    High prices aren’t endemic of an imminent bubble when demand is high. I’m from the GTA region, and any house that goes on sale, gets sold relatively quickly.

    Even with these ridiculous prices, demand is still there, and as long as that’s true, there will be no crash. At least, not any time soon.

  2. Not ENTIRELY familiar — IIRC, our crisis wasn’t quite so directly a result of gov’t intervention — but, just, wow. Double throat-punch due to Canadian mortgage practices; at least I know the thirteen years left on my fifteen-year mortgage will remain a consistent payment at 2.625%, even if my home value halves, and my rate won’t change to ¯\_(ツ)_/¯ every three to five years.

    Yikes, y’all.

  3. Hi, really enjoy reading your website, just a bit confused on the units versus market value for the cash in both the American and Canadian portfolios. For the Canadian portfolio you have 504.35 units, but a market value for cash of $567.36…. I would have expected $504.35 (ie. 504.35 units x $1)… same for the US (but different values obviously). What am I missing? Am I a dodo (or are you 😉 )?

    1. Good catch. I accidentally overwrote a formula as I making today’s update. Fortunately, it didn’t effect the orders numbers I calculated, it was just affected the intermediate reporting.

      Error fixed now. Thanks!

  4. Makes me glad I found this blog and lost my ‘housing boner.’ I might look into rental properties in a couple years when the smoke clears (can’t wait for the affordanything course!) but am in no rush. I’m just hoping all these half-built skyscrapers in Toronto don’t get abandoned.

  5. What you’re seeing in Toronto seems pretty accurate. Vancouver has been doing the slow bleed out since last fall with the only thing keeping it from going totally off the rails being the BC Liberal gov’t deciding to get into the subprime mortgage business with their 5-year interest free down payment loans. I’d wager that, in general, people are just tapped out. Worse for us is that the professional class is increasingly leaving and all for similar reasons – it feels a bit bizarre when you have a household income > $250k/year and you’re having a hard time finding a place to live.

      1. Indeed. Our political situation here is all sorts of complicated though – the BC Liberals are deeply in bed with the real estate development industry (through various avenues the real estate industry ends up being their biggest donors). On the other hand, the NDP may not be so keen to get out of the subprime loans in the name of ‘making housing more affordable’ business.

  6. One beef I have with the renting scenario is that you always compare it to your own situation, where you have likely a below market rate rental unit for $800, and use that as a basis for favourable calculations going forward.

    Just like the years of rising real estate values the vacancy rate and the rental cost has also adjusted accordingly in those specific hot markets. I read recently in my area of Vancouver of how a decent, nice rental unit became available and there was a line up down the block wanting to check it out and something crazy like over 300 applicants for that desirable rental unit.

    I am not a renter and I cannot verify if such news is accurate or not, but the jist I get is that the rental market today is extremely competitive and you always run the risk of getting booted out of a basement suite if the owner decides to sell the house in this hot market.

    1. The rental market has become increasingly competitive, however, I’d point out a few things:

      – as housing markets unwind, the rental market tends to see more pressure because people can’t get the house, but still need a place to live

      – even with the significant cost increases in the last couple of years rents are still considerably lower than the cost of owning. Still 2x the cashflow to own vs rent, as far as I can tell

      1. if people can’t sell they will rent it out .. so more rentals at cheaper prices

        and a crackdown , finally, on Airbnb will free up a lot of rentals

        1. I’m not so sure of that. If you’re cashflow negative on the rental and can’t keep up with the mortgage payments, the bank may go for power of sale. I doubt the bank wants to be a landlord.

        2. Rent control INCREASES the amount landlords charge to new tenants because it REDUCES rental supply. News of developers cancelling rental projects due to the new government regulations abound. In June, rental prices in Toronto hit a new record of $2000/month on approx 750 square foot condos.

          This won’t let up unless developers think they can eventually make the math work to spend money erecting buildings where the government dictates yearly rate increases. Generally, rent control has led to the creation of ghettos filled with cheap rentals and rooming houses. It’s been said that besides war, rent control is most effective at destroying cities. Why do parts of Toronto such as Parkdale exist? It’s gentrifying now, but it’s still the poorest neighbourhood in the city (it used to be the most expensive in its heyday). Rent controlled, cockroach infested slums where rats eat little babies for breakfast. The sidewalks there used to be lined with hookers.

