Juggling Dynamite

If we had a dime for all the times people say silly things, like “You’ll never lose money in real estate” or “high-end properties always hold their value.” Not true, never has been.

The current real estate correction cycle is well-earned after years of easy money speculation and uneconomically high prices. Three years into the downturn, many people are still in denial. But the mean reversion process is happening, and it packs a big financial hit for owners, lenders, the broader economy and jobs.  See, Cottage purchased for $1.9M sells at a 45% loss in Ontario:

An Ontario cottage purchased for $1.9 million in 2022 just sold for a huge loss.

As housing prices decline across Canada, homes continue to sell for much less than homeowners paid just a few years ago.

In Brampton, a home recently sold for a $469,000 loss, and a Mississauga home sold for a $700,000 loss in July.

In a tough market, recreational properties are not a priority for many buyers. A recent report found steep price declines in recreational markets across the province on a year-by-year basis, with areas like Niagara-on-the-Lake, Peterborough County, Northwestern Ontario, Orillia, and Grand Bend being hit the hardest.

Margin debt (people borrowing against their security portfolios) has now topped $1 trillion for the first time in history, +25% over the past year alone. Other, lesser, margin-abuse peaks occurred before major bear markets/recessions (grey bars below) since 1995, courtesy of Rosenberg Research.

Among professionals, dry powder is also in short supply. Trend-chasing portfolio manglers managers are all in with portfolio cash ratios at a record low of just 1.4%.

The tech-heavy NASDAQ 100 index is today priced at 105% of the US economy (GDP) for the first time ever (shown below since 1990).It is not just the Nasdaq index that’s grossly inflated.

Shopify is back to being the largest weight in Canada’s TSX composite. Three tech stocks–Nvidia, Microsoft and Apple–make up a record 20% of the S&P 500 market capitalization, and the top ten most expensive account for 40%, versus the prior mania record of 27% at the 2000 cycle top.

The historically informative Shiller price-to-earnings ratio for the S&P 500 at 38.8x is a range only seen briefly in the stock market euphoria of 2000 and late 2021 (below since 1975 courtesy of www.multpl.com).

Within the S&P 500, the technology sector’s price-to-sales ratio hit an all-time high of 10x (black line below since 1990), compared with 7.8x at the 2000 tech bubble top and a median ex-tech ratio of 3x (gold line below).  Paying 10x sales for a singular company has long been recognized as crazy, for a whole index? Financially suicidal.

The Wilshire 5000 Total Market Index (Wilshire 5000) is a broad U.S. stock market index designed to measure the performance of nearly the entire investable U.S. equity market. It is currently trading at an all-time high of 212% of US GDP, compared with 172% in February 2021, 137% in March 2000 and a long-term average of 155%. Warren Buffett has famously said that a market-to-GDP valuation over 140% is dangerous.

At the same time, junk debt (with a credit quality less than investment grade) is priced so high as to have the lowest yield spread over similar dated Treasuries since 2021 and 2007.

Market cycles are a full circle, and current valuation levels suggest return-free risk from here. It’s a fantasy to think that the valuation-insensitive capital that’s in today will get out intact.

All’s well that ends well. We can either look foolish by shielding capital and minimizing exposure to irrational exuberance or holding on as prices mean-revert lower once more.  The former can feel hard for a while, the latter tends to leave lasting financial, emotional and psychological harm. Consciously or not, we each pick our poison.

As policymakers focus on tariffs, bursting real estate bubbles pose a significantly larger threat in terms of relative economic impact, and that’s now happening in several major economies simultaneously. Homes are the foundation of the household balance sheet and assets in the banking system.

A 2025 Bank of Montreal report, “A Long Way Home”, concurs with our analysis that Canada’s current real estate downturn—often a bellwether for broader North American housing trends—is the most significant since the 1980s correction that lasted six years from peak to trough. Given the still-persistent lack of affordability, the current housing downturn, which began in February 2022, could last longer than most expect.

Canada lost 40,800 jobs in July—the most significant decline since January 2022—and just over half of those lost were in construction (–22,000).

The ongoing housing downturn is the biggest story, and it’s getting little coverage. No doubt, there is financial pain unfolding, but longer-term, much lower home prices are a massive part of the economic rebalancing and revitalization needed.

Vancouver developers are sitting on roughly 13,000 unsold condos, a record high. This is up from roughly 5000 units during the pandemic era. No wise developer is going to start new projects until this backlog clears, hence the cries for removing the foreign buyer ban. There were just 1300 condos sold in the Toronto Real Estate market in Q2, Urbanation calls it a collapse. Rental construction surging in Calgary which will push rents lower. Here is a direct video link.

Similar trends are unfolding in major American centers, too.

Condo prices are dropping across the U.S. as HOA fees skyrocket and condo owners look to sell before the drop gets worse. Condo prices are now down over 20% in markets such as Oakland, Austin, and St. Petersburg, and now they’re even dropping in Nashville. Access condo and rental market data at www.reventure.app. Could this condo correction be a signal of an impending housing market downturn? And when will it be a good time to buy a condo? In a market like Nashville, the rents for apartments are well below the cost of buying a condo, suggesting that the downturn will continue. The last time we saw condo inventory this high on the U.S. Condo Market was 2011, the end of the last housing market downturn.  Here is a direct video link.