The great Canadian “housing bubble”

My first blog post and a clearly a topic that deserved me setting up my blog and talking through the details from both sides of this equation.

Two sides of the coin:

The first side that states that we are in a bubble and that it will burst soon. The second side claims that an increase is warranted by the change in fundamental factors like immigration, low interest rates etc.

Let’s follow both of these sides in this article to see what you(the reader) and I can agree with.  Let’s lay down some base facts to start (please comment and let me know if you agree with them or not):

  1. Housing and real-estate is now much more speculative than ever before
  2. Low interest rates, unrestricted movement of capital globally and immigration may be some of many factors creating this very fast growth or bubble, and
  3. Planning personal finances are important for us.  Predicting some possible outcomes of this event can help in the planning process.
  4. Stats can be twisted and turned, every side giving us data has an agenda.  Let’s see if we can decipher the truth.

First lets look at if this has happened before, as that may give us some clues.

History Does Not Repeat Itself, But It Rhymes – Mark Twain

Mark Twain has a way with words that I find extremely beautiful. Here’s a graph of Toronto housing historical prices

Key reasons for this growth:

As we briefly touched on these before, I believe they are the following:

  1. Allowing free movement of capital.  This leads to a scenario of “capital flight” to safer destinations.  There is a great scare in China of government cracking down on the rich, of their currency devaluing and of a credit crisis looming on them. So the rich, smart people are taking most of their currency out of the country even if they have to spend 50% of it in doing so.  “Why is the government not doing anything about it” – a novice reader may ask.  Well thats because of something called the “Greater Good” theory of governance.   We will talk about that in a different blog post.  But how to move capital you may ask. Many possible ways.  Example #1 most Chinese shipments I receive are marked as “samples” so money from those can be deposited in offshore accounts.  Example #2 almost 90% of bitcoin transactions happen in china.  Bitcoin being an anonymous cryptocurrency can then be redeemed world over usually at a 15-20% service charge.  Most Chinese are happy paying all these fees and charges because they believe what they have today will decline considerably in value in the future.
  2. Immigration!  I doubt a newly landed immigrant is able to afford a million dollar home.  But the speculation of them coming in allows the speculators to keep grinding the wheels to a point where affordability erodes.  This erosion of affordability is ever so present, just like water flowing on a rock.  Slowly, slowly over time it cuts the rock.  We look at dying inner cities, rise of urban poor and we feel increasingly helpless.  Let’s ask ourselves what we did to them.  We hung in front of them a carrot of a city job, but while they were distracted by the carrot, we took everything from them.  Their time now gets spent in commute. Their money gets spent in expensive housing, expensive groceries, expensive everything due to rent costs.  Their health deteriorates due to air and noise pollution.  In my opinion, the only people who benefit from Cities are the landlords and uber rich who can afford a rural palace for themselves.  Cities are like a slave prison run for them using jobs, credit and finance as the new shackles and fences.  Can they create jobs somewhere else, yes they can. But they are not that dumb to do so.  In large cities, they get more back in price increases of their properties, rent and income from their other companies providing services in the city than what they spend on giving jobs.
  3. Interest Rates.  Let’s refer to the graph below.  Green line is interest rates.  Please ignore everything else on it right now.  I will do an in-depth review of it soon in another blog post.  For now, let’s focus on the Green line and a sloping bright red line touching the tops of this green line.  What this is telling me is that either reserve banks keep interest rates low for long, or there’s a large risk of recession.  A dotted red line from Green line to Red line shows a possible path for recession to happen.

So the thinking is that Reserve Banks will hold steady a low interest rate.  Which in the long run will lead to a fiat currency bubble thereby replacing fiat currencies with a form of crypto currency like Bitcoin.  However I won’t be surprised if they do decide to raise interest rates to 15% globally and make illegal cryptocurrencies at the same time to provide a “reset” to all economies and an extension of life to fiat currencies. However something like this will require at-least 5 years of planning, a very co-ordinated effort by all major Reserve banks and a super global scenario like China debt burst to pull this one through.  It’s a very difficult thing to pull through, but Reserve bankers are some magicians – incredibly smart and very hard working.

