The other day, a reporter called to ask me about Toronto real estate prices. She was specifically interested in whether older people with a large capital gain on their property should sell their homes and move into rental accommodation.

Now, I don’t claim to be an expert on real estate, but I know a bubble when I see one and the Toronto housing market is in one now.

That’s not just my opinion. Doug Porter, chief economist for the Bank of Montreal, used the “bubble” word recently in describing the housing market in the Greater Toronto Area. He said that prices anywhere within commuting area of the city “are overheating and perhaps dangerously so”.

If you believe that’s scaremongering, let remind you that it has happened before. Between 1989 and 1996, Toronto house prices fell by 40 per cent, adjusted for inflation. It can happen again and probably will. It’s just a matter of time.

Our housing market isn’t the only financial bubble these days. The stock market is just waiting for someone to stick a pin in it. As of the end of last week, the price/earnings ratio of the S&P 500 was 26.47. That’s the highest since 2010. The historic mean, using data going back to the late 1800s, is 15.64.

This doesn’t mean stocks or house prices will crumble next week. But if history is any guide, the downturn will come sooner or later. No market goes to the moon.

So, what should you do to prepare? Stock market investors must be very cautious about making new commitments at this time. The Trump effect that has bolstered share prices since his election may not be over yet, but investors are increasingly concerned about the negative economic potential of some of his stated positions, including on immigration and trade.

I had dinner recently with a U.S. money manager who specializes in value investing. That means he searches the market for stocks that are underpriced in relation to their intrinsic value. He said that about 60 per cent of the new money he receives is sitting in cash because very few stocks meet his investing criteria right now.

One of Canada’s top value managers, Larry Sarbit, takes a similar view. As of Jan. 31, the IA Clarington Sarbit U.S. Equity Fund, which he manages, had 62.3 per cent of its assets in cash and cash-like securities.

In his 2016 year-end commentary, Sarbit said he is “increasingly concerned about the current stock market environment.” He went on: “The United States has elected a pro-business president that has promised to increase economic growth and jobs. This remains to be seen. The stock market has given him the benefit of the doubt, rallying on already all-time highs. Let us remind investors that recessions still happen to pro-business presidents.”

My advice is not to add any new stocks right now unless there is a compelling case to be made that they are attractively valued at the current price. There are a few of those around, but not many. Pay close attention to the downside risks in any security you are considering. What happened to the shares in the crash of 2008? If they fell 30 per cent or more, they could do so again.

The housing market is more complex. Selling a stock involves nothing more than calling your broker. Selling a house is a life-changing experience.

I would rarely advise selling purely for financial reasons. There are many other factors to consider: the children’s schooling, proximity to work, the quality of the neighbourhood and your own personal comfort level. Financial gain is just one part of a much larger equation.

That said, if you have been considering selling into this hot market and you’ve thought through the lifestyle consequences, then go ahead. I just wouldn’t be too quick to reinvest in a new property. Bank the cash, move into a rental unit for a while and see how the market plays out. At some point, you should be able to get back in at a much cheaper price.

These bubbles will burst. They always do.

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Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is www.BuildingWealth.ca . Follow him on Twitter at twitter.com/GPUpdates

Correction – March 9, 2017: This article was edited from a previous version that mistakenly said a “stress test” done by Canada Mortgage and Housing Corporation last fall found that house prices could fall by as much as 30 per cent if mortgage rates were to rise by 2.4 percentage points over two years.