By now, you’ll know that I have been alarmed by stock market valuations for a long time. Late 2019, in fact. Recently, I pointed out that the bond market is severely stretched based on current valuations. It is now time to complete the TINA Trifecta by examining real estate.
Depending on which market you live in, real estate in Canada is likely somewhere between “pricey” and “there is no hope in hell for my kids to ever be homeowners”. In the greater Toronto area where I live, the consensus price increase in real estate over the past three years or so is about 30%. No wonder there’s speculation that the forthcoming federal budget will include a capital gains tax inclusion on principal residences.
From a financial planning perspective, it is considered prudent to expect real estate prices to increase at about the same rate as wage inflation. Inflation has been hovering at around 2% for over thirty years now. Wages have been essentially stagnant over that timeframe. Stated differently, we’re already gone nearly a third of a century with real estate outpacing prudent expectations. That’s what TINA does. There is literally no alternative because everything is expensive to buy, but ridiculously cheap to own – in terms of financing and the cost of carry.
Central banks started lowering rates aggressively in early March 2020. Government cheques started to be sent out about a month later. Over the past 13 months or so, we’ve reached the point where the combined effects of fiscal and monetary stimulus have created a valuation monster that touches on all major asset classes. Stocks, bonds and real estate are all flashing red in terms of historical valuations. Someday, people could look back on this unprecedented confluence of circumstances and call it the “Great COVID Bubble”.
That’s the thing about the word great. People used to call the war from 1914 to 1917 “The Great War” until about a generation later when a new, even greater war came along. I can’t help but wonder if there will be another re-branding on the horizon. Am I alone in thinking that The Great Depression might one day be called “Great Depression One”?