          Expect rents to keep skyrocketing as renters fight for the limited housing that is available. Vacancy rates are once again at record lows,

          1. It’s rare that we agree, but as a free-market guy I think rent controls are kinda dumb too. In the short term, they’ll have the desired effect of controlling the rents for existing renters. But in the long term, it screws up supply-and-demand to the point that rental supply dries up and you get shortages.

            That being said, there’s so much locked-up rental supply right now held by speculators, they may be forced to eat the loss, sell at a drastically lower price, and then the new landlord can afford to rent that place for much lower because they paid much less for the property.

            So price controls always eventually dry up supply, but in Toronto’s case, that may take a lot longer than you or I think.

            1. As far as rental supply drying up is concerned, we don’t have to wait long. It’s already bone dry. The vacancy rate is close to zero, hence the rental rate increases and renters bidding on places to rent. It’s been running on empty for several years and only getting tighter.

              The ratio of speculators in the condo market remains to be seen. If you are right that speculators have locked up condo supplies (they did appear to be active in luxury detached homes, which pushes prices up for all detached homes even though the luxury market – homes above $2 million according to Sotheby’s- is a small part of the housing market) there could be an ugly fallout. However, if it is long term investors and ordinary buyers trying to get on the property ladder, the dynamics may not change very much. Unless there are massive job losses due to a recession.

    2. I am a renter in the Vancouver market and can confirm what you are saying. Rents are becoming equivalent if not more than a mortgage on a condo/townhouse with a decent deposit. We are being forced to buy, because we have moved 3 times in 3 years due to rentals being sold and each time we moved, rents were increasing and a lineup of people desperate to rent it. We currently rent for $2000 all included a top floor of a house, but next year this property is being sold and we would be looking at paying $2300 exc bills for similar property. Scary times. I agree with idea of not owning a house, love the thinking…but in some areas it’s not the best way forward especially for families with kids who need some stability and can’t keep moving further out of town each year. Rates just went up today…let’s see what happens!

      1. Got to disagree with this. Even with significant rent increases total cost of ownership is still enormously worse than renting.

        eg: we pay $3800 in rent for a property that I would estimate would sell for ~$1.5M. (a 1500 sq ft half duplex close to Douglas Park)

        – mortgage alone on that is $5600/month
        – opportunity cost on the $300000 down payment required is ~$1500/month

        Before taxes, insurance and maintenance it’d already be > north of $7000. I can easily see that number hitting $9000/month out the door.

        Also, being forced to move sucks – we’re probably paying higher than market rent because we spent a lot of time landlord shopping. We talked to lots of douchy landlords, most offering fixed term non-renewable rentals. One of them even told us ‘we want to do this so we can kick you out whenever we want to’.

  7. Nobody knows what the market will do. However the amateurs, the fearful and the greedy who suspect that a rout is in the making will panic and list their homes. This could drive down the price. In addition buyers may also decide to “wait and see”. In the nineties I remember homes that sold for $250K unable to attract buyers at $155K or a 62% drop in value. If this happens again, and it will, many of my friends and family are going to be roasted. One couple bid up their purchase from $600k to $1.2M and then spent another $300K to fix sloping floors, a busted furnace etc. Then…new furniture and top end Euro SUV’s. Time will tell but my opinion is that the baby party is over. In the meantime I rent as I have done for the past 20 years. This apartment is my landlord’s responsibility, headache and sleepless night. All the while my portfolio earns F/You income that allows me to do and say as I please. I drool at the thought that some of my acquaintances (who mocked and laughed at my humble living accomodations) are going to have their feet held to the fire. Many have sleepless nights if their boss looks at them sideways or if there are water cooler rumours about layoffs. We renters and investors sleep soundly, stress is for the other suckers who are stupid enough to want to impress and keep up with the Jones !

      1. I wouldn’t say we slept soundly, but in the end we DID retire in our 30’s because of balanced index investing. How have you done in the same amount of time?

    1. Have you calculated what your property gains would be if you bought 20 years in ago in Vancouver? I know here in San Francisco, I would happily go back with a time machine and buy ALL I could back in 1997!

        1. I’m pretty sure in 20 years, we’ll be having the same discussion. Of course there will be dips and turns, but 20 years in the future we’ll be kicking ourselves for not buying today.

