Canadian housing bubble ripe for popping – Prem Watsa

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”.
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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  • by Robert 2016-05-27 11:09:05 AM

    Troll fodder... Subprime meltdown in the US had to do with poor lending practices from greedy banks and investors. Canadian banks are one of the most stringent lenders around which is why the Canadian economy was the last to falter and the first to recover after the global meltdown (thanks to the US spreading their junk bonds around the world).

    Perhaps someday CREW and it's sister publication REM will publish useful articles for the industry vs doom and gloom articles that's only use is to boost readership.

  • by JIM 2016-05-27 2:21:56 PM

    The significant factor bean-counter types can't measure is the buyers emotions and sense of desperation. Most home buyers are not conservative, logical bankers nor economists. The market is a force driven by thousands of individuals who want/need a home for every kind of reason. Thus real estate is possibly the most unpredictable market on earth.

  • by GP homeowner 2016-06-08 11:51:46 PM

    I'd like to hear his analysis by city and not just blanket the entire country with this prediction. Each city is a vastly different market, as seen recently with activity in Alberta with Oil weakening, meanwhile Toronto grows 15% vya. There are so many factors impacting supply and demand in each city and Toronto is fuelled by immigration/population growth into the primary business hub of the country. Toronto also has a lot of immigration and it is a city that people move to and stay in.
    With the number of buyers looking for homes vs supply, there would need to be a serious trigger to turn the tables on supply/demand. Interest rates going up even 2 full percent would still mean extremely low rates historically. Employment is strong. People are not accessing Credit through their equity to buy more properties at the level in the US pre-2008, because mortgage rules in Canada require 20% down on second properties and only 50% of potential rental income is considered as income in securing a mortgage for that property. In other words it is extremely difficult to buy multiple properties in Canada vs how it was in the US. I am accessing a line of credit to improve my house an make it livable/holdable for longer term, which is relatively healthy. Active house flippers re-invest it in Canada (consumption) because flipping one house isn't going to mean retiring to the Bahamas, it's income, it's a part time job just like any other and it helps drives the economy. They're selling that flipped house to a long term homeowner that didn't want to renovate themselves.
    What I do see is a big shift vs 30 years ago - more double income families that can afford more expensive housing prices, people paying off their mortgage later in their lives (unless inheritance allows them to wipe it clean). More of a grind, less work life balance, more day to day stress, and middle income families being pushed out into new areas of development... In other words, growth... Expansion... Which is natural in a city like Toronto in a country like Canada. It's been happening for a long time but it is accelerating now. Foreign investment is natural in this scenario. Every highly attractive major city has levels of foreign investment.
    It's an evolution of the city. Maybe not everyone will be able to buy a house close to downtown if they please. Maybe people living close to downtown will only be highly stressed pushed to their limits low work life balance families that need less commute to make their life possibly sustainable. Toronto will not be the first city to experience this.
    Will prices keep going straight up forever with no bumps? Improbable. But unless someone explains an actual trigger like with the fraudulent market in the USA in 2008, then no one's prediction of a crash should be flat out believed. If a true trigger or tipping point was discovered, it would be real and the markets would start declining the next day. The day after any doomsday predictions over the last 5 years, nothing changed. Until then, it's guessing. In a way I look forward to the day the trigger is revealed... It might hurt, but at least it will be interesting. So far, no predictions have been the slightest bit interesting.

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