I recently went shopping in the suburbs of the Greater Toronto Area (GTA) and ran into a real estate agent I know. She always seemed like a pretty smart lady... German, in her 50s, with more than a couple decades in Ontario real estate. About 5 years ago we used to chat about finance and markets.
The last time I had seen her was in 2007 and she remembered that I had shared my forecasts for the US mortgage and banking system. Recalling that I saw the whole thing coming before, she wanted to pick my brain again.
It seems that she's been watching things very closely lately -- she reads daily German media and communicates with business partners in both Europe and Canada. She says that things are relatively strong in Germany and holding up much better than the rest of Europe, but everyone in Europe (including Germany) is rather nervous these days.
She sees Canadian real estate slowing now, and is telling people to “wait 3 years” if they're keen on buying RE. She also thinks the Canadian household debt-to-income ratio at 154% (of disposable income) is totally unsustainable and is going to implode. This is already higher than the American ratio at its pre-crisis peak! She told me she expects at least a 25% drop in Toronto home prices, and a larger drop in condos as there is way too much supply.
As a RE agent, she also reminded me that many people are in fact buying homes with 0% down in Canada due to cash-back mortgages, still available as of September 2012. She also said that some international holding companies are buying Toronto buildings with 5% down and flipping the units for profit. She described a scam I didn't totally understand, but she figures that many buildings are being bought by speculative foreigners, who expect to walk away and default on obligations the moment the market turns.
Her rule of thumb to “wait 3 years” actually aligns very well with my bond investment strategy. I hold Government of Canada bonds, with an average maturity of 3.2 years. So we are generally aligned; we both figure that you'd better sit and wait approximately 3 years before making capital decisions.
I caught a re-run of Robert Shiller (of Case-Shiller) on the Canadian BNN channel, September 6. He calls Toronto a “glamour city” and identifies real estate bubbles in both Vancouver and Toronto.
While Toronto and Vancouver are most frequently mentioned, I'll also add that Alberta seems to have a bubble too. When I was doing google searches for zero-down cash-back mortgages, Calgary brokers were coming up quite often.
- Perpetual Bull