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Does 15% Appreciation in Property Prices mean the Bubble is here?

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(img: rick harris)

This isn't a post judging the good or bad state of current real estate prices.

In fact, we believe real estate can still be a very critical component of your life.

We believe that there's a much bigger issue Canadians need to know about.

But this post does begin with the insanity of real estate prices.

Stick with us ... we'll try to bring this all together.

When a country like Canada somehow believes that they can "stimulate" their way out of a global economic slump by using low-interest rates for excessive periods of time, funny stuff begins to happen.

Case in point...

TREB is publishing that the average price of Toronto homes has gone up 15% year over year.  (Source)

Let us repeat that ... 15% appreciation in one year.

This is after years of already strong appreciation.

OMDREB, which is the real estate board that the Town of Oakville falls under, is reporting that the average sale price went from $863,748 in February 2015 to $994,902 in February 2016.  (Source for 2015, Source for 2016)

That's also a 15% gain.

15%!

In one year.

Oakville, a suburb of Toronto, is on track to be a town of $1 million dollar average home prices.

The Canadian government can talk all they want about the "need for Canadians to be careful with debt" but let's face it, when the banking system offers mortgages for super low rates and you combine that with money flowing into Canada like a surging river, we're bound to get crazy prices popping up all over Toronto.

Here's the point we would like to make:

We believe you cannot judge the validity of real estate prices using historical averages as a comparison.

And why would we say such a silly thing?

That sounds like such a naive and uneducated type of comment, doesn't it?

Here's the thing.

We've never lived in a world of such low-interest rates for such long periods combined with such easy mortgage lending options.

We believe the inflation that the governments of Canada, the U.S., Europe etc., have been so desperately trying to create since 2008 is finally showing up here in Canada in the housing market.

China has been the place we have all be sending our money to buy TVs, PS4s, iPhones, Samsungs, furniture, clothing, shoes, flooring, toothbrushes .... everything!

And as a result, they stockpiled a whole bunch of money.

Just take a look at this chart.

China has gone from just having about nothing in US dollar foreign exchange reserves in the mid-1990s, to reaching about $4 Trillion... TRILLION ... in 2014.

All that easy money that's been floating around with low-interest rates found its way to China and they stockpiled it.

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(Source)

Now take a look at what's happening over the last twelve months.

Money is racing out of that country.

$107 Billion left in December, $99 Billion left in January.

"Only" $28 Billion left in February and this was advertised as a "low" amount.

Money was being stockpiled in China.

Now it's running out of the country with its hair on fire looking for a home.

If you were money ... and you were looking for a home ... would Canada look like a nice, safe place?

We think it would.

We wrote about this in last week's blog post in more detail.

So all of a sudden, the money surging into Canada is driving up the real estate prices over the last year more than ever.

And we've just been talking about China. What about all the other countries that have money leaving their shores looking for a home?

We believe that the real story isn't that prices have gone up 15% year over year.

Although, that is rather shocking.

The real story is this...

What happens if this money continues to flow into here for the next twelve months?

And what happens if rates in Canada continue to stay super low for another two years?

And what happens if our government decides to run a $30 Billion dollar federal deficit this year for "stimulus" spending in Canada?  (Source)

And what happens if the Ontario government decides to print cheques for everyone who they deem worthy of them and send them money in the mail? (Source)

We definitely don't have all the answers.

Far from it.

But we do know this...

These are not the problems all of our parent's faced.

This is a whole new brave world.

To comment on real estate prices here in Canada without looking at the world's monetary policies as a whole isn't capturing the whole story.

So why do we think real estate can still play a role in your life?

Because a good income property that pays for itself is to us ... a productive hard asset.

It's one way for us to ride the ups and downs of this madness.

If the governments around the world want to inflate prices into the stratosphere, we'll be along for the ride. If prices blow up, as long as we can cover our costs on our property, we can survive.

This may sound naive but we don't see another way to manage through these times.

And even though Canada recently sold all its gold, we believe having gold and silver is insurance against this madness as well.

So to us, a combination of good income property, some gold and silver and some cash savings gives us a lot of options.

Hopefully, we'll not only survive these times, but we'll thrive!

Until next time ... Your Life! Your Terms!

 

 

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