I am a regular reader of Financial Jungle and, as readers of his blog know, he lives in Vancouver: host of the 2010 Winter Olympics. I asked FJ to guest-blog on the Vancouver real estate market in anticipation of the Olympics and to determine whether Vancouver real estate will experience the thrill of victory or the agony of defeat. Thanks for the guest post Financial Jungle.

“It doesn’t matter what Games you go back and examine, the experience is always the same. People in the host communities think that there are going to be more fantastic returns than they actually realize,” Whistler Mayor Ken Melame said.

Realtors and real estate enthusiasts have been gaga over the anticipated 2010 Olympics since the announcement in 2003. You’ll be hard-pressed to find an investor not dreaming about the day when visitors from around the Globe finally discover Vancouver as a vibrant, beautiful city surrounded by mountains, rivers, parks and ocean, and coupled with mild weathers. The growing optimisms on the Olympics along with government expenditures helped gear local construction into hyper drive, and sent BC into an economic prosperity and an unprecedented housing boom that we haven’t seen in much of the previous decade.

While the real estate craze is partly upheld by strong economy, this may be a self-filling prophecy. It’s up in the air whether the economy can bootstrap itself once all the Olympic construction jobs leave the province. Perhaps we don’t have to wait that long as mounting evidence suggests we’re already entering a correction phase. “Open House” signs were virtually non-existence during the rampant housing boom, but the streets of Downtown Vancouver are looking mighty different nowadays.

During a stroll around our downtown neighborhood, my wife and I found ourselves bombarded with a flurry of open house signs. I was trying to snap the following photos discretely but that proved challenging when eager realtors were sticking their noses out of the lobbies inviting us inside for personal tours.

Bidding wars are also a thing of the past. The Real Estate Board of Greater Vancouver recently released the February report citing a 6.4% deterioration in residential sales relative to a year ago, and a 26.2% jump in new listings during the same period. This is huge. A combination of a drop in sales and a rise in new listings spells troubles for the housing market. Most sellers are still in denial by holding their prices firm and letting their listings stall on the market. But, at least a couple listings in my neighbourhood are lowering their prices. (See photos.)

No question that the market is softening. I know a co-worker whose Kitsilano home has been on and off the market for the past 7 months. My brother’s realtor is recommending home staging to speed the sale. Finally, realtors are scouting for buyers, not sellers. Today, a couple of Royal LePage realtors went through the trouble to send me this invitation:

>> YOU ARE INVITED!

>> We will be providing free information on real estate and investments…

>> Do you want to know about the Nova? (a high rise)

>> We can tell you information on any building you have questions about…

>> Are you a renter? If so, stop paying someone else’s mortgage and start building your own wealth.

>> Let us tell you how. Feel free to bring your friends…

>> ENTER A CHANCE TO WIN A TRIP FOR TWO TO LAS VAGAS!

>> Stop by for a drink and introduce yourself… we look forward to meeting you.

I truly believe we’re finally at an early transitional stage from a sellers’ market to a buyers’ market. This is only natural since the benchmark price for a Vancouver home is now $761,000; townhouse $472,000; condo $387,000 – way more than what an average household can afford.

Valuation On The Condo I’m Renting

Market price = $370,000

Annual rent = $17,400

Rental yield = 4.7%

Condo Fee = $2,640 (est.)

Property Tax = $1,000 (est.)

Earning yield (aka CAP rate) = 3.7%

A report from Genworth Financial foresees Vancouver condos to appreciate 3.5% annually from now till 2012. Note that Genworth is in the business of selling mortgage insurance – their paychecks depend on their optimism. Don’t tell this to my landlady, but to translate the above figures to stock lingo, the property is selling a hefty 27 P/E ratio with a mere 3.5% expected growth rate. As a reference, the prevailing discounted 5-year fixed is 5.79%.

The specious housing bubble is best illustrated with a chart in the following report, but only peek if you’re not afraid of heights: http://www.realestatetalks.com/pdf/VanStatsFeb08.pdf.

Just like the stock market, real estate also has the propensity to overshoot in both directions while trying to revert to the mean. My guess is that the same speculators, who are driving the house prices up today, will be the ones knee deep in their foreclosures unloading their dirt-cheap inventories back to the market.

It appears wherever you go now the question on everyone’s lips is not “are the good times over?” but “how bad will it get?” It appears, in certain parts of the United States, a lot further. An often-cited indicator of how far the real estate bubble has to fall is the price-rent ratio. Often called the price to earnings ratio for real estate, the price-rent ratio is calculated by the formula of (house price/annual rent in an equivalent housing unit).

