Will Metro Vancouver & Fraser Valley Real Estate Markets Burst?
BCHH and other local real estate professionals believe the American investors are likely to lose their shirts betting against metro Vancouver real estate, which is described as "a special market thriving on international demand." We aren't even adding the record low metro Vancouver and Fraser Valley rental vacancy levels into our own analysis which would place market demand even further over the top as rents are forecast to increase to keep up with lower mainland real estate valuations.
The U.S. hedge fund investors, known as short-sellers, are betting against what they believe is a housing bubble in Vancouver, Toronto, Calgary and other Canadian cities.
They believe Canadians hold too much mortgage debt, and that Canadian banks, mortgage insurers and “sub prime” private lenders will lose money on unpaid loans when property prices fall. They are wrong, our housing market doesn't suffer from the "no house left behind" NINJA (no income, no job no problem) mortgages that the U.S. market did.
These short-sellers use complex financial arrangements to make rapid profits when publicly traded stocks fall in value. In this case they are betting against businesses connected to property and household debt.
A few though, like Marc Cohodes, take the opposite approach.
Cohodes, once called Wall Street’s highest-profile short-seller by the New York Times, has come out of partial retirement on his chicken farm in Northern California to make targeted bets against “subprime” Canadian lenders. These lenders make loans to borrowers rejected by traditional banks.
Cohodes is a large, humorously profane man who battled a range of opponents during his career, from CEOs of public companies to the management of the world’s top investment bank, Goldman Sachs.
Cohodes — who is familiar with Vancouver and has befriended well-known locals, like celebrity chef Hidekazu Tojo — says metro Vancouver real estate has reached peak insanity, and any number of factors could trigger a collapse.
“The cross-currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates,” he said.
“A house is something you live in, but in metro Vancouver you guys are trading them like the penny stocks on Howe Street. It’s as clear as day that the market is a Chinese money laundering mecca.”
Cohodes said famed New York investor Steve Eisman is the analyst who helped him locate lenders to target in Canada. Eisman will be a featured character in The Big Short — a Hollywood movie based on the inside story of short-sellers who made fortunes targeting major banks and bad debt products in the U.S. housing crash.
For example, in that crash a previously little-known New York hedge fund manager named John Paulson reportedly made between $3 billion and $4 billion for himself in one year.
One Canadian housing analyst who advises U.S. clients including Cohodes was recently quoted in the media, saying that "major investors are currently “building positions” against Canadian housing targets."
They are predicting that a rise in historically low U.S. interest rates this fall will spill financial stress into Canada.
“All of the big global macro funds that were involved in betting against the U.S. in 2007 and 2008 and 2009, they’ve all studied Canadian housing for a few years,” said the analyst, who asked not to be named because of client confidentiality. “I know a number of them are shorting Canadian housing. It looks like an accident waiting to happen.”
The analyst noted that short-selling bets against big Canadian banks have doubled in New York markets in the past several months. And the risk of a sharp housing correction connected to Canadians’ high household debt has risen since December, the Bank of Canada recently reported.
While short-sellers point to Vancouver as the most extreme housing bubble in Canada, the analyst noted that some investors believe a massive flow of investment from Mainland China makes the market impervious to corrections. Others speculate that if China’s economy slows dramatically, Vancouver’s housing market will go bust.
“Toronto sees some offshore money from China, but definitely metro Vancouver is in its own world,” the analyst said. “Some of the guys that have timed this bet think that when China blows up Vancouver will blow up, too, but I'm not sure that will happen.”
Count one of the world’s most influential investors — Laurence D. Fink, head of the world’s largest asset fund BlackRock Inc. — among those who believe Vancouver property is not only as good as gold, but better.
“The two greatest stores of wealth internationally today are contemporary art, and apartments in Manhattan, Vancouver and London,” Fink recently told a conference of investors in Singapore.
BCHH and other experts believe there is tangible mounting evidence that the city is, in fact, a special market.
“It’s an increasingly internationally-focused market with demand not just from Asia, but increasingly from Americans, too." BCHH penned an article in 2004 forecasting the next ten years of metro Vancouver and Fraser Valley real estate valuations and sale growth and in particular the luxury market and its comparison to the growth in luxury automotive sales in Vancouver and Sydney, Australia.
We understand short-sellers (as well as political opposition parties and urban social engineers) are betting against Vancouver, but believe the speculators will lose.
“Even a broken clock is right twice a day." “Will there be a correction, some time? Yes, because markets are cyclical. But barring some huge external shock ... it’s hard to see any big decline.”
Meanwhile, Canadian banks suggest a period of economic vulnerability in early 2015 has passed.
TD Economics reported in early June: “The notion of ‘short’ or sell Canada became a growing theme in international circles, as falling oil prices added to concerns about an overheated housing market and high household indebtedness.
“A few months later it seems the bears have not been proven right.”
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