Bill’s Blog June 8th, 2021
Real estate is a hot topic these days. Because for most Canadians purchasing a home is the single most significant financial decision of their lifetime. I felt it was essential to provide some perspective and guidance. Real estate is a broad topic, but we will focus on residential homes, condos, townhouses, and detached homes for this blog. The most crucial issue today is deciding whether to buy, sell or rent in a significantly overvalued housing market?
Firstly, we have to have a gut check. Is it a good idea to run out and leverage up hundreds of thousands of dollars or even a million-plus in a bubble market? To give you perspective, Canada is in the top three overvalued housing markets in the world, alongside China and Australia. Toronto and Vancouver housing markets are two of the most expensive cities and their regions globally. With 20 to 30% plus appreciation over the last year in many markets in Canada, we are setting records and not good ones from my perspective! Here’s a recent quote from a respected real estate expert: TORONTO AND SURREY – DOWNRIGHT SCARY!!! Ozzie Jurick
So what are other housing market analysts and associations saying?
CREA: Ottawa, ON, March 15, 2021 – Statistics released today by the Canadian Real Estate Association (CREA) show national home sales set another all-time record in February 2021.
The MLS® Home Price Index (HPI) jumped 3.3% m-o-m and was up 17.3% y-o-y.
The housing market is on fire, and there doesn’t seem to be anything to put out the fire.” These are the words of Sal Guatieri, a senior economist at the Bank of Montreal. Robert Kavcic, another senior economist at the bank, is warning that Canada is “playing with fire” right now, indicating that the housing bubble could burst soon.
Scotiabank’s Head of Capital Markets Economics said, “Ottawa has been caught completely off-guard in the magnitude of the housing response to very low financing costs,”
David Rosenberg, Rosenberg Research Chief Economist and Strategist, told BNN Bloomberg, “This might be one of the biggest bubbles of all time. It’s been predicated on where mortgage rates are.” Amid rising house prices and growing concern about a real estate bubble,
OSFI this week proposed a tougher stress test. The regulator wants to set the qualifying rate for uninsured mortgages at the contracted rate plus two percentage points, or 5.25%, whichever is higher.
So what has caused this housing market euphoria? Three main factors:
1). Central Bank Policy: With the lowest interest rates historically and mortgage rates, sub-2%
2). Government policies. And banks are mainly loaning to the housing market.
3). FOMO (fear of missing out). People are believing falsely that house prices only go UP and interest rates will remain low forever!
I want to let you know I like housing as an asset class, but just not at these nose bleed levels. We have owned three houses in Western Canada, and one became a rental property. Currently, we are renting intentionally until the housing market does a significant correction or even crash. We will carefully decide to purchase in the future after this event.
There are far too many risks in the global and Canadian economy. We have unprecedented and unsustainable government, corporate and personal debt levels. The recession that started before the Covid crises has accelerated with abysmal government decisions (lockdowns and selectively shutting down businesses). We will see well over 100,000 small and medium businesses bankrupt before this is over and high unemployment for the foreseeable future.
So, let me provide for you some sound counsel on when to buy (possibly sell) and when to rent.
1). We have never purchased a home that was more than 2.5 to 3.5 times our household income. Nor should you. This range historically tells you the housing market is fairly valued and affordable for average Canadians. If your average home price is above this in your market, it is best to rent.
2). Your monthly payment for rent or a mortgage should not be more than 30 to 35% of your monthly take-home income. Who wants to be house poor?
The housing market cycle typically goes from trough to peak price approximately every 18 to 20 years. In Canada, in 1980, the housing market crashed with high inflation and 22% interest rates. Tens of thousands of Canadain’s lost their homes to the banks. Housing went up for the next 17 years and peaked, corrected and was flat until around 2000. The housing market then took off again and has remained in a bull market (with only minor corrections in most markets even in 2008) for over 21 years. We are overdue for a significant correction or even crash. I believe it would have already happened if there had not been major manipulation and intervention by governments and central banks.
3). I recommend you never purchase at the peak of a cycle, as this is when bad things can happen to you financially. If you can pay cash and it doesn’t bother you if your asset goes down potentially 30% or more in value and you have a long-term view (20 plus years)…then potentially buy. Unfortunately, it would bother me, especially without a hedge, but you need to decide!
4). Finally, when you purchase an asset, including a home, it needs to be done with careful evaluation and a well-thought-out plan. Do your best to keep emotions out of the process (though not easy), as most people’s worst financial mistakes come out of fear and greed.
Till next time, invest wisely and keep educating yourself financially, and you will make better decisions. Bill