By Justin Spittler, editor, Casey Daily Dispatch
Toronto’s housing market is unraveling.
Last month, home sales in Canada’s biggest city fell 40%. That was the largest annual decline since 2009.
But that wasn’t the only bad news to come out this past month.
The price of the average home in Toronto also fell 4.6% in July. That’s the biggest monthly decline since at least 2000.
It was also the third straight month that Toronto home prices fell. The average home is now selling for $175,000 less than it did in April.
That’s a staggering decline. But it’s just the beginning.
You see, the number of house listings in Toronto also jumped 5% last month. There are now 65% more homes listed for sale in Toronto than there were a year ago.
This is a bad sign.
• It tells us homeowners in Toronto are running for the exits…
If this doesn’t change, the supply of Toronto homes will outstrip demand. This will send prices even lower.
Most investors aren’t taking this seriously. But they should.
After all, Toronto isn’t headed for a run-of-the-mill downturn. It’s headed for a crash.
I’m not the only one saying this, either.
David Madani, an economist at Capital Economics in Toronto, thinks housing prices could plunge as much as 40%. Madani also said that the coming downturn will be deeper and longer-lasting than previous ones.
That’s the last thing Toronto can afford right now.
• Toronto’s housing market has been booming for nearly two decades…
Local housing prices are now up 218% since 2000.
That’s far more than prices have climbed in New York, Miami, Las Vegas, and even San Francisco.
Prices have risen so quickly, the average person can no longer afford to live in Toronto. These days, the only way to swing it is to borrow huge sums of money.
It’s complete insanity.
That’s why I’ve been writing about Toronto’s housing bubble this year. It’s also why I’ve been urging investors to take shelter.
If you took my advice, great. You’re much better off for it. If you haven’t yet, please read this essay closely.
As you’re about to see, a Toronto housing crash isn’t just a problem for Canadian real estate investors. Anyone with money in Canada’s stock market is in danger right now.
I’ll explain why in today’s essay. I’ll also tell you how to “flip” this crisis into big profits.
But let’s first be clear about something. This isn’t just happening in Toronto.
• Canada’s entire housing market is collapsing…
In June, nationwide home resales fell 6.7%.
That’s the biggest monthly drop since 2010. It was also the third consecutive month that this happened.
The number of monthly home sales in Canada is now down 14% since April.
That’s a big drop. But it’s only going to get worse.
You can see why by looking at the chart below. It shows Canadian housing prices going back to 1975. It also tracks U.S. housing prices for comparison.
You can see that Canada’s housing market wasn’t slowed down by the last global financial crisis. It just kept rolling.
Canadian housing prices are now up 101% since 2009. And they’re up 218% since 2000. U.S. housing prices are up 85% over the same period.
As if that weren’t crazy enough, the average house in Canada is now selling for 16 times more than the average Canadian’s income. For perspective, this same ratio peaked at 12.5 during the last U.S. housing bubble.
• You’re probably wondering how this is even possible…
It’s simple. Canadians have borrowed enormous sums of money to buy homes that they can’t afford.
You can see what I mean below. This chart shows how much debt the typical household in Canada has relative to income. A high ratio means households are highly indebted.
This ratio has surged 57% since 2009.
The typical Canadian household now owes C$1.67 in debt for every dollar of disposable income.
That’s a record high. It’s also 31% higher than where this ratio peaked during the last U.S. housing bubble.
• In short, Canada’s housing market is floating on a sea of debt…
And that’s a threat to everyone investing in Canada today.
This isn’t an exaggeration. It’s not hyperbole. It’s simply the hard truth.
You see, real estate, financial, and insurance companies now make up around 38% of Canada’s stock market. These same industries made up just 21% of the S&P 500 back in 2008.
Real estate and related industries also account for about half of Canada’s stock market earnings.
Housing is the backbone of Canada’s economy, too.
In fact, residential property construction accounts for about 7% of Canada’s economic output. For comparison, residential construction accounted for 6% of U.S. economic output in 2007.
And perhaps most alarming of all, housing ownership transaction costs have accounted for 21% of total gross domestic product (GDP) growth post-2014.
• If it crashes, the rest of Canada is going to have big problems…
That’s why it’s so important to take precautions if you haven’t already.
Here are two things you should do today if you have so much as a penny in Canada’s stock market…
Get out of Canadian housing and bank stocks. These stocks will plummet if Canada’s housing market crashes.
You might also want to bet against the Canadian dollar. The easiest way to do this is to short (bet against) the CurrencyShares Canadian Dollar Trust (FXC).
This trust tracks the value of the Canadian dollar against a basket of other currencies. Its value should fall if a housing crisis causes Canada’s economy to implode.
August 7, 2017
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