A price-rent ratio has no meaning in the abstract. A price-rent ratio of 10, for example, isn’t necessarily a good or bad ratio. The ratio has to be compared against historical price-rent ratios in the same area (here is a sample of price-rent ratios in the south-western U.S. which have to revert back to the norm) and this is where things get scary.  The Federal Reserve of San Francisco published a report in 2004 about a possible housing bubble forming since price-rent ratios where significantly above historical ratios (this study has been cited quite a lot lately with hindsight, as always, being 20/20). The issue is that this same study, and others after it, have found that price-rent ratios only return to historical averages through a great dependency on decrease in housing price (i.e. housing values fall back to historical averages) rather than increase in rent. This makes sense because rents are subject to external factors, such as rent control and available rental stock, which do not affect non-renters. The conclusion? In order for the real estate market to get back to “normal”, there will have to be a fall in housing prices.

How far? Depends where you live. Fortune Magazine published projections on 25 real estate markets poised to fall. They tend to be clustered in California and Florida. This supports the view that recessions tend to have regional impacts; certain regions will be the real losers of recessions while others will get off much more lightly.  But how much are we talking about on average? Noted economist, Paul Krugman, stated in the March 31 issue of Fortune Magazine, an average decrease of 25% nationally and up to 50% in some areas (Miami and L.A. were specifically mentioned).

For those who are (happily) owning real estate not located in the United States, you are not immune. When I started looking up research for this post, I noticed the global price-rent ratios are at historical highs. MoneyWeek, an English publication, had a few choice words for Vancouver real estate comparing it with Syndey’s housing bubble that popped. Locally, a developer is introducing a condo with introductory prices at $1.5 million- when prices on any asset get that outrageous, it is usually a sign we are on the last legs of any boom cycle (the parallel analogy being the BCE going private transaction- the dollar figure is obscene and marked the end of the private equity deals in this cycle- if they even complete it).

What does this all mean for you?

• if you are in your 20’s-40’s, and are going to live in your house for 10 plus years, the short term effects on these adjustments will be negligible. If you have a weak stomach, do not bother even asking what the neighbor sold their house for until at least 2010. Like any other asset, the longer you hold on to it, the greater the possibility you will not lose money.
• if you are in your 50’s and 60’s and (i) recently bought a home; and (ii) have little equity in it; and (iii) and intend to sell soon, depending on where you live, you could be in for a rough ride (the trinity of troubles).
• Regardless, remember the primary reason you buy real estate- shelter. In the grand scheme of things, real estate is still a good investment if the primary purpose is shelter for the long term; a place where you can raise your family safely and put down roots. The larger issue is that, over the last ten years, societal views on real estate have increasingly shifted towards treating real estate as an investment you leverage, flip and hop in and out of like we were real estate day-traders. Most day-traders earlier this decade lost their shirts or stopped doing it after a while. Looks like history is repeating itself.

I am going to fully admit my bias up-front: I do not consider residential real estate a good investment. The costs of residential home ownership or upkeep of residential real estate investments are too great relative to other forms of investments (commercial real estate or residential on scale are different ballgame since the rules are different). Real estate should be considered shelter and no more. However, when real estate prices eventually find their true valuation, what type of return can only expect from real estate?

It depends on who you asked (to be as impartial as possible, despite my bias, I tried to find the high and low end)

• Fidelity Research Institute (funded by the mutual fund giant) found from 1963 to 2006 the average appreciation in real estate was 5.9% with great regional variances. Keep in mind who funded the research but a great piece on how we have moved from viewing our homes as a an asset of last resort to leveraging the door knobs off.
• The S&P/Case-Shiller Home Price Index found the that the value of residential real estate grew by 9.31% in the U.S. from the period of 1998-2007 (the survey period excludes the real estate crashes of the 80’s and 90’s). The study excludes new housing and any pricing out of the ordinary in a region (i.e. someone massively overbidding or a fire sale relative to other prices).
• Jack Francis and Roger Ibbotson published an academic paper called “Empirical Risk-Return Analysis of Real Estate Investments in the U.S., 1972-1999” updated in 2004. The researchers found real estate values grew at 8.6% annually during this period (sorry, I couldn’t find the paper, I am relying on Money.com as a source).
• The University of British Columbia Sauder School of Business summarizes nominal and real growth rate (growth after inflation) for real estate in selected Canadian cities from the period of 1985-2003. Real return growth rates varied from 1.65% to 3.89% implying real estate growth at mid to high single digits factoring in inflation.

