How Cash Will Crash This Market

In the U.S., it was largely mortgaged buyers who brought the booming property market to its knees. In Canada, it will be cash buyers.

While Americans have spent the past five years in the hangover phase of a record boom-to-bust property cycle, Canadian property investors are still riding high. Home prices in this real-estate hotspot continued to rise after a brief contagion dip in 2009.

Here’s the latest on Canada’s Teranet-National Bank National Composite House Price Index:

See larger image

The solid black line is the still rising home price index, which gives Canadian property bulls ammunition to trumpet their familiar tune, saying things like “we’re not in a bubble” and “we’re different.”

Real estate agents and banks in Canada point to larger down payments and the prevalence of cash buyers as stark, meaningful differences from the U.S. house of cards that was built on overstretched borrowers and liars loans.

However, it could very well be these cash buyers who’ll be the market’s undoing.

Last year alone, wealthy Chinese families poured an estimated $30 billion into foreign real estate. Among the top three destinations was Canada.

While the Canadian governrnment has maintained flimsy records of exactly how much Chinese cash is moving into its property market, data shows Chinese buyers have outnumbered local Canadian buyers by three-to-one.

Of course, some of the Chinese wealth flowing into Canadian real estate is legitimate. And some of it is not.

Bribery and corruption are undoubtedly still an issue in China’s state-run economy. So many foreign real-estate transactions should be scrutinized as money laundering endeavors.

Just this summer, Canada and China announced an agreement to work together closely in fighting trans-national crime and cooperation in seizing assets purchased with the proceeds of criminal behavior. Uh oh!

Whether this move will put a dent in China’s corruption issue, or the Chinese cash-buyer-inflated Canadian property market is still to be determined. Regardless, you have to stay a cynic when looking at real estate prices in Canada. Its implicit tie to the Chinese economy (legitimate and otherwise), is a real risk that many investors have failed to price in.

Now, with the 12-month percentage change in home prices trending decidedly downward (see red circles in the chart above), we may be closer than most think to a significant downturnrn in Canadian real estate.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.