By Justin Spittler, editor, Casey Daily Dispatch

Canada’s banking system will soon be put to the test.

And that’s because the country’s massive housing bubble is starting to unravel.

If you’ve been reading the Dispatch, you know what I’m talking about.

In short, housing prices in Canada’s biggest cities have skyrocketed in a short period of time.

It’s now a bubble in every sense of the word. And like every bubble before it, it’s going to end in catastrophe.

Even Canada’s government can see this. That’s why they’re scrambling to prevent a full-scale housing crisis.

Last July, officials in British Columbia rolled out a foreign buyers levy. This basically slaps a 15% tax on non-Canadian residents who buy a residential property in the country. In other words, a foreigner would have to pay an extra $150,000 in taxes if they bought a $1 million house in British Colombia.

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• Officials rolled this out because Vancouver housing prices were rising at about 30% per year…

And foreign money, mostly from Asia, was a big reason for this.

The hope was that this tax would cool the city’s housing market and keep it from crashing. But all it really did was accelerate an inevitable crisis… one that’s already begun in Vancouver.

Real estate research company Inman reported last week:

According to Elton Ash, the regional director of Re/Max of Western Canada — who’s based in Vancouver — “the effect was that the market died immediately. It just fell off the ends of the earth. We went from a multiple-offer situation to zero within a weekend.”

Vancouver home sales are now about 40% lower than they were last year. Meanwhile, local housing prices are falling at about 13% per year, according to The Wall Street Journal.

In short, the emergency measure didn’t fix Vancouver’s housing market. It caused it to unravel.

And yet, officials in the province of Ontario just did the same exact thing.

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• Two weeks ago, Ontario officials implemented their own 15% foreign buyers tax…

They did this because, like Vancouver, Toronto is also in a major housing bubble.

Last month, housing prices in Toronto jumped 6.2%. That’s the biggest one-month jump on record.

Local housing prices are now surging almost 30% per year. This is making it nearly impossible for everyday people to buy a home there.

In fact, the average home in Toronto is now selling for just under C$1 million. That’s about three times more than the typical Toronto family can afford.

Worst of all, Toronto’s housing bubble is now spreading like cancer. According to Fox Business, housing prices in the city of Hamilton, 42 miles west of Toronto, rose 30% in March.

They surged 32% in the Kitchener-Waterloo area, which is 66 miles west of Toronto. And they jumped 43% in Barrie, which is 68 miles west of Toronto.

• Ontario officials hope the new foreign buyers tax will bring house prices down to earth…

But it may not be enough.

David Rosenberg thinks the city is in a “bubble of historic proportions.”

Rosenberg is the chief economist and strategist at Gluskin Sheff + Associates, one the largest money managers in Toronto. According to Rosenberg, Toronto’s housing bubble is just as bad as the last U.S. housing bubble:

This bubble is on par with what we had in the States back in ’05, ’06, ’07,” he said. “We have to actually take a look at the situation. The housing market here is in a classic price bubble. If you don’t acknowledge that, you have your head in the sand.

In other words, Toronto appears to be in serious trouble. After all, the average price of a house in the United States went on to plunge more than 30% between 2006 and 2009. In parts of California, Florida, and Nevada, the average home price plummeted more than 60%.

• That kind of crash could trigger a full-blown banking crisis…

But don’t take my word for it.

Take it from Prem Watsa, who runs the Canadian investment firm Fairfax Financial Holdings:

Most banks can’t survive a 50 percent drop in real estate values…

It’s going to come down, and a lot of people are going to get hurt.

If you have any money in Canada’s stock market, here’s what you should do.

Lighten up on Canadian housing stocks. If Toronto’s housing market tanks, Canadian homebuilders could severely struggle. Get out of these stocks while you still can.

Sell Canadian bank stocks. This is another no-brainer. If housing prices in Toronto tank, a wave of foreclosures could rip across Canada. Banks and other lenders would take huge losses if this happens.

Regards,

Justin Spittler
Delray Beach, Florida
May 1, 2017

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