When you think of the worst housing bubble of all-time Japan in the 1990s takes the cake and spreads a thick triple layer of icing for good measure.
Real estate in Japan was so outrageously overpriced in the 1990s that it still hasn’t recovered even in 2022.
Unrivaled for decades, as far as housing bubbles are concerned, there may be a new Sheriff in Town.
Hold your beer, Japan.
Canada has entered the room.
The perfect storm of overconfidence, lack of speculative foreign buyer regulations, impossibly low interest rates, generational ignorance, greedy guts investors and unabated soaring prices without any form of a correction (such as what happened in the US in 2008) has Canada teetering on the edge of THE mother of all-housing bubbles.
I’ll be the first to admit I’m no expert when it comes to real estate but I can share the experience of what it was like witnessing family sell a house in the Greater Toronto Area (Brampton) during the absolute peak of the housing bubble in Canada.
Canada Housing Bubble
How Overpriced Were Homes in the Toronto Area?
Just how overpriced were homes in the greater Toronto area during the peak of the housing bubble in Canada around March 2022?
Consider this.
The family house sold in Brampton (quite honestly an unremarkable suburban satellite city approximately 1 hour driving distance from downtown Toronto) was listed for 5.6 times the amount it was purchased for in the early 2000s.
Yeah.
You heard that correctly.
5.6 X!
And the amount overbid to secure the home from other prospective buyers was 1.75 times the price paid for the home in 2002.
I’ll say that again.
1.75 X overbid on the listing.
The real-life consequences of the house selling at the top of the top of the mother of all super-bubbles was that the family members who left Brampton were able to purchase a jaw-dropping dream retirement home with acreage in Alberta overlooking the Rocky Mountains with a considerable retirement nest-egg to go along with those views.
What has happened since?
With inflation soaring, markets down (stocks, bonds and crypto) and interest rates finally rising in Canada, houses that were listed at all-time highs in March are now selling at lower prices and closing hundreds of thousands of dollars below asking price.
It’s changed that much in just a few months.
And it’s likely only going to get worse.
All The Classic Signs of an Asset Bubble Were Present
Part of my financial education that I feel most grateful for was learning from legendary investors such as William Bernstein and Warren Buffet about what kind of specific behaviour is present during the top of any asset bubble.
1) Extreme Overconfidence
Firstly, you’ll notice extreme overconfidence.
Family members, friends, acquaintances and random interactions with strangers in taxi cabs and barber shops revealed overconfidence and ignorance more than a peacock displaying its feathers.
“You just have to buy any property 1 or 2 hours away from Toronto and in less than 2-3 years it will double in price.”
The crazy thing is that they were right.
For many years investors and/or just regular folks with a family house were doing just that.
Yet, no one considered the other side of the coin.
2) Getting Angry When You Don’t Agree
“What if you overpaid for that house and it goes down in value?”
I remember saying that as a counterpoint, every once in a while, when I heard such extreme overconfidence.
“Nah. Dude. You just don’t get it. That’s impossible. Common man. It’s a unicorn riding a rainbow straight to the moon.”
Furthermore, you’re an idiot for not “seeing clearly” just how easy it is to make money flipping houses in Southern Ontario.
3) Greater Fool Theory = Overbidding at the Supermarket
Warren Buffett classically pointed out just how ridiculous it is to overbid and overpay for an asset by using a supermarket analogy.
Imagine going to the grocery store and being thrilled that peanut butter is now triple the price of what it used to be just a few years ago.
Not only are you thrilled beyond belief you’re willing to pay even more.
That’s right.
You and a crowd of others are in the pit bidding for that jar of peanut butter auction style.
You want it so badly that you keep going higher and higher.
Screw buying it on sale.
It doesn’t matter what the price is as you’re determined to get it at all costs.
That probably sounds ridiculous, no?
Indeed.
Yet this is the behaviour that was being displayed during the showing of the house sold in Brampton, Ontario.
20-30 viewings over just a few days.
Offers immediately being put in well above asking price.
Conditions waived to entice the owners – such as no home inspection necessary.
Yep.
All of that happened.
I think in total there were 4-5 bids that were well above asking price.
It was a game of who was going to pay the most while in tandem offering the owners the most favourable conditions.
Greater Fool Theory.
“In finance, the greater fool theory suggests that one can sometimes make money through the purchase of overvalued assets — items with a purchase price drastically exceeding the intrinsic value — if those assets can later be resold at an even higher price.” (source: Wikipedia).
Canada Housing Bubble = Worse Than Japan?
All of that anecdotal evidence was all fine and dandy but let’s see some data and charts to back it up.
Just how bad is the Canada Housing Bubble?
Is it worse than Japan in the 90s?
Let’s find out.
Bear markets are the slap in the face that is required every decade or so to remind investors of intrinsic asset value.
A good lick here and there is often necessary to prevent humans from being all too human.
FOMO.
As you can see above, Canada did not experience the correction most other countries did around the world in 2008 when real-estate was becoming overpriced relative to fundamentals.
Housing in Canada was already more expensive than Japan, Germany, Italy and the US in 2008 with only Great Britain and France more overpriced.
What has happened since then is likely going to be studied by academics for years to come.
Like a rocket to the moon Canada surpassed all of these nations and then added a triple sundae of insanity to top it all off since 2020.
Canada vs Japan Housing Crisis
Let’s get back on track and compare the current housing crisis in Canada to that of Japan in the 1990s.
