Canadian Real Estate is Ripe for a Correction


Led by Vancouver and Toronto, amidst tighter mortgage rules, real estate transactions are declining in Canada. Typically, less volume equals lower prices. The same theory applies on the TSX Venture and look how the pitiful exchange has performed over the past quarter or two.

TSX Venture – 6 Month Chart

TSX Venture Chart

Declining volumes are the achilles heel of an exchange known for its booms and busts. What many investors fail to understand is that declining volumes led to declining prices. When liquidity dries up, it is a big warning sign prices are to come under pressure. Real estate transactions in Canada are drying up…

Monthly Home Sales or Real Estate Transactions Fall Below 10 Year Average

home sales decline
source: http://creastats.crea.ca/natl/index.html

 

Real estate transactions in Greater Vancouver hit a 27 year low in June. Before these results came out, Steve Saretsky outlined the weakened state of the market and why a fallout may be on the horizon. Make no mistake, if the Canadian real estate market corrects by 10 or 20%, the stock market will feel it.

Weakening job growth in BC is also contributing to declining volumes. Canada is in a predicament when it comes to interest rates. With the U.S. economy on fire, it is set to raise rates at least two more times this year. If Canada continues to fall behind in the rate hiking game, the Loonie will plummet. On raising rates in Canada, Saretsky states,

“By raising those rates, that’s going to put a lot of pressure on households. It’s probably going to collapse the household balance sheets.”

Furthermore,

“Particularly, when you consider that over the last five years, Canadian households have experienced the largest increase in household credit growth amoungst the 20 advanced economies.”

Saretsky concludes his podcast with other downward pressures on Canada’s west coast real estate market. If Vancouver and Toronto decline, expect investors to become more cautious.