A few readers took exception to my recent comment that it’s not wise to “ stand in front of an onrushing locomotive” – which in this case refers to the ever-rising Canadian real estate market. Wayne Timms, from Waterloo, Ontario wrote “Don’t stand behind that locomotive when it runs out of steam going uphill! You can quote me on that one.”

One USA based reader in particular is convinced the main culprit is Asian money flooding our market in search of investment properties. Paul Paetz from Atlanta, Georgia wrote……

“The onrushing locomotive is the crash that follows, which will flatten everyone. It’s inevitable, and the market is already overvalued – you know that. So how can you honestly recommend to anyone to get onboard now? Even if things rise another 10 or 20 % — bubbles always over-inflate before they pop, but then the popping hurts even more.

Better solution for the long term would be special regulations on foreign ownership to slow down that locomotive before it kills everyone. Australia, for example, requires foreigners to seek permission to buy, and when things get overheated, they slow down granting of permission.

They also make it easier for foreigners to buy new developments, but limit foreign ownership of anything new to 50% of the development, while making it harder to buy existing housing stock (so as not to put too much pressure on house prices).

They also have limits on how much a foreign student can invest in a property. All these things were targeted at Japanese and later Chinese buyers who were gobbling up prime beachfront, and causing prices to gyrate wildly. I’ve heard that in Toronto there are some condos with nearly 100% foreign ownership, with Chinese investors buying several units at a time in a building. How much is this uncontrolled foreign speculation driving the difficulty for young Canadians?

Much of the US market is feeling this pressure too, although I think Asian buyers prefer Canada for a lot of reasons. Still, a huge amount of the commercial property that’s finally being bought up in the US is being acquired by Chinese buyers, and the historically high number of all cash deals on housing stock also suggests a lot of foreign money.

Our markets would still be moribund without foreign buying, so I think people here welcome it, but Canada has to get real, or you’ll have an entire generation who either can’t buy or is so over-loaded on debt, they’ll never get out from under it. (i.e. US and Canada have opposite problems right now).

Related Article: Chinese bought $22 billion worth of homes in the USA in the past year

Even though US prices are for the most part (outside of San Francisco and NY/Boston corridor) a lot lower and more rational than in Canada, the influx of Chinese money is already starting to shut out a lot of hopeful US buyers who still have trouble getting loans approved in the aftermath of the crash, while Chinese don’t need loans, and that is creating a lot of resentment which will likely boil over in the next couple of years.

People should stop overpaying and loading up on debt. The intrinsic value isn’t there. Foreign buyers using overpriced currency to snap up what seems like a bargain when compared to their home market is not value. It’s an anomaly, and it will end. The onrushing locomotive is what happens when those people stop propping up (or overheating) the market.”

The gist of my article was that I am deeply concerned about domestic real estate prices – primarily from an affordability point of view. I am not prepared to say the ‘bubble is about to burst’ – even though this is a safe and fashionable prediction these days. But trying to be a market timer is very difficult – whether it is home prices, stock prices, the price of gold, oil or whatever. And when a strong trend is manifest, it typically does not turn on a dime.

Related Article: Rising real estate values creating societal problems

Paul later wrote back with more thoughts on the matter….

“As you know, I’m a free marketeer, and I would abhor controls on Canadians, but foreign speculators are a different issue. The nouveau riche Chinese are pushing up US prices, and China is only 4x the size of the US. It’s 40x bigger than Canada, so at par (dollar and Chinese currency both well-valued and no other market aberrations present), there are 40x as many Chinese who can (and want to) speculate in the Canadian market as there are Canadians.

In reality, there are way more than that – probably hundreds of times as many because of the rapid minting of a new Chinese wealthy class due to all the manufacturing moving there. There is no way that couldn’t have an adverse effect on prices, and the desperation that Canadians feel in trying to purchase a home. It will have lasting impact, both financially and socially if the government doesn’t act to get it under control, and the only proof needed of the problem is the historically high debt and debt to income ratio that Canadians are holding – twice what it was 30 years ago, which was already a high level.

Worse, with the aging of the population, that means people aren’t retiring their debt and getting ready for retirement years, but will instead by carrying mortgages and other consumer debt into their 70s and 80s – a frightening prospect. The lemmings are all about to fall off a cliff when people our age start wanting to cash out, downsize, etc. it won’t be possible, and if nothing triggers collapse before that, the downward pressure of all baby boomers wanting to sell at the same time certainly will.”

Tip of the Day

If the bank doesn’t want to speak with you… if alternate lenders are not interested… if all seems hopeless but selling your home isn’t an option… a private mortgage may be your only hope

— Money Matter № 168