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ETFs and Funds

Will Canadian Housing Market Collapse?

Several charts illustrating the unsustainability of Canada’s housing market.

Some fun with charts:

Over the past year, the average house price in Toronto increased by almost $200,000! For those saving up for a down payment, they are another $200k behind.

Over the past several months, home prices in Toronto have gone vertical.

The IMF recently stated that overheating real estate is the greatest threat to Canada’s economy. The IMF provided their own fair value estimates for a variety of Canadian cities.

Toronto: Fair value is 28% below current prices

Vancouver: Fair value is 13% below current prices

Montreal: Fair value in line with current prices

Hamilton: Fair value is 30% below current prices

The proportion of median household income required to own an average home in Canada is approaching the Q2 1990 peak. Canadian real estate entered a long bear market in the early 1990s.

So when will Canadian real estate crash?

Or at least flatline for a while?

Honestly, who knows. People have been predicting a crash for a decade. Anyone who bought that narrative missed out on massive gains and is now likely priced out of the market.

Should I buy a house in Toronto?

I think most people should look at real estate as a rational purchase of shelter, not as an investment. This means taking a look at what you can truly afford relative to your assets and what you can earn while living in a certain geographic area. Compare that to renting (adjusting for square footage and perhaps some lifestyle benefits – e.g. a back yard) and you should have enough information to make a decision.

Unless you’re an investor, nobody should buy real estate with the hope or expectation that prices will continue to rise. Similarly, it is often foolish to hold off on a purchase hoping prices fall.

Of course, nobody wants to make a massive purchase only to watch prices fall 30% over the next couple years.

I don’t take any of this lightly. I understand that many people might run through the numbers and simply determine they can’t afford to live in Toronto, even if they must.

What’s quickly emerging is a two-tiered socio-economic strata – one with the financial means to afford a home and another that must resort to housing densification, cramming more family members into the same dwelling. The first group includes top decile earners and people with family money. The latter is everyone else.

Suggesting the latter group move to find more affordable accommodation is not the answer. The city needs tradesmen, social workers, waiters, day care workers, and so on. A city of lawyers and doctors doesn’t work (and would be a bore).

This is an urgent problem.

A huge portion of Canada’s economy is directly and indirectly connected to real estate. Real estate is the biggest risk to the Canadian economy and it is gutting the middle class. Either real estate prices collapse and hurl Canada into a massive recession or real estate prices continue to rise, further dividing the haves from have-nots.

The Federal and Provincial governments need to immediately create a task force to deal with this issue. While robust policy requires careful analysis before implementing, there are some obvious options that could quickly be executed. Namely, ban blind bids! People are bidding $100k, $200k+ over the next lowest bids driving prices artificially upward. Some people are even making offers significantly over asking not knowing there are no other bids!

Simply eliminating blind bids would cool the frenzy. Let’s start there.