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Stocks are at an all time high.
Gold is at an all time high.
Real estate is at an all time high…
If you live in the United States.
In Canada, real estate is telling a very different story.
House prices are significantly down since the market peaked in 2022
The Canadian real estate market just experienced one of its biggest price declines in almost 40 years.
Today, we’ll break down:
Why the Canadian real estate market is down
The warning to the U.S., and the rest of the world
What you should do if your wealth is disproportionately tied up in real estate
The pros and cons of storing most of your wealth in your primary residence
First, we have to understand the problem…
Housing = Wealth in Canada
For generations, Canadians have been told one thing:
If you want to build your wealth, buy a home.
And if you’re American, or European, or from really any relatively developed nation, you’ve probably heard something similar.
Owning your own home is not only a huge personal milestone for many, but it has historically been a very effective vehicle for building wealth.
So although this concept isn’t unique to Canada, Canada takes it to another level:
Canada’s economy relies much more heavily on real estate prices.
At an individual household level, this means
The house = the retirement plan
The HELOC = the emergency fund
Rising prices = wealth growing
Canadians store more of their wealth in their primary residence, on average.
But this is just the first ingredient. There’s more to this concoction.
Canadians Use More Debt
Long-time subscribers of Wealth Potion know that I use this line often:
A lot of investing is a self-fulfilling prophecy.
People think prices will go up, so they buy, and that causes price to go up.
Canadian real estate is a prime example of this.
More and more Canadians piled into the real estate market over recent decades. And in order to not be left behind, Canadians took on more debt to do so:
Canadians have almost twice as much household debt than U.S. households of the same income level, on average.
We can also see this when comparing household debt to GDP (and to show comparison to a few more OECD countries):
As you can imagine, a huge part of household debt is the mortgage.
Canadians mortgages are significantly larger than U.S. mortgages, and the OECD average.
If these charts scare you, it gets worse.
Canada is More Sensitive to Interest Rates
Most people are familiar with fixed rate and variable rate mortgages.
Fixed rate mortgages allow you to lock in at a specific interest rate.
Variable rate mortgages will fluctuate as market rates increase and decrease.
But there is a catch in Canada.
In Canada, even on a 25-30 year fixed rate mortgage, your rate is locked in for only 5 years. After that 5 year period, your mortgage renews.
In comparison, a fixed rate mortgage in the U.S. can lock in a low rate for the entire 25-30 year term.
The result = Canadian mortgages are much more sensitive to interest rates.
When central banks hiked rates in ~2022, the effective interest rate on Canadian mortgages started to climb much faster than in the U.S.
And when interest rates climb, people’s mortgage payments increase.
When mortgage payments increase, some people can no longer afford them, and have to downsize their home.
Or at the very least, it delays Canadians from upgrading to a new home.
In other words, more sellers and fewer buyers.
This puts downward pressure on housing prices. And the cycle reinforces itself.
The Key Takeaways for Canadians and Non-Canadians
Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.
If you're a non-Canadian reading this, you might feel assured that this debacle is unique to Canada.
That may be true. But the conditions that created this situation are not.
Any market where housing became the primary wealth vehicle (i.e. where people stretched into debt on the assumption that housing prices only go up) is one rate cycle away from the same reckoning.
Here are some lessons you can learn from Canada, regardless where you reside:
What This Means for You
The lesson isn't "don't buy real estate." Real estate is a legitimate asset, and it is completely normal to want to own your own residence.
The lesson is to NOT let it be your only asset. Especially when it comes with a bundle of long-term debt.
A home is a place to live first. A store of value second. An investment vehicle third.
If the bulk of your net worth is sitting in your primary residence, you are not diversified, you are concentrated.
And to be clear, concentration is not inherently bad. In fact, concentration can build wealth very fast.
But concentration means you are taking on more risk.
And there are two things that magnify that risk even further.
Leverage and Liquidity
We’ve already touched on the role of debt in home ownership.
The vast majority of home owners use a mortgage (AKA leverage) to make the initial purchase. These mortgages are often 10, 20, or even 30+ years in duration.
Here is a quick example of how leverage amplifies risk:
Let’s imagine a hypothetical scenario with simple math:
$1,000,000 home value
20% down payment = $200,000
You put down $200,000, and you own your first home. Mortgage payments leave your bank account every month. The remaining $800,000 becomes a liability (debt) on your balance sheet.
But now imagine the value of your house goes down 20%. The value of your home is now $800,000.
If you can wait it out until the home value recovers, you’ll be fine. But what if you lose your job?
If you can’t make your mortgage payments, you may be forced to sell your home. But now that your home is worth $800,000, and your mortgage is $800,000, you’d basically be losing all of your down payment.
The other difficulty here is liquidity.
Selling your home is not easy. It takes a long time, and it incurs additional costs.
Leverage can amplify your gains, but it also amplifies your losses. And without liquidity, you are increasing the worst type of risk: risk of ruin.
A few honest questions worth asking:
If your home's value dropped 20%, where would you stand? Would you still be net positive? Would you be underwater? Could you survive a forced sale?
What percentage of your net worth is your home? If it's above 60–70%, you're more exposed than you think. This applies regardless of what country you're in.
Are you building wealth outside the house? Retirement accounts, index funds, Bitcoin… assets that are much more liquid are especially important.
One More Thing
If you’ve been enjoying the Wealth Potion newsletter, and if this kind of systems-level thinking about wealth is what you're after, then check out the Wealth Potion Academy.
If this kind of systems-level thinking is what you're after -- not just tactics, but understanding why the rules work the way they do -- that's what the Wealth Potion Academy is built around.
Income, Savings, Investing, and Time: four modules designed as a progression, each one building the foundation the next one needs. Early Access pricing won't last. Start here.
To your prosperity,
Brandon @ Wealth Potion
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