WILL THE BUBBLE BURST?
Some key Wall Street investors betting that Vancouver real estate will crash, but local analysts debunk that speculation
Large Wall Street investors who made billions when the U.S. housing market collapsed in 2008 now are betting that real estate values in Vancouver will crash.
But local real estate professionals believe the American investors are likely to lose their shirts betting against Vancouver property, which they described as a special market thriving on international demand.
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 Canadian banks, mortgage insurers and ‘subprime’ private lenders will lose money on unpaid loans when property prices fall.
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.
They are also betting against the Canadian dollar, believing it will decline significantly in a housing bust.
Most of these traders are employed by secretive New York investment funds that shy away from publicity, partly because they want to disguise how they lay their bets.
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 to make targeted bets against “subprime” Canadian lenders. These lenders make loans to borrowers rejected by traditional banks.
Cohodes 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 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 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.”
One Canadian housing analyst who advises U.S. clients, including Cohodes, told The Province major investors are “building positions” against Canadian housing targets.
They are predicting that a rise in 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 reported recently.
While short-sellers point to Vancouver as the most extreme housing bubble in Canada, the analyst noted some investors believe a massive flow of investment from Mainland China makes the market impervious to corrections. Others speculate if China’s economy slows dramatically ,Vancouver’s housing market will go bust.
“Toronto sees some offshore money from China, but definitely 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 investors in Singapore.
Jonathan Cooper of MacDonald Realty Vancouver said evidence is mounting 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,” Cooper said.
He said he understands short-sellers are betting against Vancouver, but believes the speculators will lose.
“Even a broken clock is right twice a day,” Cooper said. “Will there be a correction, some time? Yes, because markets are cyclical. But barring some huge external shock … it’s hard to see a 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.”