          It’s the same thing with the stock market. Gotta love inflation!

      1. wanderer, no i didn’t. THAT wasn’t my goal- ‘to retire in my 30’s’. Rather it was to raise a family .:)

        I could retire tomorrow, choose not to. I love my job , unlike you. Am also owner of the clinic this provides tremendous hourly freedom.

    2. In Toronto, prices took six years to bottom out after the 1989 crash, and at its lowest point house values had dropped about 27%. A similar drop now would mean the market reverts back to 2016 valuations. Is a bigger crash likely? Say 50% or more? Doubtful. Population has doubled since 1989, bigger economy than ever before, and we’re short on housing even with the tens of thousands of condo unit completions.

    1. Brian,

      Here is a link to a Google Sheets spreadsheet I prepared for that (save a copy before you start filling it). There are a Canadian and a US tabs.
      You need to manually put in your target allocations and how many units of each ETF you currently own, and then follow the 3 steps which are clearly noted in the spreadsheet.
      Let me know if you need any help. Cheers!

      https://docs.google.com/spreadsheets/d/1Wo6H_buMsKdz-RXDqjzza71gBQh6RjJz9n7iYXN6APg/edit?usp=drivesdk

      1. You have to follow those steps after clicking the link in order to use the spreadsheet:

        1) Log in to your google account (link at the top-right corner)
        2) Click on the “file” menu and select either “create a copy” or “add to my drive” in order to create a copy of the spreadsheet in your own google drive
        3) Now you can put in your own numbers.

        If you don’t have a google account, sorry, it won’t work for you.

  8. We’re originally from Winnipeg but have lived in Texas the last 21 years. We witnessed all the problems from the US crash in 2008-2009. We could never fully understand why Canadians wanted to repeat all of our mistakes. As the prices of Canadian homes climbed post 2008, we asked family/friends back in Canada what was causing the home prices to rise so much. They thought it was foreign investors. But according to Garth at greater fool.ca, the foreign investors weren’t that high a proportion of the purchasers. I guess it’s like many other bubbles, irrational exuberance and lemming behavior. But I certainly wonder why Canadians, prior to paying such inflated prices, didn’t look back at our terrible American home recession and pause to think, “Is this wise?” It’s still difficult for me to understand why people didn’t have more fear.

    1. Greed and a pervasive sense of superiority.

      Also, it’s just normal human behaviour. I used to worry about it a lot before realizing that I depend on this behaviour to make money more and more. 🙂

      1. Totally, as much as a lot of us like to talk shit in the comments on this site about all those spendy people, if everyone decided to join the Millennial Revolution then the economy would suffer and so would this FIRE strategy.

        1. Well.. I don’t necessarily agree with that exactly. I think I depend on the greed/fear approach to churn equity prices and make money. That has very little to do with the spendy-ness of anyone and everything to do with the panicky-ness of everyone.

          Philosophically, I don’t think the economy would ‘suffer’, per se, if everyone were smarter about their money. I think that it’d actually stabilize and people would be encouraged to do productive things in lieu of doing things based on the projected ROI. One of the things I have a great deal of difficulty with myself is that I view my own particular domain of expertise as being both extremely lucrative for myself and yet having extremely low social value – especially when compared with, say, a teacher. I think the end game of everything taking a FIRE-like approach is something like universal basic income with people doing work that has higher social value in lieu of the stuff a lot of us do today.

          1. Very good points, bikemike. However, I do think that homebuyers make better overall citizens of a society because they’re wholly and materially invested in it. When you’re just a stock investor, you’re invested in society on an abstract level. You don’t care about the neighbourhood you’re renting in because if it deteriorates, you will just move elsewhere. You don’t care about domestic issues or social issues to the same degree because you can pack your bags and flee when the going gets tough. Communities are not built on that mindset. They’re built on stability, investments, friends, neighbors, and family who share the same goals in their corner of the city they live in. Ditto for the country.

            Not all decisions can be based strictly on finances. Kids for example, are a drain on the wallet. There is no financial gain, only burden to have kids. Fortunately, this fact doesn’t stop people from having kids and investing in them. Such choices make life more grand than money alone.

