This is our final "best of" show of the summer, and it's a doozy: my interview with Hilliard Macbeth (you can find the original show notes on our is the Canadian real estate bubble about to burst page) is the most downloaded show of 2016.
Why is a show on debt and real estate our most downloaded show? I think it's because there are two opposite opinions: one group believes that real estate is the greatest investment ever, and another group believes it is over-valued. Obviously Mr. Macbeth is of the view that it's over-valued, and the bubble will eventually burst.
As I write this in the summer of 2016 the real estate market in Toronto and Vancouver is "crazy". A one bedroom condo in Toronto can easily sell for $500,000 (and more in Vancouver). If you buy that condo with the minimum of a 5% down payment, your $475,000 mortgage, if you can get a 5% rate (and you pay a higher rate due to the low down payment mortgage insurance requirement) your monthly mortgage payment is $2,763. Add in condo fees, utilities and repairs and maintenance and that condo will cost you $3,500 per month, and that's before you pay for food or transportation! And it's only a 600 square foot condo! If you are single, and in the 30% tax bracket, you need to earn $60,000 per year before tax just to pay your shelter costs, not including food, transportation, or anything else.
It's those numbers that convince Hilliard Macbeth that we are in a housing bubble, and it's hard to argue with him.
However, you could have made the same argument last year, and the year before, and house prices keep going up. That $500,000 condo this year was only $400,000 three years ago, so buying then, even with a huge mortgage, was a good investment, if you could keep up with the payments.
And that's the problem: the monthly payments. If you get behind on the payments, you've got a problem. House prices won't keep going up forever, so at some point the bubble will burst; I just can't tell you when it will happen.
Find out more by listening to the show or by reading the original transcript: When is the Canadian Housing Bubble Going to Burst? Podcast 89, Transcript
Resources mentioned in the show:
- Teranet National Banking Index
- MLS® Home Price Index - Canadian Real Estate Association
- When the Bubble Bursts: Surviving the Canadian Real Estate Crash