Why Canada’s Housing Bubble Could Soon Become Your Problem
by Justin Spittler
What kind of house would you buy with $1 million?
A beachfront property…a mansion on a large estate…maybe a luxury condo?
Any of these would be possible in most cities. But you might want to temper your expectations if you live in Toronto.
That’s because $1 million won’t buy you much there.
Just look at this house. It recently sold for C$1,050,000.
That’s 63% more than the property was appraised for in January 2016. As if that weren’t crazy enough, this property sold for C$370,000 above list price after only being on the market for ten days.
A bidding war actually broke out for the tiny house in Toronto’s east side.
Here’s another example.
This house was only on the market for six days before it was scooped up. The buyer paid C$988,018 for it. That’s twice as much as the owner was asking.
From the looks of it, the buyer didn’t get their money’s worth. Just look at the kitchen. It looks like it hasn’t been renovated since the 1970s.
• This is happening all over Toronto…
Last month, the average home in the Greater Toronto Area sold for C$916,567. The average detached home sold for C$1.6 million.
To be fair, Toronto is a great city. There’s a ton to do there. It has a great food scene. And it’s the beating heart of Canada’s financial system.
Real estate should be somewhat expensive in Toronto. But home prices in Toronto aren’t somewhat expensive right now. They’re insanely expensive.
A million dollars barely buys you a shack. And yet, people are lining up left and right to buy stuff like this.
What’s going on here? Have people in Toronto lost their minds?
In a way, they have. And that’s because Toronto’s housing market is in a serious bubble. This is when asset prices rise so much that they lose touch with reality.
I’m not just basing this on anecdotal evidence either. The hard data is screaming “bubble” too.
Today, I’m walking through those numbers. By the end of this essay, you’ll see why Toronto’s housing market is getting ready to implode…and why it could have serious implications for U.S. investors.
But first, let’s look at the data.
• Toronto housing prices have gone parabolic…
They’ve risen 14 months in a row.
Last month, the average price of a home in Toronto surged 33% from a year ago. That’s the biggest jump in one month since February 1989.
Prices are now rising so fast that a lot of people are buying homes without doing a home inspection. In fact, one local inspection company recently reported a 30% drop in home inspections.
This is a serious red flag.
It means the market is so hot that many buyers can’t even wait an extra day or two to complete a home inspection. If they do, someone else could come along and buy the property from underneath them.
• Now, rising home prices can be a sign of a healthy economy…
But this is only true if the rest of the economy is keeping up with the housing market.
That’s not happening in Toronto.
You see, the typical family in Toronto makes about C$76,000 per year. Based on that figure, the typical Toronto resident should only be able to afford a house worth C$362,775.
And yet, the average home in Toronto is selling for about C$916,567 these days. That’s almost three times more than people can afford.
• The scariest part is that this is happening all across Canada…
Just look at this chart of the Canadian House Price Index from Teranet. This index tracks housing prices in Canada.
You can see that Canadian home prices have skyrocketed. The average home in Canada now sells for 58% more than it did at the peak of the last North American housing boom.
• After a run like this, you would think Canada’s housing market would cool off…
But that’s not happening either.
According to the National Bank of Canada, home prices are rising by 10% or more (year over year) in half of the country’s urban markets.
As if that weren’t alarming enough, home prices in Canada have now become divorced from reality.
You can see what I mean below. This chart compares home prices in Canada with the country’s average annual income.
It’s never been more expensive to buy a home in Canada…
Canada’s economy clearly isn’t fueling the country’s booming housing market.
In short, people across Canada are borrowing huge sums of money to buy homes they have no business owning.
The following chart drives the point home.
This one compares the level household debt in Canada with the average level of disposable income.
As you can see, the average Canadian is now more indebted than the average American at the peak of the last U.S. housing boom.
• In short, Canada’s housing market is one big house of cards…
It’s now only a matter of time before the party ends.
When that happens, Canada’s economy is going to unravel. That’s because real estate now makes up 12% of Canada’s annual economic output.
Of course, you might not be worried about this if you live in the United States.
But you have to understand that Canada is one of America’s most important trading partners. We send them more than $200 billion worth of goods and services every year.
In other words, the U.S. could have serious problems if Canada’s housing market implodes.
A coming Canadian housing crisis could be what triggers the next U.S. financial crisis.
Most analysts haven’t considered this. They’re too busy focusing on the problems we have here at home.
That’s a serious mistake. After all, if we learned anything from the 2008–2009 financial crisis, it’s that problems in one country can spread across the global economy like wildfire.
U.S investors can’t afford to ignore what’s happening in Canada.
• If you haven’t already, I suggest you “crisis proof” your wealth today…
Here’s how to get started.
Set aside some extra cash. Holding extra cash will help you avoid big losses if U.S. stocks fall. It will also put you in a position to buy stocks when they get cheaper.
Own physical gold. Gold is the ultimate safe-haven asset. It’s survived every financial crisis in history. It will certainly survive the next one. You can learn more about the best ways to own gold in our Gold Investor’s Guide.
Delray Beach, Florida
April 17, 2017
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