            1. In what way are the folks wagering on getting rich from house price appreciation in places like Vancouver and Toronto invested in their community? From a personal standpoint, those are the folks making it difficult to be invested in my community because of their parasitical desire to eke out profit at any cost to the community. Why wouldn’t you bail on that if it became too undesirable? When did those folks take everyone else just trying to live in the community into consideration?

              As a stock market investor, at least I’m being honest – this is a game intended purely for profit. Because my method of making profit can easily shift as the rules change, I’m also able to more objective about the way I think my community or society should proceed. Because I have many wagers spread across industries and localities, I’ve got less to be afraid of, whereas my neighbours and friends that have to be concerned about their primary (only?) asset are more likely to oppose approaches (eg: putting a price on vacant housing) that benefit others at some expense to them.

              The kind of community I want to live in isn’t built around some form of mutual suffering predicated on all being stuck in the same crappy ship together. It’s built around engaging with and enjoying other people, helping each other out when you need to. Because you want to. Not because you’re forced to.

              Fwiw, I do have kids – that’s a huge part of why I feel this way.
              🙂

              1. Places like Toronto and Vancouver are exceptions to the rule, but even in these cities, most owners are not investors or speculators. They’re people who desire to live in a home in a nice community. Accelerated bull markets like the one we’ve seen are atypical and they don’t last very long. Some people get rich by flipping while most remain in their home or trade it for something a little bigger or smaller to suit their needs (e.g. Bigger for kids on the way, smaller for empty nesters).

                Communities are established over time and with people, not under cyclical real estate patterns. Chances are your neighbors are mostly the same people before, during, and after it all, by choice. Social cohesion and culture doesn’t arise out of mere engagement from stock investors that are only invested in the abtrsact. Travel and various localities are enjoyable because the people in those destinations have created established communities based on the sentiments expressed here.

                Your point about objectivity is solid however I think people choose homes in places that promote the lifestyle they enjoy. For those in Toronto, there is a large diversity of opinion and groups with their own interests and agendas which makes for great debates and decisions on how to proceed based on reason (as well as politics). As a Toronto resident, that’s part of what makes the city so exciting. Nobody gets everything they want but compromise is the price we’re all willing to pay to maintain such a great city. Not unlike human relationships be it friendships, common law, or marriage where compromise, mutual suffering (and winning) is necessary and worthwhile.

                1. Eh, I think we’re going to have to agree to disagree here. I live in the thick of it in Vancouver and people are mostly buying based on FOMO and greed. This isn’t a recent thing driven by the run up in the last 12 months, this has been going on for at least as long as I’ve lived in Vancouver (since around 2005). Virtually everyone here is convinced that they will get rich by buying a house – it’s absolutely pervasive. I’ve never seen so many aspiring property magnates in my life.

                  As to who my neighbours are – chances are you’d be wrong. I’ll give you an example that is obviously quite anecdotal. We lived in a condo complex for approximately 4.5 years and I’ve kept track of the sales and listings since the time we’d moved in there. In a complex of ~230 units, around 100 have been up for sale in the last 6 years. What kind of community does that create? How would you even begin to adhere to a community where almost 50% of the population isn’t going to be there within a decade?

                  All in all, my point is that saying that ownership makes for better citizens is a bit of a crock. It definitely makes for more captive citizens, because it’s harder for owners to just toss in the towel when it gets too shitty. But again, what kind of community are you building when it’s filled with people who are there because they can’t escape? Seems like that’s one of the themes of this blog – participation because you want to, not because you’re trapped….

                  1. Ah yes, the same could be said of condo dwellers in toronto. The size (small) and infrastructure around condos in Toronto mean that they’re essentially built for singles as a place to crash after work. People do not build communities in most buildings yet, for this reason. They either buy a low rise house in the city (if they can afford it) or in the burbs to raise a family. That’s where they stay for a long time and form the cohesive communities that folks like you and wanderer enjoy on your travels.

                    1. I get the perspective you’re coming from – I grew up in the suburbs (not of Vancouver mind you).

                      I do however disagree on the idea that owners are better citizens and renters don’t build community. It’s a bit like saying I’m a better employee because I have equity (that vests over time). I think that’s baloney – it makes me more apt to stay with the company, which reduces my exposure to ideas outside of my immediate environment and actually makes me a worse employee. The ownership cult has created this idea that if you don’t own your own home, you’re automatically an outsider, which in this case translates into ‘worse citizen’. How on earth does property speculation, while being up to your eyeballs in debt and having little to no savings for the future make you a better citizen?

