I was born and raised in Southern California's beautiful Orange County down here in the U.S. I also lived in Canada for 8 years, so I am pretty attached to both places. And I can state without any hesitation that Canada sure seems an awful lot like the U.S. was in the boom, and then bust years, of what I call "The Great American Real Estate Deception" era. |
And guess what? Canadian real estate in 2017 is AN EXACT REPLICA of the U.S. real estate market in 2007.
Don't think so? Well maybe it's time to look at facts and statistics before you bury your head in the sand. I know, because I've been there before. Look at the charts and statistics below and tell me if this doesn't look like a similar trend occurring right now in the Great White North. If that doesn't open your eyes, then keep going and read what the Canadian Real Estate Board had to say yesterday.
As most of you know, I was right at the epicenter of the earthquake that shook the banking and real estate markets from 2005-2010 in the United States. During that time, I was strategically poised as the Acquisitions Chief and Servicing Supervisor for Continental Capital Corporation. We purchased bulk quantities of delinquent mortgage notes by the bushel. So many foreclosures were coming SO FAST that by 2008 we stopped buying paper and just started buying large packages of homes that had already been through foreclosure from floor traders with Homecomings, Ocwen, EMC Mortgage, Litton Loans, Fannie Mae, Freddie Mac and HUD. Man-- what a great time to be in a place like that! Of course, we never bought into the idea of an endlessly surging real estate market and unlimited credit, so I did not take it on the chin like 80% of the country did. One look at the housing price index chart below will tell you all that you need to know.
(NOTE- The Housing Price Index, or HPI, is a broad measure of the movement of single-family house prices in the U.S. Apart from serving as an indicator of house price trends, the House Price Index (HPI) provides an analytical tool for estimating changes in the rates of mortgage defaults, prepayments and housing affordability)
Now, let's look at 3 of the hottest U.S. markets during the "Boom Years" and what happened on the rollercoaster ride of ever-increasing price increases. Pay particular attention to 2005-2010.
AND THEN SUBSTITUTE THESE CITIES NAMES WITH VANCOUVER/VICTORIA, GREATER TORONTO AREA, AND MONTREAL. Can Canadian investors maybe learn a thing or two by what happened in the U.S. or can we really believe that this Canadian housing gravy train will last forever?
And remember, I said that 2017 Canada is a carbon copy of 2007 US? Let’s take a look.
Can this possibly be the big U.S./Canadian Deja?
And here is the saddest part of the whole calamity in the 2000’s. Most people did not do anything wrong or anything that was different or unconventional from their peers. They were refinancing every year because their home values went up another 30k-50k and they pulled the equity out for other purposes. Bank money was CHEAP & EASY to obtain and the credit available was almost unlimited. They were pulling short time 0% interest money off credit cards and using it to invest. The whole of the U.S. was in a feeding frenzy, indulging from a trough filled with unimaginable profits from real estate riches.
Everyone made money. Investors. Realtors. Mortgage lenders. Banks. Everyone!
And so, when I read this report published in Canadian Real Estate Wealth Magazines “Daily Briefing” it sent a shiver down my spine and it should do the same for any Canadian real estate investor. Let’s read:
Breaking News: Homes sales decline 'sharply' in May
The Canadian Real Estate Board releases latest round of housing market stats. National home sales dropped 6.2% month-over-month from April to May, according to CREA. That represents the largest sales decline since August 2012.
The most drastic sales decline occurred in the Greater Toronto Area, where the market experienced a 25.3% month-over-month drop.
Activity was also down “significantly” in surrounding areas, including; Oakville, Hamilton, and Barrie. “Recent changes to housing policy in Ontario have quickly caused sales and listings to become more balanced in the GTA,” said CREA President Andrew Peck. “Meanwhile, the balance between supply and demand in Vancouver is tightening up, while many places elsewhere in Canada remain amply supplied.” CREA argues the sales declines in the Greater Golden Horseshoe Area are a sign of dwindling speculative home purchases.
“This is the first full month of results since changes to Ontario housing policy were made in late April. They provide clear evidence that the changes have resulted in more balanced housing markets throughout the Greater Golden Horseshoe region,” said Gregory Klump, CREA’s Chief Economist. “For housing markets in the region, May sales activity was down most in the GTA and Oakville. This suggests the changes have squelched speculative home purchases.”
The national average home price increased 4.3% year-over-year last month and newly listed homes increased 0.3% month-over-month.
"With sales down considerably in May, the national sales-to-new listings ration moved out o f sellers: territory and back into balanced market territory for the first time since late 2015," CREA said in its release.
"The ratio stood at 56.3% in May 2017, down from 60.2% in April and the high-60% range over the first three months of this year."
What goes up, must come down (except taxes!)
Is the balloon starting to go up? Are interest rates going to go up? Will investors, banks and the economy in general get caught with their pants down? How many investors will own a home worth 500k that was worth 800k just months before and that they couldn't give away today? What will it be like owing 30% more on your family’s home than it is worth once the prices adjust (AND THEY WILL ADJUST SOONER OR LATER) and the markets come back down to reality? Selling it will NOT be an option when you owe 30% more than market value.
And perhaps most important is this- When the gravy train comes to a screeching and terrifying halt like it did in the U.S., do you have any special "piggy banks" that will provide 10-13% returns when the real estate riches are no more? Will there be an international real estate investment to fall back on?
For a viable, sustainable, long term investment real estate alternative you MUST diversify your strategies and investment options. If all the eggs are in one basket and it is dropped, all the eggs break and there is no breakfast tomorrow.
In the U.S., the markets have adjusted and are back on Planet Earth. And our company is the only company with internal underwriting that provides 30-year fixed rate lending for foreign nationals to own U.S. cash flow investment properties with11% returns.
Exchange rate? Well, if you were getting your returns in Canadian dollars that would be bad, but the same haircut taken is offset when the returns come back in USD. Duh.
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