Quote:
Originally Posted by Cowboy89
I am a corporate finance professional who has a keen interest in valuation bubbles and how they end. I have read books specifically on such things. My favorite being "Manias, Panics, and Crashes: A history of Financial Crashes" by Charles P. Kindleberger & Robert Aliber.
What's happened in Canada is a classic valuation bubble, and all bubbles tend to end violently. It's inevitable, the primary reason is because market valuations in bubble scenarios are based more on expansion of credit and psychology rather than market fundamentals. Prices reach such unsustainable levels financed by increasingly high leverage that as prices climb higher the fragility of underlying market participants grows (160% debt to income, higher than our American friends ever were at). Eventually something upsets the apple cart, the market psychology turns which leads to a contraction in credit, which exposes the fragility of the underlying market participants, which then turns into a panic and eventually a market crash.
In any case the book I suggested above is a an interesting read if you're into this kind of stuff and it highlights that basically no valuation bubble ends with a soft landing and provides basically every example in history going back centuries and great underlying rationale to why.
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While I see where you're coming from, I also think that this is appropriate for certain areas, but maybe not the country as a whole. The bubble has been forecast for a long time in Toronto and Vancouver, but elsewhere I'm not so sure. Even that 160% debt to income that is mentioned is basically a Canada-wide stat that would be higher in some areas than in others. Of course that doesn't mean that if Vancouver real estate crashes that everywhere else is free and clear, but there surely would be less impact in some areas where the price hasn't grown as swiftly and the fundamentals are not as out of line.