Wednesday, September 01, 2021

Our New House - Renting Vs Buying during a Housing Bubble

 Back in April of this year my wife, my son and I moved into a new house. It isn't our dream home, but it has a great backyard, a large front yard, lots of space, great amenities nearby, conveniently close to work...

I gotta admit I love this house.

However there is 1 big problem. It is a rental.

We are renting a house for almost $4000 per month, and while that is a good chunk of change, we see it as a transition between where we are now and buying a house later on.

It would be nice to buy a house (in Toronto), but let's face it the housing prices right now are ridiculous (in Toronto), and I really don't want to buy a house (in Toronto) because I am worried the housing market (in Toronto) will implode any moment.

See the problem?

Toronto's housing prices have become so overheated and ballooned into a giant housing bubble where even if we can afford to buy a house, I wouldn't want to because what if the housing bubble implodes?

We could end up buying a house, it implodes, and we lose the house and every dollar put into it through no fault of our own.

And mark my words, a housing bubble implosion is coming. It even has a name:


Or something like that. Something Babyboomer in the name. The Great Babyboomer Bubble?

Yeah. I like that. Let's use that. The Great Babyboomer Bubble.

So here's what is going to happen.

During the next 10-20 years a lot of babyboomers are going to start dying off due to old age (or possibly COVID because 10% of them didn't get vaccinated) or moving into elderly homes and selling their old homes, and this in turn will cause a surplus of houses being put on the market.

At some point this surplus of houses will reach a tipping point, at which point the housing bubble will implode. Housing prices will drop significantly within months.

This will then trigger a second wave of sell offs... from foreign investors. And from domestic investors too, but most of the housing investments is from foreigners.

Toronto, Vancouver and Montreal have seen huge ballooning in housing prices thanks to foreign investors who buy houses, rent them out, and then watch the housing prices skyrocket - so they're making money two ways: Money from the rental, money from their investment going up in value.

But what happens when the market goes in the opposite direction?

Buying a house suddenly gets cheaper, which means people renting can finally afford to buy a house, but they're going to wait until the market bottoms out before doing so.

The investors meanwhile are trying to sell their houses in a hurry before the market bottoms out, which means they need to SELL NOW. Right away. So they drop their prices in hopes of getting a faster sale.

But when many investors (and babyboomers) sell their houses all at once it results in too many houses becoming available at the same time. The babyboomers will be the catelyst, but the foreign investors dumping their properties back on the market is what will cause a downward spiral in housing prices.

When it finally bottoms out... That is when my wife and I will finally decide to buy a house (in Toronto).

Or the other alternative is that we buy a house outside of Toronto, somewhere that the prices are more reasonable.

You would have to be really dumb to buy a house in Toronto right now.

Hence why my wife and I are renting. When the housing prices finally collapse (and they will, just look at the chart below to see how big the Toronto housing bubble has become in the last 15 years) we can expect the average house price in Toronto to drop to approx. $400,000, give or take a few.

So remember when the Great Babyboomer Bubble bursts and you own a house, please think of me... And how I warned you not to buy right now.

And for all of you homeowners who are thinking of selling... Yes, you should sell NOW while the prices are still high.

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