                2. I’ve lived everywhere, and there reason why I bought multiple properties in San Francisco is because I think it’s the best place to live out of everywhere I’ve traveled. There’s no other place that offers both the scenery, food, activities, AND massive amounts of high income opportunities like SF.

                  SF has Vancouver beat bad in terms of everything imo, yet we are still cheaper! Whoo hoo!

                  I think the world is finally realizing what a good bargain SF is.

                  Sam

    2. RocDoc, Toronto is not representative of the Canadian real estate market. It is the NYC of Canada, and that’s why people are willing to pay inflated prices. The majority of Canadian cities have experienced modest or negative price growth. With only two entry points in the country – Toronto and Vancouver (nobody, not even most Canadians know or care about places like Halifax or Manitoba, they’re just words on a map) – excessive house prices compared to other Canadian markets have been and will remain justified for our lifetimes.

  9. “hording properties like a fat kid hordes cake”

    Hoarding and hoards.

    Hordes are swarms of things (e.g. Mongols). Hoards are stockpiles (e.g. Smaug’s hoard).

  10. Government intervention like this distorts any market (real estate, equities, bonds, etc.), so be careful celebrating when artificial influences like government overreaching happens to benefit you as a renter. It could just as easily and quickly interfere in a way that would be detrimental to you (drastic increases in dividend and interest taxes, increasing capital gains tax, limiting or taxing money “leaving the country” meaning investments in foreign companies or indexes, or whatever else some bureaucrat in government can think up). I agree with your beliefs about home ownership and think they are correct, however they are correct on their own merits, not because of the argument that some government regulation can decrease the value of home ownership.

  11. In 2004-2005 when I was completely exiting the RE flip market…and begging friends to do the same, we got in some ferocious fights. Friends, clients, etc. were all saying things like “there will be no crash. At least anytime soon”. By the beginning of 2006, the pooch was screwed and those folks were getting killed. I am thankful every day that I randomly read that 2004 Paul Krugman piece that predicted the crash. Helped us achieve FI before people were even discussing FI. Whew!

  12. I am hoping for a plateau or a slight downward slope rather than a crash for the sake of all of the people who ended up way over their heads in this situation. Just after we bought our place the interest rates and amortization changes and the prices dropped by about 7%. It slowly came back up over the next few years but only to the price that we originally paid for it. Then shot up in the last year because of the Vancouver housing market. When I bought my place I knew that we’d need to stay put for a long time and wait for house values to rise quite a bit before we’d ever make a profit off the house due to realtor commissions being so high and as I was working at a place that was notorious for mass layoffs I knew we needed to have a decent safety net in place just in case and made sure that the place we bought would have a mortgage low enough that we could still pay our monthly expenses on one income so when the prices dropped we weren’t too concerned because we weren’t going to have to sell our place any time soon. With that being said we bought our place for dwelling purposes more than investment purposes but still obviously didn’t want to lose money on it.

    1. tl;dr: I hope it’s a quick and painful crash

      It’s a bit of a tricky situation overall – in the short term most folks who are in over their heads would probably think it’s more negative to get crushed and lose their house. On the other hand, from a financial standpoint they’re probably going to be better of doing exactly that – the negative is mostly a societal perception thing, but the negative of holding on to their house will be crushing debt for 10+ years.

      In the broader sense, we’ll suffer more economically if folks have too much tied up in paying their mortgages as people have less money to spend on other things.

      1. Whether it’s a quick and painful crash vs a slow melt, how does that change anything? They’re still trapped in their shitty underwater mortgages either way.

        1. Slower bleed out deceives more people into thinking they can hang on for longer.

          This always reminds me of where my folks grew up in Cape Breton – gov’t kept the coal & steel industry running for so long that they basically nuked the entire local economy.

          Generally, if you’re going to lose your house, it’s better that it happens quickly so you can move on sooner.

        2. What evidence is there to suggest buyers in Toronto don’t have much equity and are not putting down significant downpayments?

  13. your Canadian portfolio isnt currency hedged. With a rising Cdn dollar this really hurt returns, as we saw today.

    any long term studies of currency-hedged Vs unhedged ?

