Long-Term Real Estate Investments

I’ve spent the last few months learning about North American real estate investments, in particular, studying the Vancouver and Toronto markets. Both of which in my opinion are extremely overvalued and unsustainable. Unlike what you hear in the media every day, I don’t think that we’re in a Real Estate bubble, I do however, think that prices will decrease 25–30% over the next decade.

The average price of a detached home in Vancouver, today sells for around $ 1 million (requiring a downpayment of 20% without CMHC insurance). With prices increasing on average 9.5% year over year, how can my generation, the millennials ever afford to buy a house?

On the flipside, ultra-low interest rates have granted the banks to lend out more money, more cheaply to people who, when rates rise will not be able to afford their mortgage payments. Today, a couple earning $100,000 combined can qualify for $600,000 mortgage at 2.94%. If interest rates rise even by 1%, the same couple, like many Canadian’s in the same situation will not be able to afford their home, in my opinion causing a mass selloff in the market.

I’ve also heard a lot of street talk saying that “as long as we have strong immigration, real estate prices will continue to rise…”. Not true. Not only is Canada becoming more strict with their immigration quotas and policies, but the immigrants are only coming here because they see potential for economic growth. The day we experience a slow down in the economy they will find better countries to park their money in. Let’s not forget Alberta is already experiencing a slowdown with thousands of jobs lost and more on the way if oil heads lower. I also believe WTI Crude Oil could head lower to $20, but that’s another discussion.

The average debt to income ratio in Canada is at all-time highs, 163%. If trends continue some analysts believe we could see this number increase to 200% by 2020. Meaning that for every dollar you actually earn, you have two dollars in debt.

Basic ECON 101 would suggest that this kind of parabolic growth is unsustainable.

Interested in hearing your feedback.

Imran Jiwa

imranjiwa@me.com