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Last week, we hosted a special institutional call, “Bubble, Bubble, Toil & Trouble” highlighting the epic bubble occurring in Canada’s real estate market right now and various ways investors can profitably play these developments.

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This Country’s Real Estate Market Is An Epic Bubble About To Burst - 9p

In his 130-slide deck, Hedgeye’s Financials Sector Head Josh Steiner covered the Canadian property market, how to track it and some of the best ways to play the coming problems. We highlight a few of the salient takeaways below. Please ping sales@hedgeye.com if you would like to learn more about this presentation and ways to invest around it.

Our northern neighbors saw similarly rising home prices as the US through the early 2000s until the US bubble burst. However, after US prices dropped, Canadian prices kept growing, rising 146% since 2000 as seen in the figure below. That’s roughly double the increase that’s occurred in the US market over the same time period.

This Country’s Real Estate Market Is An Epic Bubble About To Burst - 444

Median Income vs. Home Prices

There is a growing problem across all major Canadian cities regarding the explosion of home prices relative to household incomes. While Toronto and Vancouver lead the way in market size, it is Winnipeg that leads the disparity between home prices and incomes. More importantly, all major Canadian cities are seeing eye-popping levels of disconnect between prices and incomes.

To put some of this in perspective, by the end of 2006, just as the US housing bubble was peaking, the difference between the growth in housing prices and incomes was 67%.  Fast forward to today where nine out of the eleven major cities across Canada are at or above US levels from 2006 with an 11-city average of 87%. In other words, the incredible pace of rising home prices has blown away median income growth on a scale well beyond that seen in the US ten years ago.

 

The rocket fuel for rising home prices in Canada, of course, has been easy credit and growing debt. As we learned in this country eight years ago, asset prices rise and fall, but the debt endures.

The ingredients for a correction within the Canadian real estate sector all seem to be coming together. It’s just a matter of time.