Canada’s Housing Issues Growing Stronger Day-by-day
With the sudden downturn of home sales in Canada last month, the increment in home prices is still growing strong. Which were up 18 per cent nationwide from a year earlier. ‘When you consider that most houses are leveraged assets, this represents huge gains for homeowner’. Bloomberg news.
“While leverage can help boost performance on the way up, it becomes very dangerous on the way down. Leverage can turn even the best investment into poor ones when things go wrong, as losses are amplified. Equity can get wiped out pretty quickly on an over leveraged asset”, reported Bloomberg News.
The Canadian real estate market has been hot for years in a row. The housing price data there has made the U.S. real estate market during the boom of the mid-2000s look mild.
The reason home ownership should be a cause for concern in Canada is because it is typically not a great long-term investment.
“Here is a harsh truth about home ownership: over the long haul, it’s hard for homes to compete with the stock market in real appreciation. That’s because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also grow through time – unless the company makes poor decisions, as some certainly do”, explained Robert Shiller.
The problem is that the experience of buying homes is fraught with emotion. Most of us don’t think about the characteristics of real estate as an investment when putting down roots and making the biggest purchase of our lives. In Toronto, the average sale price of a detached home this spring was $1.2 million.
U.S. home owners understand all too well what can happen to the economy when the housing market destabilizes. The timing is impossible to predict, but Canadians should be on avalanche alert.