With the exception of the last study, all the real estate growth/appreciation rates do not factor in inflation. However, assuming inflation runs at 2-5% annually, real estate returns historically are inflation protectors with a few percentage points of gain built in. All the studies find that real estate tends to return between 5%-9% but, once you subtract inflation from the return, real estate has t-bill like returns (on a pre-tax basis).

The perception that real estate is a good investment appears to derive from the fact inflation is not stripped out of the return and prices keep going up because of inflation and not necessarily a great return.

By comparison, Jeremy Siegel, in his book Stocks for the Long Run, found that the historical nominal rate of return on stock was 11.2% from the period of 1946-2006. After inflation, the return is 6.9%. All the studies cited above (with the exception of the Shiller index) show that stock had greater returns than real estate over the period studied (and the Shiller index finds REITS, which are stock, to be more profitable than real estate).

Having said that, I don’t believe the real estate market has collapsed completely (remember that the media reports on exceptions rather than the rule and ignores the 90% silent majority). Certain areas will maintain their value and certain types of housing will always be desirable. This chart is often used to discredit real estate investing altogether- careful how it is applied since it lacks any context (although I agree with Millionaire Mommy Next Door’s argument that, in some circumstances, it is better to rent than own). Real estate has its place; just don’t expect it to return double-digits over the long term. Four Pillars blogs about whether real estate investing is profitable from a slight different angle at Twice Paid.

Thoughts?

Several months ago, I entertained investing in a rental property. After much thought, meetings, spreadsheets and more meetings, we decided to take a break from looking for a rental property (I don’t use “we” in the royal sense; I had several potential partners; if you are one of my American readers, lest you think I have lost my senses, Canadian real estate has managed to hold its value- for now although things are really softening- and we started looking when values were still relatively high late last year). It was more a matter of timing than the concept itself. We may come back to looking at investing in real estate.

But as we were looking, we started getting into a real conceptual debate about what was a greater priority- cash flow or appreciation.  I believe we found the right urban area to target (Waterloo/Cambridge/Kitchener- home of Research in Motion and the real Silicon Valley North- sorry Ottawa) which, assuming the assumptions are correct, appreciation would take care of itself since a sufficient amount of people would be moving into the area to raise demand. The concern was increasingly becoming that the acquisition price kept going up but the rental rates were not increasing at the same rate. If you are an owner, this is great since your house is appreciating but, assuming interest rates do not rise significantly on a variable rate mortgage, your debt to income ratio (% income to cover debt) remains relatively constant. Without increasing costs, you have a paper gain.

But the game is different in real estate investing. Low interest rate environments are bad for real estate investors- it means that there is a low barrier of entry into the housing market which decreases the rental pool as renters become owners and an increasing number of people, with cheap mortgages, are bidding up real estate prices. Decreasing renter base + increasing property prices = unhappy real estate investor. An investor ends up getting less bang for the buck as it costs more to acquire a property renting for approximately the same amount as the year previous (remember that as the number of renters decrease, rents decrease as well; in Toronto, landlords are giving out free LCD TV’s to entice renters since everyone started buying condos instead of renting and, you guessed it, property prices in the “good” parts of the city began to reach unaffordable levels for most middle class families).

Ideally, a real estate investor wants to avoid the south Florida housing trap- lots of real estate being bidded up, no real renter base relative to the number of new homes going up and an over-supply of most types of housing (I may call this the Vancouver trap in a few years). No one is happy- home owner or real estate investor.

The other approach we looked at was to look purely at a cash flow property. This meant looking at old dumps (I believe that’s the technique term) with multiple units which could be rented out or duplexes and triplexes which were not dumpy (again, a technical real estate term). For duplexes and triplexes, we ran into the same issue- appreciation was too high even with multiple units. We had to put a lot down and still not yield that much rental income relative to acquisition costs. The issue with trying to purchase duplexes and triplexes in appreciating areas is that purchasers are buying for both appreciation potential and the cash flow multiple renters provides which adds a premium to pricing. Whatever gain you get from multiple sources of rental income is being off-set by the amount of money you have to put up to acquire the property. With respect to investing in a dump and becoming a slumlord, no one wanted the headaches. Enough said. Perhaps, we were looking too soon and with the market softening, a wait and see attitude may be the most prudent one.