    1. I’m actually seeing a divergence between the 2 portfolios because of exactly that. A strengthening Canadian dollar (which precisely NOBODY predicted) is actually hurting the Canadian portfolio because it causes the unhedged portion to go down, when the entire portfolio is priced in CAD. I’ll cover this in a future article.

  14. Hey! I’m from Auckland, NZ. I’ve been super interested in what is happening in Canada because we have been totally copying you all.
    But for the last 3 months in Auckland, there hasn’t been any increases in prices, and also a fall in sales volume.
    Our govt also put some new rules in, but they are pretty toothless compared to Canadas.
    Maybe we are in for a pop as well…

    1. Megan, what is the reason why Auckland has the most expensive real estate in the world according to The Economist’s housing index? I wrote a profile on this, and couldn’t figure out what are your Googles, IBMs, Facebooks etc that reason for such prices.

      Thanks,

      Sam

      1. Sam, I have no idea.

        It is a demand based, speculative bubble for sure. People want sections they can subdivide, so it’s nothing to do with actually living in the home. In fact, the “done up” houses don’t sell as well.

        There is no tax currently on owning houses in NZ. That’s as close as I can come to an answer.
        People are getting the best return on their money by investing in houses because it’s a tax haven.

        Also, NZ is an attractive place to put money. It’s a stable, developed nation with no to low tax on property. So we get a lot of overseas speculators buying up land as well. The govt relaxed the restrictions on overseas land buying during 2008 and has forgotten to tighten up. 🙁

        1. Do you think part of the reason why the government has allowed for nearest to buy up all the land and property and make things on affordable for locals because they are getting paid off under the table? It makes no sense for the government to let foreigners buy property and let it sit empty while hurting affordability.

          1. No idea, mate.
            It’s pretty bullshit though.
            There is a new political party that is planning to fix it… TOP : the opportunities party.
            If they get any votes. 😛
            Fingers crossed.

            1. You know, when I was travelling in SE Asia, it was actually pretty common for governments to impose rules forbidding foreign non-residents from owning property. If you were starting a business, fine, but you can’t just yoink up houses and leave them empty. I never understood why it’s taking so long for Western governments to catch up.

              I suspect realtors are lobbying the government to prevent these rules from being put in place, but that’s just a guess.

          2. How much of NYC real estate do you think is ‘bought up’ and owned by non-Americans, a city where most Americans could never afford to live? A lot and it’s been that way for a long time.

      2. Sam, I don’t know much about Auckland, but the markets undergoing rapid real estate gains worldwide are those that tend to be socially, politically, and economically safe places, that are also seen as desirable enough to attract lots of businesses and population growth via immigration. Limitations on available land to develop either by natural barriers or legislation bolster prices by increasing demand, so there is also the great potential for upswing in value even if your money is merely parked there.

        Oh and these markets tend to be friendly to new investors from China or already have strong Chinese community ties that make investing a no-brainer.

        1. Good points! It’s amazing how there is a WORLDWIDE real estate inflation. To deny it would be silly. But to not also buy with a critical eye is worse.

          Real estate is a multi-decade trend … a lifetime trend that I don’t see abating. Just don’t get carried away folks!

          If you can invest in a TREND, you will get rich… like next level rich without much effort.

          Sam

  15. i’m happy to be a renter here in Australia. I just ask my landlord to decrease my my rent by another $50/week. Thats another $2,600 to be added to my Vanguard ETF porfolio.

  16. I’m not necessarily a housing bull but there needs to be greater objectivity when evaluating the housing market:

    Prices dropping from the all time high seen in April, or for any time period, is not something to be hysterical about. If most people are buying to have a home (versus speculating and flipping), ANY drop in house prices is not something to lose sleep over. If you intend to live in the home for a minimum of 5 years (let alone a lifetime), then the sell price of your home is virtually irrelevant. But this fact would make the news cycle boring.

    Prices every month in 2017 are up year-over-year, including in June. Benchmark house prices were HIGHER in June than in March or April. Yes, the media has focused on average home price, rather than the more accurate benchmark price. Sensationalism sells.

    Newly built condos, townhomes, and detached homes hit a record high in May. It now costs $1 million for a new townhome and $1.9 million for a new detached home.

