Will History Repeat in Canada?

By Mario on Apr 08, 2014

I recommend checking out this great presentation by Matthew C Klein. It's called Bubble to Bust to Recovery. The focus is on the US housing market from the early 2000's to the present. I found the information very interesting and it is my opinion that Canada's housing situation, may end up to be quite similar.

Click the link below to watch:

Below are eight points that sum up my interpretation of this presentation, and basically how a cycle works:

1. In a real estate cycle (inflation and deflation of home prices), not all areas will be effected equally. Typically, the ones that rise the most, will also correct the most.

2. In areas that borrowing levels (the amount of money borrowed to buy real estate) are high, housing prices increased quickly, meaning the speculation of buyers significantly pushes up prices.

3. Loose government regulation in the banking sector allows banks to make riskier loans, to people who may not have adequate credit. Using government backed insurance companies, these loans are guaranteed with taxpayer money (government bailouts). Banks hedge (limit) their risk this way.

4. Borrowers use the equity in their homes (inflated equity because of inflated property values) to purchase depreciating assets (cars, TV's, toys) and to cover other debts (credit cards, LOC's, car payments etc) This spending contributes to a thriving economy. Unfortunately, this is mostly debt driven, and not sustainable for the long term.

5. As long as house prices are rising, people continue spending. They feel rich. When house prices decline, the opposite happens. They stop spending cause they no longer feel rich. With this contraction in consumer spending, the economy goes into a recession. People have to continue to borrow and spend money to keep the wheels of the economy turning.

6. During the recession real estate prices plunge. Many homeowners find themselves under water (they owe more than the house is worth) and walk way from their home. The well positioned investors (patient investors who know the cycle and have been waiting for the correction to buy) purchase much of the bargains. They then rent these properties out, many times to previous home owners who lost their home in the recession.

7. The purchase of this real estate signals the beginning of the recovery. Effectively, this is how educated investors position themselves to prosper in times of economic despair. They can now contribute their income to growing the economy once again.

8. The cycle restarts and here we go again. This time it might be in a different asset class (stocks or commodities) but psychologically we will follow the same path, as we are creatures of habit.

Thanks for reading. What are your thoughts?