Hello, everybody. It's Sam from Financial Samurai. And in this episode, I want to talk about the US housing market and what could ignite the US housing market further. So for those of you who have been reading my stuff, I'm very bullish on the housing market. I love real estate.

It's my favorite asset class to build wealth. The combination of rising rents and rising real estate prices is a powerful, powerful combination for the average person to build a lot of wealth over time. History has shown real estate is one of the best wealth creators. So I've been thinking a lot about what could make house prices in the United States go up even further.

The market has already been on a tear since the beginning of 2020. And frankly, since 2009, 2010. And it seems like prices should slow down. And I think prices will slow down, it can go up by 15 to 20% year over year for years because housing prices must follow income growth.

Otherwise, nobody can afford a home. It's very basic fundamentals. One of the things I wonder about is whether the typical American knows how good he or she has it. You know, you how you hear about immigrant stories who come to America, and they just do very, very well. I think one of the reasons why is because there's a lot of perspective, they know how great the United States is compared to where they came from.

And also, they don't want to screw things up once they come to America. This is their one chance. Their relatives back home are counting on them. And the relatives are watching them to see if they can succeed in the land of hope and dreams. The reality is, the US housing market is cheap.

It is one of the cheapest housing markets in the world. Look at all the data from The Economist to Numbia, which is the largest cost of living database site, supposedly in the world. And the United States ranks as the second most affordable country in the world. Whereas Canada, our friends up north, ranks as the 17th most expensive country for real estate.

So I got to thinking, what would happen if the United States housing market got as hot and as expensive as the Canadian housing market? It could happen. Why not? We're both, we're part of the North American continent. We both speak English. We have similar cultures, not the same, but similar cultures.

We have really open borders, relatively open borders. We have similar philosophies. So why couldn't the US housing market get one day as hot as the Canadian housing market? If you haven't been paying attention, well, the Canadian housing market is truly on fire. It makes the US housing market look like a little anthill.

It is unbelievable how much home prices have risen in Canada. And the funny thing about this is that, look, incomes are on average lower in Canada, yet home prices are higher in Canada. I mean, why is this? Is it because Canadian weather is so much better? There's a lot more big companies that pay big bucks.

The answer is no and no. I don't know of many big companies in Canada that are paying 22 year old college graduates $150,000 to $200,000. Like almost all these big tech companies in the Bay Area. If you look at the banking industry in the United States, Goldman Sachs raised their base salary from $80,000 to $110,000 plus, you know, a $30,000 to $50,000 to $60,000 bonus.

Income is very strong in America, which is why real estate is relatively more affordable than almost any other country in the world. And so if you click over to my post, you'll see an amazing chart that graphs disposable income to home prices. So for the United States, the correlation is very tight.

In fact, it looks like or one can argue that home prices are still about 10% undervalued in the United States compared to disposable income. Now then take a look at Canada. The Canadian home price chart is through the roof. It totally decoupled from the Canadian disposable income line starting at around 2001.

Therefore, we can make several conclusions. One, the US housing market is not in a bubble because disposable income growth is strong. Two, the Canadian housing market looks like it's totally decoupled from fundamentals and it looks like it's in a bubble. And then three, if there's a choice between buying a comparable United States property or Canadian property, you probably want to buy the United States property.

After all, income growth is higher and the average income is higher. Let's now do a back of the envelope calculation to determine how much higher United States home prices would have to go to equal the Canadian housing market. Right now, the median home price in America is anywhere from $350,000 to $400,000 depending on whose data you use.

It's kind of interesting that we don't have the exact figure, but that's kind of economics. That's finances. You don't know for sure, but you have rough estimates. So let's average the range out and say the median US home price is $375,000. That's up about 15 to 20% year over year.

Now, if the US housing market got as expensive as Canada's housing market, the median home price would be closer to $656,000 with a range of between $612,000 and $700,000. And if the US median home price was to rocket higher by 75% because that's what the calculation is, Canadian home prices are about 75% higher, income adjusted.

The prices in the most expensive coastal city markets, San Francisco, LA, DC, New York City, and so forth, would likely increase by double digit percentages as well. Probably not 75% because it's coming from a higher base, but we could easily see these more expensive real estate, coastal real estate markets, increase by 30%, 35%.

So half the overall rate of return. And that's what you're seeing right now in the markets since the pandemic began. You're seeing 18 hour cities, secondary cities, Austin, Charleston, all that. They're growing at 20 plus percent, whereas the bigger cities, the more expensive cities are growing at 8 to 12%.

Think about that folks, a 30 to 75% increase in the median US home price, depending on where you are, if the US housing market gets as hot as the Canadian housing market. And some would say that America has much more opportunity than Canada when it comes to making money, starting a business, and so forth.

So the next logical thought process is what are the chances? What are the chances that the US housing market could turn into the Canadian housing market? Well, I don't have some exact data to blab off to you, but I think there's a 60% chance that it could happen within the next 10 years.

And I think there's a 75% chance the United States housing market could turn into the Canadian housing market over the next 20 years. And I think this likelihood is much greater than the Canadian housing market reverting to the United States housing market. Once the genie is out of the bottle, it's hard to put back.

