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High Debts and Rising Rates Means Canada “Isn’t Out of the Woods” Yet

I wanted to bring to your attention a growing concern with regards to rising interest rates and how that can affect real estate affordability in and around Toronto. Toronto and Vancouver are two of the top five cities worldwide facing the risk of a real estate bubble as stated by UBS in their UBS Global Real Estate Bubble Index with the others being Hong Kong, Munich and Amsterdam. As the study notes, a real estate bubble “refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts”

While Toronto house prices have stabilized over the last 12 months, they are still 50% higher than only five years ago when adjusted for inflation. Prices at that level mean somebody employed in a skilled trade would need an average of six years income just to afford 650-sq ft condo in the downtown core, which means more and more buyers are looking outside the city for affordable housing.

Policy measures meant to cool the market have been implemented such as taxes on foreign buyers, taxes on vacant homes and the expansion of rent control. Even with those policies in place, the weakening Canadian dollar is still making Toronto real estate an attractive investment opportunity for foreign investors over the short-term. The outlook is much worse in Vancouver as foreign taxes have not depressed prices at all. Somebody employed in a skilled trade would need an average of nine years income to afford the same 650-sq ft condo in the Vancouver core. With prices being that high, a rise in interest rates or the tightening of mortgage rules could really blow the doors off and cause the bubble to finally burst.

“This is something that we are going to have to deal with for several years,” said Frances Donald, the head of macroeconomic strategy at Manulife Asset Management during the Bloomberg Canadian Fixed Income Conference in New York, which you can read here . Three economists at the conference agreed that the effects won’t be felt until closer to 2020 since many borrowers have five-year fixed-rate mortgages and the interest rate hikes won’t be felt for them until they renew. At that point, the Bank of Canada will be forced to re-examine the impact of raising rates again to avoid a household-led recession.

I am monitoring the situation and determining if increased global exposure may be necessary in your portfolio. With the next Federal election in the Fall of 2019, only time will tell.

Thank you and enjoy your Thanksgiving,

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