From the perspective of our topic of housing bubbles, let’s hope that Reserve banks may not want another recession and thereby not boost up interest rates and the we are in something called “low for long”.

Let’s see how United States (The Case Schiller Index) property market looked in 2008 and now.

The composite case shilled index was deprecated in favour of more regional indexes. The most generic / averaged one I found that closely resembled the old index is the new 20 city composite. The below graph paints the same with it’s wave 3 and wave 5 targets.  United States seems to be ready for a steep and long extended wave 5 (elliott wave theory).  So the “low for long” interest rates regime seems to be showing strong signs of being true from the other side too.

Let’s come back to our past Canadian performance.  Below graph is percentage growth from 2005.  What I could decipher is that something is wrong with Montreal, Ottawa and Moncton. And that Toronto and Vancouver may follow the Regina or Calgary model of a soft landing.

When property is growing at 20-30% in it’s growth-spur years and averaging a 6-7% growth and money can be borrowed at 2.5%, then it’s not un-natural to expect every person with financial sense to borrow more and buy more thus feeding the fire even more.

But Canada’s property market seems to be a tale of two cities – Toronto and Vancouver.  And it seems technically that Vancouver leads the price movements.  Below are charts.  Vancouver is left and Toronto is right.

The key “switch” will be our government’s thought process and willingness to adopt a strict Fiscal Policy.  Every single dollar of budget deficit and borrowing by the government is a dollar that comes in the economy and leads to inflation which does impact property prices positively. I believe the Harper government kept a lid on it and thereby built up some “potential” which is now being liberated by the liberals.  So if the same continues, we can look at rising or “soft landed” prices till 2023.

In fact a leading indicator for real estate is the housing starts.  And that seems to be referring to a growing trajectory till 2023 and sometime beyond that. The time-scale on this graph is incorrect.  This data is published quarterly and the largest timescale afforded by this tool is Monthly.  Thereby you will notice that years are more compact till today’s date and then they take much longer on time scale.

The “bubble burst” theory

Bubble burst theorists on the other hand cite the following graph (below).  This shows housing prices adjusted for inflation.  Although fairly accurate in it’s own right, this scale makes 2 key assumptions:

  1. That most of us are financial genius and that our money will definitely produce return at the rate of inflation.
  2. That inflation rate is consistent over the years.  This I believe is inaccurate.  Inflation rates are much higher during growth spurs and much lower in recessions / corrections. However they devil is in the details and every detail like the delay in reporting period, the number or commodities used in inflation to the exact math used in computing inflation adjustment.

So the graph below cites a fact that when we have a trendline overshoot (price moves over the trend-line), then it moves in that direction for a year and a half and then falls.  We had this trend-line overshoot in March 2017 (give or take) and thereby points to a reversal in inflation-adjusted prices after a peak in September 2018.

Now lets refer to the same data in non-inflation adjusted graph.  This is the “soft landing” theory (which i believe has higher probability).  The key take-aways I have from this are:

  1. If you sold 2 years earlier than the top, then prices never gave you a chance to catch up even in the lowest low of a recession / correction.  At-least that’s the past performance which is not indicative of future results.
  2. You seemingly got a better price selling after the top than before the top.  Again that’s past performance which is not indicative of future results.

Best of luck in your investments.

3 thoughts on “The great Canadian “housing bubble””

  1. Thanks for publishing this. Ajay, I remember an investor meeting you anchored in October 2015. Based on speakers present there, you had concluded for us all to “buy single family homes in GTA”. I bought my primary residence and it couldn’t have been a better time. But I made mistake of not buying any investment property. Can I buy now? or Should I even sell my primary residence now and lock in my gains?

    1. Thanks for attending that event and thanks for using that information. I unfortunately can’t advise as I am not licensed to do so. What I can say however is that very few if any rentals are cash flow positive at this point. And NONE in Golden Horseshoe (Greater Toronto + Hamilton + Kitchener Waterloo) are cash flow positive at the qualifying rate used in Canada of 4.64%. Which means you will be purely speculating that someone will pay you a higher price for your rental later. If that happens soon then good, else you will be spending on mortgage, taxes, utilities till you are drained. So if I were you, I will work my risk – reward ratio on this one more carefully at this stage of the market.

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