    A lot more supply of detached homes is on the market for three reasons – buyers tapped out after the 30% yearly price gains, government intervention which makes people take a pause from buying, and the usual summer slowdown. Supply will likely increase and prices decline further in July and August, like they do every year. The small increase in interest rate announced today will also impact housing, more from a psychological than financial standpoint. But perception is reality.

    A Toronto market correction or crash is not comparable to the US crash of 2008. The US crash was a national crisis due to national banking policy. In other words, scandalous banking practices affected every market in the US. There is no equivalent circumstance in Canada. The Canadian real estate market is larger than Toronto and Vancouver. Home prices in most markets in Canada are modest and have not seen the whirlwind growth of Toronto. Likewise, the US has many large markets whereas Canada only has two entrance points – Toronto and Vancouver. This is where money from domestic and foreign investors, and speculators, will mobilize. With that in mind, I fully expect Toronto to continue being the NYC of Canada – meaning prices far higher than elsewhere in Canada and Ontario for the rest of our lifetimes. Furthermore, the Toronto of 1989 is not the Toronto of 2017.

    Condos have experienced a lull too, but not anywhere close to detached homes. Supply is tight and the price gains previously seen in the detached market are now in force in the condo market. People will buy what they can afford and condos are the new starter homes, for better or for worse. Condos are the future of the city anyway we slice it (which is normal in most major cities).

    We’re witnessing a correction. How long it lasts and how deep it becomes, nobody knows. Housing could pick up again in the fall like it usually does, go sideways, or continue a slow descent. We’re far from “crashing” territory as things stand. A recession could make it a reality but up to now, it’s not on the radar.

  17. this blog is disturbing. Millemial Revolution? huh? to live like nomads. No ambition. Childless. Live off the markets. Thankfully their are millemials that will lead planet earth forward in all fields; technology, medicine, politics…

    please dont have children.

    1. I guess you haven’t read the parts on launching an app, writing and publishing a children’s book? You are concerned with them having children, that is unkind. Look around at many who are having children with no plan and no fore thought.

    2. A bit harsh. Keep in mind, some people weren’t born to lead. Let it go. They are doing their thing, their life. And sharing their investing knowledge. Do agree ‘revolution’ is a bit silly, but again their call

  18. HI I am a realtor in GTA and I have seen this crazy market being built up by buyers who wanted to buy a house at any cost. I have studied housing market and new buyers behavior in this market so this is what I concluded

    1) All provincial governments have failed to provide proper infrastructure to smaller cities and not much work opportunities exist in this cities. this makes all people flock to Toronto as any one can find work here and make a living easily. I have seen lots of people moved to alberta during oil boom and move back to toronto after oil prices crashed.

    2) South Asian immigrants all converging in GTA. Most of the households have double or multiple income source and desire to move up in life( especially to showoff) buying bigger houses and Cars, SUVs.

    3) Stock market has become so complicated normal people like me stopped investing in stocks specially after 2008 crash. A house can be seen as tangible investment and is considered solid investment compared to stocks

    4) Lack of other business or investment opportunities which is aggravated by complete inaction and incompetence of governments to address this issue.

    5) My opinion is that this is market correction and buyers are bit scared to invest in houses right now however this is just passing phase and market will stabilize in one years time

    1. Well this is the first time in a long time I’ve hard of people actively walking away from deals they’ve signed.

      What’s the saying? May we live in interesting times?

    2. There should be less incentives for small cities. The more sprawl that’s eliminated the better. Those cookie cutter houses in the burbs that require owners to drive an hour every day to and from work in Toronto is a disaster. Inefficient, costly maintenance, more pollution, traffic congestion.

  19. Some more interesting trivia:

    “The GTA saw 14,292 high-end homes change hands from January 1 to June 30 of this year — an increase of 41 per cent compared to the same period last year.” – http://www.torontosun.com/2017/07/11/gta-leads-way-in-sales-of-homes-over-1-million

    So even with the slowdown in May and June, volume of sales is still up 41 percent from 2016, which was a record breaking year itself. So even if July and August underperform in sales numbers, we may just see a reversion to a more usual rate of growth for the year.

