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Originally Posted by OMG!WTF!
I think you're right, all "booms" end. But it's what happens after that is more intresting. Typically any traded commodity tends to revert to its underlying trend. If the real estate market had been trending upwards, then goes into a parabolic up trend, it will likely go back down to where its fomer up trend was and continue that trend. Since the Canadian housing market has been in a slow upward trend, it would be logical that it reverses, goes down, hits the upward trend line and starts going back up again.
There are all kinds of fundamental reasons that back this up....inflation, population growth, demand/supply correction, government policy. The 2008 crash did exactly that. Knowing this, I'd probably wait unil the upward trend resumes before I sold anything.
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Except the last time housing prices had such a precipitous climb, they were stagnant for about 20 years afterwards.
That's the big issue here.
Canadians are over leveraged in terms of the debt they carry, and most of these debt carriers are relying in some capacity on continuation of rising prices. With the ripple effect of Alberta shedding jobs, the potential for a cascading effect of people not being locked into their mortgages has a pretty serious potential impact.
A correction might not just mean a drop in value of 10-20 percent, based on wages in the country, it's likely that drop will remain where it is for 15-25 years until it begins to increase again. That's the historical market trend.
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Now, both Shiller and Drummond are quick to say Canadians are not likely to experience the near-total meltdown Americans experienced.
For one thing, Canadian banks never joined in the subprime-lending lunacy that inflated the American bubble to such extremes.
For another, Canadian mortgages are insured by the federal government through Canadian Mortgage and Housing Corp.
But Shiller says Canadians do seem to be suffering from the same delusion that afflicted Americans: the notion that housing prices always rise.
He has studied data going back a century, and says that when you factor in inflation, and depreciation of the home's physical structure, "historically home prices haven't gone up. Real home prices were essentially unchanged over that interval."
There are bursts of growth, as in the past 10 years in Canada, but historically they are offset by retreats.
Shiller says real estate bubbles are nothing more than groupthink, and that they "always have their end built into them."
"People are investing in real estate that is tough for their budgets because they think it will make them rich, and that can continue only as long as [prices] keep increasing.
"When they stop increasing," he says, people back off, and the bubble then collapses. "So it has its own internal dynamic."
Exactly when this groupthink changes course, says Shiller, is hard to pinpoint, but one sign is a flurry of media stories. Such as this one, I suppose. Not to mention the attention we are giving this subject on The National.
Even though many of us in the media own homes ourselves — and have a self-interest in the market continuing to rise — there clearly comes a point when the subject begins to dominate public discussion.
Shiller also points out that it was not the financial crisis that burst the American housing bubble. Rather, when the groupthink that caused the bubble turned, the market collapsed, and that in turn triggered the financial meltdown and the crisis among lenders.
"The same sort of thing might well happen in Canada," Shiller told me.
Canadians seem to think that stricter government regulation in Canada protects them. But they are in some ways more vulnerable than Americans.
Americans at least have the option of lifetime payment stability. The gold standard here is the 25- or 30-year fixed mortgage. The interest rate can be locked in for the life of the loan.
In Canada, most mortgages "renew" every few months, or years, and payments can spike by hundreds of dollars a month if rates rise even slightly.
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