Canada’s housing market is red-hot.
In 2015, home prices in Canada continued to rise while ratings agency Fitch warned that homes were 20% overvalued.
But a report from Bloomberg’s Katia Dmitrieva on Wednesday makes clear that no matter what a financial analysis of Canada’s housing market might yield, anybody worried that a full-on frenzy has stricken the country’s housing market will have their fears confirmed.
Dmitrieva’s report looks at the building spree currently taking place in Waterloo, an Ontario town that is home to BlackBerry and has attracted Google and other tech startups. The town is billed as Canada’s Silicon Valley.
The scene Dmitrieva sets, however, is one of a housing market where animal spirits have really taken over.
A 250-unit condo project is sold out in hours and $60 million worth of real estate is booked.
Another 170 people are added to a waiting list.
And then (emphasis added):
The fervent demand for property in Waterloo, about 110 kilometers (68 miles) west of Toronto, highlights the city’s coming-of-age as an investment destination: first by technology companies and now real estate firms looking to gain from the city’s metamorphosis. Real estate investors at the event, including families, seasoned individuals and couples, were looking for higher returns than in Toronto, where homes are sold for almost double what they are in Waterloo.
“It’s what that fellow was talking about,” said Bill Ring, head of operations for a property management company, referring to Wekerle. “Students are coming in and need a place to live, tech companies are opening. It will all drive the value up.”
Ring drove two hours to attend the event and buy a one-bedroom unit. It’s his first condo investment, which he intends to flip to another buyer before it’s completed, taking advantage of the advertised 40 per cent return. “I don’t want to invest in stocks because they’re crazy and real estate is a solid, safe investment.”
Not entirely reassuring.
2015 was a rough year for the Canadian economy as the crash in oil prices weighed on the country’s western provinces and the Canadian dollar lost about 20% of its value against the US dollar.
The force buoying the economy, however, has been the housing market.
But as Robert Shiller outlines in his book “Irrational Exuberance,” there is simply not a ton of evidence supporting the idea that on an inflation-adjusted basis home prices rise appreciably over time.
As Shiller breaks down, there is an idea that home prices — or real estate prices, generally — rise only if the home you are living in rises in value. But the increase in home prices in a given city will only continue so long as the residents of that city continue to make enough money to continually push up home values.
And this is not a given.
Eventually, the mortgage required for a home of a certain price will exceed what jobs in that city pay, thus leading to a decline in home values.
And of course when thinking about the cost of owning a home one must include taxes, upkeep, and so on: owning a home is work.
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