Canada’s real(ty) problem

Like most Canadians, real estate forms a large portion of my family’s balance sheet, so it’s not exciting to acknowledge that prices have run far past reason. But denial is a disastrous investment strategy and no up cycle lasts forever. For those who are living in a paid for home that they want to keep and can afford to maintain over the next decade, this is not the end of the world. But for the bulk of market participants who are today highly levered investors/speculators/developers/homeowners who bought for a flip or bought more property than they can afford to maintain, prospects are dangerous.

And for the Canadian economy and its budget deficits that have deteriorated with commodities since 2011 and are now dependent on real estate as the last engine firing…the downside is daunting:   for related services, for taxpayers, banks, pensions and the many investors with a concentrated exposure in the space.  Repeat: denial is not an intelligent financial plan. See: Canada’s one-legged-stool economy.

“…the real estate industry accounts for 12 percent of Canada’s gross domestic product through November.

“It is concerning to see that degree of concentration coming from one sector,” said Brian DePratto, economist at Toronto-Dominion Bank. “This underscores the importance of real estate to Canadian growth, and also reinforces how key of a risk the real estate sector is for the Canadian economy.”

The Bank of Canada warned that real estate may be overvalued by as much as 30 percent. In its December Financial System Review, monetary policymakers cited the elevated level of household indebtedness and imbalances in the housing market as two key vulnerabilities to the financial system.

Abraham Lincoln famously said that “a house divided against itself cannot stand.” One corollary that Canadians can take as gospel: An economy built on housing can’t stand for too long either.”

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