Bloomberg recently ran a story on the hot housing market in Toronto. While it is seemingly good times for those who own real estate there, it also shows all of the classic signs of a bubble that will eventually burst.
The one big problem with predicting bubbles, as with other investments, is timing. Even if we can accurately predict that there is a bubble, we don’t know when it will burst. We don’t know how much longer and further it will go higher.
If I owned real estate in Toronto right about now, I would think about selling. Prices are up 33% from last year. The average price of a detached downtown home is almost 1.6 million Canadian dollars. That is about 1.2 million U.S. dollars. Even the average price for all homes in the Toronto area is getting close to one million Canadian dollars.
This is simply unsustainable. If you are an American, you may not think this applies to you. But Canada seems to resemble the U.S. in many ways. The policies of the two countries are often similar. There is probably more military spending (per capita) in the U.S. and more domestic welfare spending in Canada (per capita). But overall, policies are somewhat similar, including central bank policy.
The U.S. dollar has been really strong for the last few years. The U.S. and Canadian dollars hit parity a several years ago though. This trend reversed back in favor of the U.S. dollar around 2012.
Not all of Canada is in a real estate bubble, or at least not anywhere close to Toronto. Vancouver is another Canadian city that is likely in a major real estate bubble.
It is no different in the U.S. Major cities in California are in a big bubble. Some of this is due to rent control, zoning laws, and other regulations. Some of it is just hot money flowing into real estate. In Silicon Valley, the tech boom helps fuel the real estate boom. And it is no surprise that Hollywood has a lot of money to bid up prices in that area.
If I lived in California, I would move, unless I had a really great job there. I don’t see how it is worth it to most people. I understand that some people love the lifestyle and the culture. Leftists want to be around leftists, but I know that it goes beyond the politics. I also understand that some people stay there because of family and the weather.
While you can make a higher than average income in San Francisco and Toronto (to use two examples of major housing bubbles), you have to really be earning a lot to make it worth it. Why would someone pay $3,000 per month in rent – or higher for a mortgage – to live somewhere? You could find someplace a bit less expensive, but then why would you live in a tiny apartment and still fork over a lot each month? What kind of lifestyle is that?
In the long run, this is not sustainable. The last housing bubble in the U.S. started to pop about 10 years ago. It wasn’t that long ago. Yet, here we are again in some areas with prices going up sky high.
I think the current real estate bubble is more local than the last time. Last time, most of the country was hit hard. The next time around, only certain cities will get hit hard. Everyone may get hit hard by a recession, but I don’t think house prices are going to get cut in half as they did in many cities last time around.
It is still a good test to compare rents to mortgage payments. If you are planning to stay in one spot, then you can add up the costs of getting a house. This includes mortgage, insurance, taxes, any association fees, and an estimate for repairs. Make sure to account for repairs. I just spent over $1,300 to fix an air conditioner, so don’t neglect this. When you add up all of your monthly costs, is it still less than you would pay for rent for a comparable place?
Sometimes renting can make financial sense. If you live in Toronto or San Francisco, it probably makes sense right now. It makes more sense to live in a cheaper area with a lifestyle you still enjoy.