Understanding the Fundamentals of a Real Estate Cycle

When people start to worry about a housing crash, bubble or apocalypse, it's because the images of the 2008 US crash, and all of the Hollywood movies that followed, still paint a dreadful picture in our minds.

But as us Canadians love to point out - we are NOT American.

The crash in 2008 was fueled by systemic fraud, greed and corporate corruption, not economics. Let's quickly summarize some of the key factors:

1. Institutional lenders were blatantly and purposely misleading investors as to the strength of their investment (mortgage) products.

2. The lenders then bet against their own garbage knowing that it was, well...garbage. Conflict of interest, hmmm??

3. Credit agencies were bribed and extorted into falsely recording the credit worthiness of some of the highest risk loans possible.

4. People on the ground, like mortgage brokers and advisors, were paid high upfront fees to entice innocent borrowers into signing contracts which were doomed from the start.

This is NOT what is happening in Canada. Here:

1. There are more checks and balances in the financial system than one could ever count. Have you ever tried to get a mortgage? The amount of red tape and bullshit you need to jump through is staggering. While this seems annoying in the moment, it only serves to protect the entire system and the biggest assets we have.

2. Regulators have rules in place to limit over-borrowing: a) 25 year am max on insured mortgages, b) 80% max on refinance (government doesn't want you blowing your entire equity), c) rules on how many properties you can own, d) the mortgage stress test and the list goes on and on and on.

Canada is about to commence a down turn shortly, but this is merely cyclical. No different than the weather becomes horrible in December each and every year. The problem is that the beginning of a housing crash like the 2008 US shit show and the begininng of a normal, economic downturn look very similar out of the gate, but they ARE completely different. Do not confuse one for the other.

My advice for investors? Keep your foot on the gas but be cautious in which direction you are going.

My advice for beginners? Just start driving. You'll figure the rest out as you go