And the reason why I think the US housing market could turn into the Canadian housing market is because of technology and information and capital flows. As technology advances, and as governments develop stronger international relations, it's only logical to conclude that capital will continue to seek the highest returns in the world.

Just think about the evolution of the stock market. Decades ago, we can only invest in single stocks, right? And then there was the creation of the S&P 500 index and the Dow Jones Industrial Index. And then there was the creation of ETFs and index funds. And then those ETFs and index funds were going into different asset classes and also international equities and country specific ETFs.

And it kept on evolving and developing. So in a way, the stock market evolution is much quicker than the real estate market evolution, especially when it comes to commissions, gosh, is now free to trade securities, stock securities bonds. But yet we still have to pay four and a half to 6% in real estate commissions to sell a home.

So it is clear to me that the real estate market has a lot more disrupting to do a lot more, which is one of the reasons why I'm so bullish. It's why I'm paying attention to the real estate crowdfunding industry. It's why I'm looking at the mortgage market to see where that can get disrupted.

It's why I'm trying to invest in some private companies in the real estate space, there's a lot of opportunity. And the more the market evolves, I think the more liquidity is going to go into the real estate market. And that's going to be very beneficial for investors. I think there are two main things that could revalue the United States housing market higher.

The first is a massive realization by international investors that the United States market is attractive. It's affordable and as a stable government and as an international reserve currency. If you're a wealthy person coming out of any emerging market country who needs to park money somewhere, why wouldn't you want to buy United States real estate, send your kids to some of the best schools in America and give them the biggest opportunity possible.

The second catalyst, I think, is the collective realization by Americans that we've got it so good. We have got it good, folks. Prices are low. We've got internet. We've got a stable government. The air is pretty good. We've got our freedoms. Life is good in America. And the more you live abroad and travel abroad, unfortunately, that's been truncated a lot due to covid.

But the more you will realize United States is good and you don't want to let other people buy up your assets. You want to buy up your assets first. Otherwise, you're going to get pissed off and your children are probably going to get screwed because prices are going to keep on going up.

And they're going to ask you one day when they're adults, why didn't you buy real estate when you could have or before? You know, the foreign invaders bought up all our property, just like the Japanese bought up all of Hawaii property in the 1980s. So I say one of the greatest X factors in determining the price direction of the US housing market are foreign investors.

So just to give you an idea, the top five foreign buyers of US real estate from April 2020 to May 2021 are Canada, Mexico, China, India and the United Kingdom. In that order, traditionally, it's always been Canada at number one because they're the closest to us. And then Mexico is traditionally a top three because it's also one of the closest countries to us.

So for us to compare ourselves to Canada is the right logical thinking. And then to compare our housing market to the Canadian housing market is also a logical extension. And I think it's really important for us to also discuss why why is the Canadian housing market so strong? It didn't really correct at all during the global financial crisis in 2008 and 2009.

And it is just continue to go up. So if we can understand why the Canadian housing market is doing so well, and why it's done so well, I think it can better help us understand where the United States housing market could go. So there are five main reasons. One, supply and demand high demand for single family homes, but not enough being built.

Canadians were building mostly apartments from 2011 to 2020. Whereas Canadians wanted single family homes, so simple supply and demand fundamentals to running out of land. Did you know Canada is larger in land mass than the United States? 3.9 million square miles. Pretty interesting, huh? That's about point 2 million square miles larger than the United States.

However, most Canadians are clustered in a handful of major cities not far from the US border. So most jobs, you know, Toronto, Vancouver, Victoria, that's how the structure is. So in terms of land, Canada is boxed in by the United States below Pacific Ocean to the west, the Atlantic Ocean to the east, and mountains and really, really cold weather to the north.

So Canada doesn't have as much livable land as one might imagine. 3. Relaxed foreign buying rules. Canada is relatively well known for having an open door policy for immigration. Therefore, if you have more immigration, you have more foreign money coming into Canada. Unfortunately, this open door policy has really squeezed locals.

And if you listen to the news, watch the news regarding Canada, so much of it talks about real estate, about the runaway prices for real estate and how it's really hurting renters who want to buy in future generations. It really makes me wonder whether local Canadian politicians are sleep at the wheel.

Are they not listening to their constituents, the local people who are getting priced out of the market as foreigners buy up their housing and their land? It just seems so odd to me that Canadian politicians would allow housing prices to go up so far beyond what disposable income can warrant.

It just doesn't make any sense. I would be pissed off if I was a local Canadian myself. But something must be going on under the table. That has got to be the only way. So 4. Easier to launder money in Canada. I think this is something that we need to discuss a little bit more.

According to Global Financial Integrity, a Washington DC-based anti-corruption organization, they believe a significant amount of illicit funds is laundered in Canadian real estate. From 2015 to 2020, the news media ran stories about $626 million of real estate being bought with laundered cash. Over 88% of it was on residential real estate.

