It turns out that I’m not the only one super bearish on Canadian housing. David Rosenberg, formerly from Merrill Lynch and now of Gluskin Sheff was kind enough to take some questions about the Canadian housing market from Globe and Mail readers. Some of the highlights include:
(My thoughts will be in italics under each series of question and answer)
“Looking on a 3-5 year horizon and with the likely chance of (significant?) interest rate hikes, is this likely to be a period where fixed rate mortgages are better than variable?”
David Rosenberg: I found looking at historical data that sticking with shorter-term mortgages made more sense the vast majority of the time …. only when the Bank of Canada moves so aggressively as to invert the yield curve has this not been the case
Interesting. Rosenberg thinks we should stick with short term mortgages. I assume he means fixed rates, as short term variables really don’t exist in Canada.
If you want to buy a new home.should you wait or buy now?
David Rosenberg: the name of the game is to buy low and sell high … by many measures, home prices on average are overvalued right now by between 15% and 30%.
I would almost argue Toronto and Vancouver are overextended by more than that. Please listen to Rosenberg if you’re counting on any sort of appreciation.
Is there a way to hedge exposure to Canadian housing?
David Rosenberg: It’s not easy to hedge out an illiquid asset and there are no pure ways to short the stock market as there is in the USA where there is an actively traded (though small market cap) homebuilding segment. Perhaps focussing on those retailers who cater to housing (shorting them) in an indirect sense, but this is a crude way to “play” a looming downturn in real estate. If home prices do correct, then the Bank of Canada is hardly going to do what is priced in to the bond market and begin to raise rates, so buying BAX futures or short-term Canadas would again be a back-door way to “trade” around this prospect of a housing correction. From a more basic standpoint, best to either rent if you can, trade down, again if you can, or make sure you can make your payments upon renewal, especially with these new CMHC requirements announced the other day.
I like that Rosenberg came to pretty much the same conclusion I did about shorting housing. That is, just either rent if you haven’t bought yet or don’t go overboard with the amount of house you buy. Validation, it tingles!
At this point in the Q&A, there were a bunch of questions about individual markets, all of them basically saying “my market is different because of x”.
David Rosenberg: I accept the premise that much of the overvaluation is in the urban areasd, especially Toronto and Vancouver. But I shudder somewhat because I recall all to well in 2005 and 2006 about how the bubbles were regional and concentrated in Florida and California. Hindsight shows it was a lot more national than people were willing to acknowledge.
I think the decline will be steeper in the Toronto and Vancouver market, but will be felt nationally. Even places in the Atlantic provinces that seem super cheap compared to the rest of the country will not be immune.
late 2010 and 2011 seems like a very short time-frame for these cracks to appear. can you explain your timing calls here?
David Rosenberg: Prices won’t stay 15%-30% overvalued indefinitely. That’s all I know. You can rack your brain trying to time the eventual blowoff but that misses the big picture.
Like every bubble, getting the timing right is tough.
Since this post is getting super long, I’ll wrap it up. Be sure to check out the entire interview, Rosenberg provides tons of great information.