…and so we wait for the market to hopefully soften….and I may fall into the arms of my old reliable of dividend yield stocks (yes, even the banks). If you are interested in become a real estate investor, try this blog on real estate investing. To be continued?

I have begun very preliminary talks with several people to pool our money and purchase an investment property (with the emphasis on preliminary). There are three of us so far with the possibility of a fourth; they are all great people who I have had business dealings first and then becoming friends out of business so we have started with the mentality that this is purely business rather than chums who may take a more laid back approach (here’s a life experience I learned the hard way- it is always better to do business with a business partner and then become friends then a friend who becomes a business partner). One of the parties has experience looking for, acquiring and managing investment properties in the area we are looking at (Waterloo/Cambridge/Kitchener- home of Research in Motion). My role so far is to nit-pick at everything!

Seriously, the fundamental issue when you invest with others is that you have to make sure everyone is on the same page- literally. I have really advocated that we come up with a term sheet outlining the parameters of the investment and have everyone sign off on it as well as a joint venture agreement once we sign off on the term sheet (…you can take the lawyer out of the boy but not the boy out of the lawyer…). If people have other expectations on what they want to do then this is the best time to figure that out and bring in other people with the same vision.

What have we discussed so far?

1. Location, location, location: Why Waterloo/Cambridge/Kitchener? Familiarity. One member has a track record in investment properties in the price range we are looking at. Thus, we have historical analysis to compare apples to apples and to work out pro formas based on real life numbers. Waterloo is also a 45 minute drive from where most of us live and thus we can monitor the property. Finally, Waterloo has all the factors you look for in an investment property (more on that later).
2. What is the exit strategy? We had a long conversation over this. In very preliminary stages, the tendency is to start thinking big right away- let’s buy a duplex/triplex, let’s buy and flip, let’s do lease to owns. I always follow the KISS principle when it comes to investing and I am always looking at downside risk (I am not a big dreams kind of person- I am way too practical for my own good). Here’s the fundamental issue with real estate- what is the easiest type of property to invest in? Most likely a starter home (if you said Condo, I would respectfully disagree. You do not control costs in a condo- the condo board does. You have lost the element of expense control- one of the most important factors in running a successful business). There may be something simpler but a starter home is the entry point for most people looking for a house to live in. What’s one of the worse things that can happen in real estate? You have an empty place and are forced to sell. Short of a major economic downturn, there is always a resale market for entry-level starter homes. Thus, we chose a starter home as our target for easy exit and to mitigate against worse case scenarios. I readily admit this strategy is never going to make us roll in cash flow but you have to start somewhere and its best to walk before you run.
3. Who does what and for how much? This is always the awkward conversation to have- who replaces the broken toilet in the dead of winter and how much do you compensate them for this? Right now, we are still discussing this with several models in mind: (i) the “property manager” (i.e. one of us rather than a real property manager) gets front end compensation by putting in less money upfront but has to do everything; (ii) the property manager gets back end compensation by getting a greater % of sale proceeds; or (iii) property manager is paid out of profits. We are still hammering this one out. Of course, it will be on paper.

If this sounds like an exercise in herding cats, it is in some respects. But it is like being on a third date- at that time, you ask all the awkward questions before you decide to plunge ahead or otherwise you’ll be screaming at one another on who cleans the hair out of the bathroom sink (such a metaphor applying to both dating and investing in real estate).

Anyone invest in real estate with partners? Any advice?

A reader recently asked me this question and one that I am pondering myself as I am investigating the possibility of investing in some rental properties (not sure whether it will be commercial or residential). As a complete coincidence, please read Million Dollar Journey’s post today on rental property and income taxes and deductions as a companion piece since there is some over-lap on the tax implications of holding rental properties in a corporation. As a huge disclaimer, I speaking generally of Canadian law (although some general principles apply) and tax system and please seek independent legal and accounting advice about anything to do with your finances.

Pros:

1. Credit Proofing: The Corporation’s name is on title and not your own your so there is one less asset for a creditor to seize (although financing will still usually require a personal guarantee).
2. Exit Strategy: If you have several investors purchasing together, it may be beneficial to purchase through a corporation and enter into a shareholders agreement (which is an agreement governing the relationship between the owners of the corporation) with a “shotgun provision” (sometimes known as a buy-sell agreement). A shotgun allows you to either buy out another shareholder or be bought out. Its a much more elegant exit strategy if you want to leave before the property is sold than going to court or endlessly arguing about valuation (since in a shotgun clause, the party that triggers the clause has to set a price for what they think ownership is worth).
3. Deductions/tax rate: Subject to the below con, corporations are taxed at a lower rate than individuals.