    Interest rate hikes and Toronto/Vancouver real estate? Here’s an analysis on the effect previous rates have had… very little https://betterdwelling.com/heres-what-canadian-real-estate-did-after-the-last-interest-rate-hike/

    Record rental demand and prices as vacancy falls to zero: https://www.urbanation.ca/news/181-rental-demand-reaches-record-high-following-new-housing-rules

    In the 19 year history of Teranet’s benchmark price index, last month was a record breaking June in housing price increase in Toronto: https://housepriceindex.ca/2017/07/june2017/

    Luxury condo sales up 98% from last year:
    http://www.cbc.ca/news/canada/toronto/luxury-real-estate-toronto-record-breaking-1.4199273

    1. Royal LePage made that prediction! Of COURSE real estate brokerages will say that!

      Markets are going up! Now’s a great time to buy!
      Markets are going down! Now a great time to buy!
      Markets are going sideways! Now’s a great time to buy!
      We’ve been invaded by aliens! Now’s a great time to buy!

      1. Sure but the prediction rests on 6 months of sale data already completed in the year. In other words, there are solid stats behind it rather than anecdotal examples.

        Condos alone are still up 27% – 30% year over year. Speculators? According to who and based on what datasets?

          1. That’s right, and it’s why their current prediction is an adjustment downward from their earlier prediction made during the redhot first quarter. Only six months to go before the year is thru.

  20. Much like investing in the stock market, we can’t “time” the market in real estate. The numbers have to make sense. If a family wants a permanent home in t.o. Or Vancouver and can afford the crazy prices, and can afford the mortgage rates even if they rise the fluctuation in price may not hurt them. However, in a market like that I would strongly recommend having one or two rental suites in the home to help pay for it. We lived in Vancouver and had a suite in the basement which we rented to international students by the room. However we got out of that market, ten years ago, and we retired at 28 and 32. Currently own 4 rental properties and our own home. With each purchase we look at worse case scenarios, what if values drop, what if interest rates rise, what if it needs a complete Reno…..how can you handle them, and how are you willing to live to be able to afford it. I’ve seen far to many, purchase homes not thinking of negatives, not planning on the many variables in owning. Instead many buy all new appliances furniture, new deck and fence etc, instead of finding a way to reduce expenses. This is why MR is solid advice for anyone considering buying. It simply is not a good idea for everyone.

    1. Correct. Buy real estate only when you can afford to then sit on it forever. What the market does today or a year from now should have little impact on you. Timing the real estate market is a fools game. Lots of people are priced out now after waiting ten years for a market crash that didnt materialize.

      Toronto home prices are in line with the value proposition of the city, just like NYC is to the US and Paris is to France. The downtown core alone is expected to double in population within a little over a decade. Any dip in price is likely short lived and certainly destined to rebound.

  21. I found the following page interesting. According to it, housing bear and financial guru Garth Turner is quite the real estate investor. Recently he was trying or successfully did offload one of his flips:

    https://themash.ca/realestategossip/2017/6/real-estate-doomsdayer-garth-turner-lists-caledon-property

    “This is a 3 bedroom, 3 bathroom house called Belvedere House on an 18 acre lot at 16065 Mississauga Road just south of Belfountain in Caledon.

    According to the reader who sent it in, it is the home of Garth Turner, the author behind the real estate doomsday website, Greater Fool.

    But I am not sure if it is his main home because according to a 2012 article in Toronto Life when Turner said a housing crash was around the corner…

    Turner, you may be surprised to learn, is also a self-professed real estate junkie who over the years has bought and sold—very profitably—about 50 commercial and residential properties; he moved four in 2011 alone.

    And considering this house sold around $1.5 and closed in December 2016 only to undergo a large gut and rebuild in 2016 that took 7 months to complete, this is a flip and one more property to add to the 50 properties mentioned in 2012.

    For the most part, I like it. I like that they kept a lot of the original features like the floors but I am not loving the columns between the kitchen and the dining room. And maybe if the bathroom vanities were painted white and there was different furniture, I would be into it more.

    This place is now listed at $2,499,000.

    And according to the reader who sent this in…

    Real estate perma-bear tried to make a $1 million profit on real estate he bought last year…

    So, maybe not the ‘perma-bear’ is not so convinced about his own doomsday predictions after all…

    At least not for his own properties.

    UPDATE: Apparently this property is no longer on the market. Guess he’s waiting for the market to go up.”

    Thoughts?

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