Canada’s housing market nears ‘extreme bubble,’ warns ex-Lehman Brothers trader

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A sold sign is pictured outside a home in Vancouver on June, 28, 2016. THE CANADIAN PRESS/Jonathan Hayward, File

The Canadian real estate market is on the verge of a massive bubble, warns a former Lehman Brothers executive, citing a struggling Canadian economy and high debt to income ratios.

Jared Dillian, a financial analyst based in the U.S., said in an interview with Mauldin Economics that Canada was approaching “extreme bubble territory” as evidenced by increasing home prices.

READ MORE: Is the Metro Vancouver real estate market in free fall?

“The average home price in all of Canada is over $500,000 and this is with the average income at $40,000,” Dillian told Mauldin Economics, a publisher for investment resources.  “Debt to disposable income for consumers is 165 per cent which is much higher than it was in the U.S. at the top of our housing bubble.”

Dillian’s numbers match the facts. Statistics from The Canadian Real Estate Association (CREA) show the average Canadian home price was $480,743 for July 2016 up from $437,430 the year before. And the latest data from Statistics Canada shows the average Canadian employee makes just over $49,000 a year.

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Should Toronto follow Vancouver’s lead and tax foreign real estate investment?

Dillian said while there’s a perception high home prices are being driven by off-shore money, including Chinese foreign investors, this only represents about 10 per cent of the activity in Vancouver and Toronto.

“A lot of it really is Canadian citizens who are stretching to buy homes in the low seven figures,” he said “The levels of debt are very, very high and it’s all on the [Canada Mortgage and Housing Corporation] balance sheet.”
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READ MORE: Which province lost the most jobs in July?

Dillian also warned that the Canadian dollar, reeling from low oil prices, could fall to $1.60 or $1.70 against the US dollar. He added that shorting the Canadian dollar is “one of the best macro opportunities over the next couple of years.”

Is Canada’s red-hot housing market really approaching a bubble?

The warning from Dillian, who worked for the financial services firm Lehman Brothers before it went bankrupt in 2008, comes on the heels of other warnings, including a June report from research firm Capital Economics that blamed increasing debt and high-risk mortgages for rising real estate.

And some governments have taken steps to cool the hot housing market. B.C. recently introduced a 15 per cent tax on foreign homebuyers in order to slow purchasing activity in areas like Metro Vancouver.

Early data from the Real Estate Board of Greater Vancouver suggest the tax is having the desired effect as home sales in Vancouver fell 51 per cent to 758 transactions in the first two weeks of August compared to the same period last year, according to Bloomberg.

READ MORE: Vancouver’s real estate is ‘fuelled by a money laundering bubble’: Market analyst

Economist Don Drummond with Queen’s University said the debt-to-income ratios and housing prices have been high-profile risks in Canada for “five years.”

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“Obviously this has turned to some degree in the Alberta markets and the sales volumes have weakened in Vancouver, although prices haven’t come down yet,” said Drummond. “But other than Toronto and Vancouver home prices aren’t terribly out of whack in other places in Canada.”

Drummond said while shorting the Loonie is a legitimate position, he found it “puzzling” given low oil prices over the last year have already led to a lower dollar.

Short-selling occurs when an investor sells a stock he or she does not currently own and then buys the shares at a future date, hoping to make money if the stock’s value falls in the meantime.

“If you’re going to bet on the Canadian dollar you’re betting on the future [of oil prices],” he said. “I would think it’s a fairly reasonable bet that if you try to fast-forward two to five years from now oil prices are going to be higher rather than lower.”

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