In an annual missive to shareholders, Fairfax Financial Holdings Ltd. founder and CEO Prem Watsa said that the current situation in the Canadian real estate sector has eerily similarities to the condition of the U.S. economy prior to the subprime mortgage crisis that devastated the American finance system nearly a decade ago.
“Canadians have accessed their increasing real estate wealth through lines of credit easily available from the banks,” Watsa wrote in the letter, as quoted by Gaurav S. Iyer in his analysis for Profit Confidential
“Sound familiar? This is exactly what happened in the United States before the financial crisis in 2008/2009,” Watsa noted, adding that the current rash of Canadian home owners overvaluing their wealth would lead to significant delinquencies (due to over-borrowing) later down the line.
The latest numbers bear our Watsa’s observations: Average home prices in Vancouver are 11 times higher than the average household income, while Toronto residential properties sell for 10 times that average.
More optimistic industry players would be wise not to simply dismiss Watsa as a garden-variety doomsayer, as the renowned executive has a record of proven forecasts—including the junk bond collapse, the Chinese real estate bubble, and the current slowdown in Western nations—to back up his predictions of a meltdown in the near future.
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The “toxic” housing bubble that has been developing in Canada’s most in-demand cities is ready to pop, according to a finance mogul who has been hailed as the “Canadian Warren Buffett”.