Canada’s housing market hits Wile E. Coyote moment: Yale lecturer
Is the “Bank of Mom and Dad” itself borrowing to help first-time buyers step onto the property ladder?
With tighter lending conditions coming into effect in recent years and home prices continuing to soar, it appears many Canadians are turning to new, alternative sources of debt such as home equity lines of credit to help finance a down payment.
It’s a risky scenario that’s helping fuel a potential bubble in the process, according to Yale lecturer Vikram Mansharamani.
Mansharamani, who teaches a seminar on bubbles at the U.S. Ivy League school, has in recent days joined a slew of international observers, which includes the IMF and Deutsche Bank, in expressing concerns that Canada’s housing market is approaching a potentially sharp correction.
Mansharamani’s chief concern is his belief that many Canadian homeowners are tapping the equity in their homes to lend out to borrowers — such as their children — who otherwise wouldn’t be able to afford a home. Some are also borrowing simply to renovate or use elsewhere.
“Where I get very concerned is in this private mortgage market that’s starting to emerge,” he said in an interview on Bloomberg television late last week.
“You have individual homeowners; respectable, [employed], high-credit quality homeowners who are borrowing off their home equity lines and lending to individuals that can’t get access to credit.”
What evidence is Mansharamani relying on? It appears from his recent blog post the research and opinion of Seth Daniels, an investment adviser at Boston-based JKD Capital. Daniels is part of a team behind a fund that’s betting on a Canadian housing slump.
In an email, Daniels said there are “infinite examples” of this alternative lending market growing in Canada, such as this business. “[You] can also check Kijiji etc.,” he said.
Mansharamani said Canadians have embarked on a decade-long credit binge that’s helped puff up home values, a trend that’s made the country one of “the most vulnerable large economies in the world.”
And with the crude’s slump taking hold across the economy, the music may be about to stop.
“In this Loonie tune, it seems our Crazy Canadian Coyote has run off the cliff, his feet are still moving, but he has yet to look down,” Mansharamani said in March 18 blog post.
The fund Daniels advises for aims “to find investments that will benefit from a decline in Canadian house prices.”
On top of his teaching duties at Yale, where Mansharamani heads a class on financial booms and busts, his bio says he is “an experienced global equity investor.”
Have you or someone you know borrowed from a home equity line of credit or somewhere else to help a first-time buyer afford a down-payment? Tell us your story:
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