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September 7, 2018 | Thoughts on a Secular Top in Canadian and Australian Debt and Realty Prices

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Thanks to a reader for sending this clip along.  Different countries, same financial behaviors and mean reversion cycles likely.  The components are well articulated in this segment.  A key point to all ‘investors’: “This is a very extended property bubble, that has been funded by the banks…Don’t you know what happens to property bubbles?”

International investment manager Bill Strong talks about Canada and Australia’s crazy credit fueled housing bubble and what he thinks may be the biggest short opportunity he’s seen in his career. Here is a direct video link.

From a long-term historical average of 62%, Canadian homeownership rates approached 70% in 2011 and are now rolling over as shown in the chart below.

A very similar peak at 69% and then mean reversion to 62% occurred in US homeownership rates between 2005 and 2016 as shown here.

The cure for unaffordable home prices–like 5-11x household income–has always been unaffordable home prices. Eventually, they are forced to recouple with reasonable multiples (more like 3x their occupants’ income), so that families can afford to live, eat, save and have a roof over their heads! All very important for social stability and future economic strength.

Bottom line:  mean reversion in home prices is finally moving in the right direction because it must.  We should expect down-pressure to continue on pricing (and overly reliant sectors and economies) for an extended period before long-term, sustainable norms can be re-established.  A wise plan is to approach present conditions with as little debt and as much cash reserves as possible.  For those holding negative-carry real estate and high-priced corporate securities (stocks and bonds), it is still not too late to reduce risk-exposure and raise cash for future investment.

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September 7th, 2018

Posted In: Juggling Dynamite

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