Cons

1. Taxes: Income made from rental properties can be classified as passive income. If a corporation makes more than 10% of its income in the form of passive income, it is subject to the passive income tax rate (approx. 48% in Ontario) rather than the small business tax rate (approx. 18% in Ontario).  Your accountant can structure the corporation to be subject to the lower rate but it does require some analysis (read $$$) on their part (again, this is a general information overview of the law in Canada; I understand the U.S. has a different regime). This is a very complex topic so please speak to your accountant about this issue.
2. Costs:  Incorporating and properly organizing a company does cost money.
3. Paperwork: It is time-consuming and, frankly, annoying to do the paperwork for a corporation.

Holding a rental property in a corporation makes the most sense if you are purchasing with several other people or you intend to be in the “business” of real estate investing. If you hold a condo/townhouse and receive a few hundred dollars profit a month, it doesn’t make much sense to incorporate a corporation to hold title since the costs and opportunity costs will eat up your profit. As always, please seek professional advice. Good luck.

This week’s real estate Wednesday post deals with my mortgage company: Firstline Mortgages. Firstline Mortgages is owned by CIBC but, once upon a time, was an independent mortgage company. Considering that your mortgage may run upwards of 20 years, it is pretty important that you have a mortgage company that you feel comfortable dealing with. Let’s face it- if you have a half-decent credit score, you can eventually get a financial institution to match the lowest mortgage rate you can find shopping around; so, a low rate should not be the differential given it can be found with enough effort. But it is the customer service with the mortgage company that will make a difference.

Firstline Mortgage is my mortgagee by accident; I am a life-long TD man but my mortgage broker found FirstLine which has friendlier underwriting practices for self-employed individuals. So, it feels a bit like being forced into a date with your friend’s cousin- they may be a nice person but you didn’t pick them per se. Without further ado…

The Good

1. Friendly towards self-employed borrowers (friendly being a relative term)
2. Well trained customer service reps

The Bad

1. Their on-line system frequently crashes and looks and feels about a generation old
2. Their back office infrastructure doesn’t appear very reliable. If you call them, their customer service reps are good but they have to ask about 3-4 people about why something isn’t working.

As I have previously mentioned, I use to practice law and did several real estate closings. Firstline did lend to my clients several times so my comment about poor back-office infrastructure is partially attributed to my experiences with them in another context (and various colleagues grumbling about them). Thinking back, Firstline and BMO had back-office issues, Scotiabank and TD were good (Scotiabank had a particularly good on-line system), B2B very bureaucratic and all the B lenders just generally a pain to deal with (I guess they have to be control freaks given that their borrowers were not the safest of risks). B2B is especially problematic because they administer a lot of mortgages in RSP’s and they are really the only game in town for these types of products so you are really stuck with them.

Anyone have any good/bad experiences with their mortgage company?

I decided to post my weekly real estate post on Monday instead of Wednesday (hey, its my blog after all….) on a debate that has been heating up given the state of the real estate market in some parts of the U.S. Mainly, are you better off renting a place or buying a place? Millionaire Mommy Next Door has been running a series of posts supporting renting over buying recently.  Fortune Magazine has an extremely interesting article on what the future holds for real estate values premised partially on increases in rental rates as an indicator of future real estate valuations. In a nutshell, there is a historical ratio between housing prices and rental price increases; when the ratio begins to increase (i.e. housing prices are increasing faster than rental rates), a correction has to occur.

Thus, the pro-rent camp argues that  it makes no sense to buy when real estate prices are appreciating at greater than the rate of rental increases- you can pocket the difference and use the money elsewhere (assuming you have the discipline to do so)- and housing values are out of line so it is not a good time to enter the market (rental rate increases serve as a proxy on how any local market is doing economically- in healthy markets, rents continue to increase in line with housing prices; where housing prices out-strip rental rate increases, the argument is that there isn’t the fundamentals to support the housing prices for long and that housing market will correct).