And what's really interesting is that this $626 million was only from 35 cases. So that's like $17 million per case. Think about all the undiscovered illicit real estate transactions and money laundered. If you've watched Ozarks, man, money laundering is big business. And the study revealed that 48.6% of cases involved Canadian-sourced funds.

So Canada is the main culprit of its own money laundering. However, the largest international source was China, representing about 23% of cases. And then the US was the third with 11.4% of money laundered cases. Let's think about mainland Chinese people. So the government only allows mainland Chinese people to withdraw $50,000 a year or buy up to $50,000 of US assets a year.

So how on earth is the typical Chinese buyer buying a $2 million, $3 million property? There are only so many friends and relatives you can pull your money, your assets to, to buy such a property. There's clearly something going on. And I think the government, the Canadian government knows what's up.

But for some reason, it chooses to look the other way. Now, maybe if you get paid off like 100 grand, 200 grand under the table, or I don't know, something's going on, you'll look the other way. But I don't understand why the Canadian government doesn't crack down harder on money laundering.

Maybe it's just too difficult. Who knows? All right, the final reason why the Canadian housing market is so strong. Perhaps it's a stronger culture of the bank of mom and dad helping their adult children. As Americans, we strongly value independence. You know, go get a job right after you turn 18 or see you later.

Right? Go for it. Be on your own. Do the right thing. Whereas Canadians seem to emphasize interdependence, subsidized health care and subsidized college tuition are great examples of a more communal Canadian culture. Nobody is getting left behind in Canada or much fewer people than they are here in the United States.

You're not going to go bankrupt because of some massive medical expense. Unlike here in the United States. We're all in this together, right? That sounds like the Canadian mantra. Whereas in America, it's every man or woman for himself or herself. So with this type of culture, I think it's very common or more common in Canada for the bank of mom and dad to help come up with a down payment, buy a car, pay for tuition, you know, tuition is cheap, so who cares, but really, for housing sake, come up with a down payment or buy the home outright to help their adult children.

I live in San Francisco, and parents helping their children buy their first home is ubiquitous. Several realtors I spoke to said it's about 60% 60% of first time homebuyers, at least the clients they see have parents helping them with their down payment. And I believe in the median home price here is 1.7 to 1.9 million depends on who you ask.

But it's a lot. And it's going to be pretty hard for the typical person to come up with a 300 to $350,000 down payment. And what I think we're seeing is that the United States culture is moving more towards the Canadian culture of trying to help more people, bigger government programs, higher taxes on the horizon, we're going to get closer to Canada.

And I think we're eventually going to get closer to Europe, you know, where the happiest people in the world are consistently, but those guys have huge tax rates. But they also have universal health care, and good unemployment benefits, good maternity and paternity benefits, and so forth. So isn't it a little bit ironic, folks, think about it, isn't it a little bit ironic that the countries with the highest tax rates, and the biggest governments have some of the world's most expensive housing, look at the housing costs in Sweden or Norway, or Canada, very expensive, very expensive, same thing with in France.

So as investors, I think we've got to always think about the yin yang of finance, yin yang. So if you do something, what are the unintended consequences? Or what are the consequences? You can study other countries, housing markets, capital systems, and so forth to try to get an idea, but you don't really know for sure.

But what I do know is that our children in 20 to 30 years will ask us, why didn't you take advantage of cheap real estate prices today? I am pretty certain that they're going to ask us this if we start diddle dallying and not taking advantage, or if we decide to rent for the next 30 years.

I think that's a mistake, folks. Just like it's not a good idea to short the S&P 500 for the next 20 years, it's probably not a good idea to rent for the next 20 years. Because when you rent, you're short the real estate market, you're a price taker, you're at the mercy of inflation, and so forth.

Now I want to conclude by saying that the house price appreciation in America cannot sustain itself. 15 to 20% year over year growth, that's not happening. Next year, we're going to talk about single digit, high single digit price appreciation, which I think is great, especially if you have leverage.

And I want to remind everyone to buy responsibly. Follow my 3033 rule for home buying. You don't want to get into too much leverage, especially with prices on the up, up and up, because you just never know. I think things are going to continue to do well. It's kind of like a car that was going 80 miles an hour that's now going 50 miles an hour.

It's still going pretty fast. And if it hits something, it's going to get into a big fender bender accident. You want to be very disciplined when it comes to real estate investing. You don't want to be over leveraged. Please go through my archives, whether it's the 10 warning signs to look for before buying a property or how to write a real estate love letter, or how to analyze an investment property to make the right choice.

There is so much wealth of information on financial samurai. I've spent so much time writing and thinking about these topics. Please take a look. There are no guarantees, but I think we're going to look back and 10 to 20 years and realize how good value real estate was in the United States.

And if the foreigners pile on, man, watch out. Thanks so much, everyone. And if you enjoyed this podcast, please share it. Please leave a positive review. It keeps me going. I'm really pumped about this connection I've made with the Canadian housing market in the US housing market. I hope more people discuss and share their thoughts.

Trying to connect the investment dots makes investing so much fun. And I love hearing everyone's perspective. Thanks so much, everyone.