Regarded by many as the worst all-time housing bubble, Japan had private debt as a % of GDP of 213% during the peak of its crisis in the early 1990s.
Canada has now surpassed that amount with a private debt as % of GDP of 235% in the 2020s.
Bubblelicious?
Canada vs USA Housing Bubble
Many of my friends south of the border have been concerned about prices in the USA since 2020.
Indeed, there is reason for concern especially in larger urban centres where prices have soared.
Yet, compared to Canada it’s a walk in the park with regards to a potential correction.
When home prices in the USA were starting to become untethered with incomes in the mid 2000s the crushing events of 2008 provided the necessary gravity to correct the madness.
How about in Canada?
Completely and totally untethered since the early 2000s.
It was already bad in 2020.
The recent madness leading up to end-times in 2022 is nothing short of astonishing.
Real Home Prices vs Real Disposable Income is 4:1.
What kind of a bear market would be necessary to correct all of this?
Two back-to-back 50% bear markets.
What?
Yup.
Two back to back 50% bear markets would be what is required to bring housing prices to a 1:1 ratio of home listings vs disposable income here in Canada.
How Did Home Prices in Canada Become So Crazy?
How did home prices in Canada soar to such levels of insanity?
Well, this will be studied for generations.
Really, it’s a cocktail of many ugly ingredients.
- Lack of a necessary 2008 housing correction
- Lack of foreign investment regulations to prevent speculation
- Generational ignorance and FOMO
- Overconfidence = more investors than first time home buyers
- Ridiculously low borrowing rates
There are obviously other factors at play but the five I’ve listed above probably explain a great deal of the situation that has lead Canada down the path to its self-imposed housing bubble hell.
Is Housing Expensive Everywhere in Canada?
Is housing expensive everywhere in Canada?
Has the madness spread to all provinces and territories?
No.
But the radar of insanity has certainly expanded beyond just the Greater Toronto Area and the Vancouver/Victoria region of British Columbia.
Atlantic Canada, the most historically reasonable region to purchases homes in Canada (New Brunswick, Nova Scotia, PEI and Newfoundland), has seen prices increase dramatically since 2020.
However, it is not crazy like in Southern Ontario where a most unremarkable city such as Hamilton is now insanely expensive.
The Prairie Provinces of Canada (Alberta, Saskatchewan, Manitoba) have retained some level of affordability and did not get caught up in the madness of elsewhere.
For those seeking a laidback lifestyle out in nature a few places where you can still buy a home at a reasonable price remain available.
Cape Breton comes to mind.
As does northern British Columbia in communities near the Rockies such as Mackenzie.
For those seeking affordable city dwelling one could still consider Calgary, Edmonton, Winnipeg, Saskatoon, Quebec City and Fredericton.
Halifax?
Eh.
Maybe.
Generations Completely Shut-Out From Housing in Canada
Gen Z, Millenials and youngish Gen Xers have felt the brunt of the housing crisis in Canada the most.
Shut-out completely or carrying a boulder of a mortgage on their collective backs it has lead to record low fertility rates and delayed marriages.
It’s a total nightmare.
How can a young couple afford a house in Toronto and raise a family at the same time?
Not possible.
Even with great careers/salaries.
Most of Canada’s population is clustered between Montreal and Windsor where the madness is at its worst.
Getting on the housing ladder is a pipedream for many.
It’ll take a spectacular correction to bring affordability back to certain areas of Canada.
Most Embarrassing Part of the Housing Bubble in Canada?
Canada has officially six time zones:
Pacific, Mountain, Central, Eastern, Atlantic and Newfoundland.
Canada has a population of 38 million as of 2020.
We’re not a crowded nation.
Canada has a population density of 4 people per square kilometer.
We’re an enormous country with enough land to support a population exponentially greater than what currently exists.
Yet we’ve got an embarrassing affordability crisis when it comes to housing.
Unlike destinations such as Hong Kong and Singapore, where buildings rise to the heavens above and land is being reclaimed to deal with such insane population density, Canada has no shortage of land at it disposal.
It’s truly astonishing and quite frankly flat out embarrassing that things have gotten this bad.
Nomadic Samuel Final Thoughts?
This might sound harsh but I’m going to sit back with multiple bowls of popcorn and watch the housing bubble crash in Canada with glee.
Before I get into “why” I feel so strongly about wanting a reversal of this housing crisis, I first want to start off with a few specific considerations.
Firstly, I genuinely feel sorry for any new homebuyers or regular folks who becomes collateral damage when the Canadian housing bubble bursts.
It’s only just begun and many young couples and families are going to feel the brunt of the impact of having purchased a home well above its intrinsic value.
Secondly, I’m not taking any pleasure in the reduction or destruction of wealth that will happen to those who overpaid, held on too long or didn’t recognize how bad things were before shite hit the fan.
What I am going to personally enjoy is witnessing the “extreme greed” of certain folks who played the housing market like a Nintendo game on steroids for decade upon decade take a brutal licking.
Moreover, I’m rooting for the market to correct itself to a healthy level so that young people can aspire towards a middle-class lifestyle that once made Canada one of the most desirable places to live on this planet.
The housing bubble in Canada is finally bursting and it is about “fill-in-the-blank” time.
I’ve got my popcorn in hand and I’m here to binge watch every episode.
Japan never had the population growth or zoning and building restrictions that Canada has.
Japan has 338.2 people per square kilometer versus Canada at 4. And you think Canada has a population problem?
Canada does find itself in significant trouble as far as real estate is concerned. However, I would never have imagined things getting as bad as they have.