Follow Up Thoughts on Canada’s Real Estate Bubble

Bubbles can go on for a long time. Canada’s real estate, especially in Vancouver and Toronto, have been bubbling for quite some time; many years in fact. I don’t possess a crystal ball that will tell me the future. So I have no idea when it pops. All I have is common sense.

When a crack shack house like the one above is listed at $1.548 million dollars, you know things are whacky and that reality has become distorted.

I know we are conceited here on the West Coast and call Vancouver “The Greatest Place on Earth” but common, no one in their right, rational mind would pay to live in that for more than maybe $200,000.

Yes, sure, you could “build your dream home” on it – what’s that gonna cost ya? $1.5 million to buy the plot and another million plus to build you home on it? Insanity.

Or how about the income to detached house price ratio at 28 in Richmond (5 is considered “affordable”)?

It’s all a game of musical chairs at the moment where people buy turds like this for astronomical amounts of money to pawn it off to some greater fool at a higher price. There comes a day when prices get so unimaginably detached from reality that the music stops. When the music does stop, we’ll see a lot of pain.

So for the moment, we are happy to rent. Happy to put only 17% of our net income towards housing. Happy to save a big chunk of our net income to go into stocks, bonds, REITs, and cash.

We’ve never had delusional desires to own a home at any price. We would buy a home at the right price. Not at any price.

The currently environment in Vancouver real estate is like the US stock market in the late-90s: prices are completely removed from economic reality but since people are still making money pawning off expensive turd nuggets to other fools, the game continues on. Until it doesn’t. Until the last marginal player purchases the overpriced turd at midnight and realizes that all they have is a melting puddle of expensive shit in their hands.

The music started slowing down in Toronto last month. Listings are up 5% but sales are down 40%. Eventually, it will happen here. Buyers in the Lower Mainland are starting to walk away from contracts signed at peak prices. There will be many bag holders.

It takes fortitude to sit on the sidelines while irrationality ensues. Especially when the irrational are making such easy, easy money: buy, flip, profit, rinse and repeat. That’s ok. You stick to your plan and get to your goals through your most attractive risk-adjusted path. That path, for us, does not involve leveraging to speculate in a concentrated, overpriced asset in a bubble environment.

*Anecdotal side note: related to this Wednesday’s post, over the 5 years I’ve been riding the train to work, I have seen an explosion of debt consolidating ads on the trains over the past couple years, to the point where today, over 50% of the ads inside the trains are a plethora of debt relief, debt consolidation, bankruptcy guidance ads.

**Speaking of insanity and turds, this is what $1.3 million gets you in Downtown Vancouver… and it’s a brand new build!

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