legend has i t that joe kennedy ,

father of the late U.S. President JFK, knew it was time to get out of the stock market before the

1929

crash when he received stock tips from a shoe-shine boy. His thinking was that by the time the shoe-shine boy was excited about the stock market, there was probably nobody left to buy and drive the stock market higher. It turned out he was right. Recently, I received a tip that may be indicative of another market peak. Although, it was related to real estate and was a recommendation to sell not buy. The tip came from my local pizza delivery guy. When he arrived with the pizza I had ordered for my sons, he asked if I was interested in selling my home in Vancouver. He told me that he had contacts in China and that I should seriousl y consider selling because he could get me a very good price. Equally remarkable, a client who lives nearby had a Chinese person show up at his door with a cash-stuffed suitcase to express interest in his home. I thought housing prices were irrational and out of sync with the general level of incomes when we bought our first home in

2002

. With Vancouver homes roughly tripling in price since then, my wife likes to remind me that we would still be renting and waiting for a correction if it was not for her. Fortunately, I followed her intuition and thankfully I don’t make a living predicting real estate markets. Nonetheless , with Chinese money flooding into the city, the pizza guy offering to broker homes, and people approaching homeowners with suitcases full of money, it is fair to say that the situation is getting a little crazy. The pizza guy might be right. According to Demographia International, Vancouver is the third most unaffordable place to live, besides Hong Kong, China and Sydney, Australia. Nationally, Canadian home prices have risen

31

per cent from their trough in early

2009

, to stand

13

per cent above their pre-crisis peak. In Vancouver, the recovery has been even stronger, with prices up

55

per cent from their trough to a level

29

per cent above the prior peak. Today, the average selling price of a home in Vancouver is nearly

11

times the average Vancouver family’s household income. Nationally, the home price-to-income ratio is

4.4

versus the long-term average of

3.5

times. Given the severely unaffordable state of the Vancouver real estate market, it is hard to make an investment case for owning a home. Still, to take advantage of the high prices, someone fortunate enough to own a home has to down- size, relocate to a region with lower real estate prices, or rent. Those options do not appeal to my family. Still, it is worth understanding the driver s behind the housing boom, as the exercise can provide insights into managing overall risk in investmen t portfolios. Cheap credit in Canada has played a key role in the appreciation of Canadian home prices. The Bank of Canada has been reluctant to raise interest rates due to a concern that such a move would drive up the value of the Canadian dollar and make life even tougher for Canada’s export- oriented companies. Banks have aggressively pursued loan growth and consumers have will- ingly taken on leverage. Psychology has also played a part, as explained by Governor Mark Carney at a recent speech in Vancouver. Specifically, he said, “the risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear – greed among speculators and investors – and fear among households that getting a foot on the property ladder is a now-or-never proposition.” Now that Canadian consumer leverage is on par with American and British consumers, it is quite possible that the virtuous cycle of borrowing and bidding up home prices will slow or even reverse.

continued on next page

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