My comments:

1. The rent vs. own debate really depends on where you live (to state the obvious). In formerly over-priced markets (Miami, Las Vegas), it made more sense to rent and, hind-sight being 20/20, scoop up something on the cheap once the market began to collapse. Locally, I keep thinking of Vancouver- an average household income which is approximately 10-15% lower than Toronto but with higher property values and much fewer head offices than Toronto and Calgary. This would be a place to rent until the market comes to its senses.
2. Fortune makes an interesting point: in cities that are basically bubble proof (think New York City, Chicago etc.)- where a ton of people immigrant to the city year after year because of a very vibrant and diversified local economy- it is harder to create real estate bubbles (harder but not impossible- look at L.A. although L.A. does not have a financial centre such as New York or Chicago). The local economies support the increase in real estate prices (on any given day, there may be 15 million people on the island of Manhattan). In places where property values take off without a parallel growth in the local economy, watch out!
3. If I were to combine comment #1 and #2 together, the analysis would probably be buy something, anything, in large metropolitan areas that historically are major growth centers. I don’t think any Canadian city fits this bill. We don’t have the skill set or political will to nurture sustainable urban growth (for now) and we still tend to see our wealth coming out of the ground rather than out of office buildings.
4. The flip side of the argument is that it makes no sense to invest in real estate to rent out if you are in a bubble real estate cycle. The market keeps moving into buying and no longer looks at renting as a viable alternative.
5. Housing is deeply psychological and emotional. I don’t try bothering debating which is right or wrong with anymore. It is a matter of personal choice but Fortune also makes another interesting point- the increases in property values also means an increase in property tax so be prepared to pay for steadily increasing property taxes as well.

Your thoughts?

This week’s real estate Wednesday post is more of an open question than anything else which I cannot seem to find any definitive answers to. When I do a net worth calculation, I always add two ratios: (1) what is the % of each asset over the total value of assets (for example, if you had $100,000 of total assets and you had a $10,000 retirement account, the retirement account is 10% of your total assets); and (2) what are liabilities/debt expressed as a % of total assets (for example, total assets equals $100,000 and total debt is $20,000; net worth is $80,000 but total liabilities/debt is 20%)

I do this to try to figure out two things:

1. Is my asset pool too reliant on one particular type of asset- i.e. is my asset base diversified enough?
2. In a worse case scenario, do my assets, if I had to liquidate them, pay out my liabilities/debt with room to spare?

The general rule for stocks is never have more than 10% of your portfolio in any one stock or otherwise you have too many eggs in one basket.  But when determining net worth, is there a danger point when your home becomes too much of a % of your total assets? In other words, when are substantially all of your assets too tied into your house?

For some reason I have picked 65% out of the air. If 65% of your total net assets is derived from the book value of your home, I believe you have too much house. Your asset pool is too tied into an asset you cannot liquidate quickly. I honestly do not know why I picked 65%. 80% of your total assets in your home is clearly too much house. Under 50% and you are probably doing quite well in that you are saving a lot of money in your retirement account or you have held your house for a very long time and you will profit greatly when you sell (assuming the neighborhood was appreciating in price while you held).

Yes, I clearly understand I am not looking at the liability/expense side of the net worth equation for these purposes but I have this fixation that one should never derive too much of their assets in their home. The question is what is too much?

Help me out here- is 65% sound reasonable?  Am I off track? Thoughts?

Welcome to real estate Wednesday. This week’s post is about surviving a bubble real estate market. Canadian and United States real estate is like the Charles Dickens quote right now: “it was the best of times, it was the worse of times.” Having said that, there continue to be pockets in the United States were real estate continues to be quite hot.  In certain regions of Canada, there continue to be predictions that they are in a bubble real estate economy (Vancouver comes to mind immediately). I have heard two people employ the following strategies lately to survive the bubble and come out on top. Its actually quite simple if you think about it since it follows the same principles as prudent stock investing. Unfortunately, the strategy only works if you have a home:

1. If you think you are in a bubble, two things tend to happen: (1) your home is worth a lot more than you think its worth; and (2) developers are rushing into the market and creating a huge supply of a certain type of housing- typically condos since they are easy to build (this was the U.S. about 2 years ago).
2. Sell your home. It doesn’t matter if you think you are at the top of the bubble or not. The key is that in any bubble assets are over-valued and purchasers have a distorted perception of risk (people believe “its not like the last time…”) so you will end up ahead regardless.
3. Park your profit in something safe and which can be made liquid quickly (i.e. GIC) and rent a type of housing in which supply is increasing more than demand. In Toronto that’s a 500 -650 square foot condo (obviously, the problem with this strategy is that its easier if you have no kids or they are still quite young). Supply drives down the rent which allows you to keep as much money as possible. In an ideal situation, your rent should be less than your previous mortgage payment.
4. Wait for the bubble to pop.
5. Re-enter market at lower valuations and with a large down-payment.

Results seem to be quite impressive. Anyone try this?