When Will The Canadian Real Estate Market Crash?

That is the billion dollar question.

According to CBC the average selling price for a home in Canada last month was $688,000 (that’s more than double compared to the US) and unless you’ve been living under a rock you know that prices have surged on both sides of the boarder upwards of 40% in the last year alone. This “appreciation” in prices has been largely driven by 4 main factors:

• The immediate shift to work from home and people’s need for more space has driven unprecedented demand.
• Cheap money (0% interest rates) and the ability to borrow has allowed people to stretch themselves to the brink of what they can afford to pay per month.
• Government subsidies/deferral programs that put money into peoples hands and allowed them to defer their obligations (like rent/mortgage payments). This added a lot of "money" i.e liquidity into the system.
• Government printing money (devaluing the dollar & causing inflation) makes people want to trade those pieces of paper (money) for real assets (like real estate) as quickly as possible.

So the question is will this market crash, flat-line or will prices continue to test new limits? My answer depends on what the government does next.

The truth is that if we were operating in a free market economy with limited government intervention this party would have been over a long, long, long time ago. If it wasn’t for the various government initiatives over the years interest rates would have spiked making any kind of borrowing (whether borrowing for a house, car or business) cost prohibitive. Higher interest rates translate into higher monthly payments which means people need to buy things that cost less to be able to afford them… house or car for that matter. $2,000 a month gets you a $500,000 mortgage at 1.5%. At 8% that same $2,000 a month payment gets you closer to a $250,000 mortgage – same payment but ½ the house.

The Financial post put out an article “Could Canada’s high-flying housing prices come crashing down” recently where they cited the following reasons for growth including: immigration, low interest rates, unquenched demand and rigorous underwriting.

While I agree that there are plenty of reasons to be bullish on Canada I think the impact of rising interest rates is the proverbial elephant in the room no one wants to really talk about. After all who wants to be “that” guy. I’ll take my 40% appreciation – thank you very much!

There’s no doubt in my mind that Canada is a fantastic place to immigrate to, that there is growing shortage of housing options for people and that the conventional mortgage lenders in Canada are much more conservative however you can’t have it both ways.

The last time Canada has seen a meaningful pull back in real estate prices was over 20 years ago. Houses cost a fraction of what they are today and the average household income was about $50,000 per annum. Today the average household income is closer to $80,000 and house prices have been going to the moon. The major difference between then and now? Interest rates & government programs that allow people to afford "more".

The only difference between a real estate investor and a real estate speculator is that the investor focuses on creating value (positive cash flow) in both up and down markets and as many of you know this is becoming increasingly more difficult to do in many major Canadian markets. As interest rates rise and government programs have less and less of the desired impact I believe it will become clear whether the market is heading for a correction or an extended period of flat growth (like Japan over the last few decades).

History has taught us that you can only distort the economy for so long before the markets force a reset. The question is when this will begin to happen, to what level and what else will the current government do to kick the can down the road for another administration to deal with?

So much of our lives has become dependent on government policy and dynamics outside our control. Prudent cash flow based real estate investing is one way I take back control over my life. If the markets appreciate because of all the funny money out there.. great. If rates rise , mortgage still gets paid down by tenants and properties still kick off cash flow. Both cases still build net worth over the long term.

How are you using real estate to take back control over your future?

Marcin Drozdz

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