Canada's Housing Market: The Next Big Short?

Condo's under construction in Toronto, Ontario as Canada's housing market begins to slow.
Brent Lewin | Bloomberg | Getty Images
Condo's under construction in Toronto, Ontario as Canada's housing market begins to slow.

Steve Eisman, the hedge fund manager who famously bet against mortgages in the United States in the run up to the 2008 financial crash, has recommended investors now bet against Canada's mortgage lenders and banks.

Eisman, founder and portfolio manager of hedge fund Emrys Partners, rose to prominence with subprime mortgage bets that were chronicled by Michael Lewis in the book "Big Short".

Eisman is wary of Canadian mortgage originator Home Capital Group in particular, according to Reuters. And investors may have taken his advice; the stock is down 4 percent since Wednesday.

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"If housing rolls over, this company is going to have serious problems," Reuters cited him as saying at the Sohn Investment Conference. The news agency said he added that the housing market is troubled and estimated the domestic funding gap for the six big Canadian banks at roughly $427 billion.

House prices in Canada have doubled in the last ten years, according to the Teranet-National Bank Composite House Price Index. The surge in the index, which measures price changes for repeat sales of single-family homes, has stuttered this year falling back by 0.09 percent in what some believe is a cooling off period.

This year's figures show a long slow winter of decline following the government's move to tighten mortgage lending rules. In July 2012, Finance Minister Jim Flaherty unveiled major changes to the limits of what state-owned Canada Mortgage and Housing Corporation (CMHC) is allowed to insure.

Last year, outgoing governor of the Bank of Canada Mark Carney added his weight to the debate by warning on numerous occasions of elevated household debt levels which represented a significant threat to the financial system.

Fears remain that Canadians aren't listening as the ratio of credit market debt (such as mortgages) to disposable income continues to rise, according to Statistics Canada, reaching 165.0 percent in the last quarter, compared with 164.7 percent in the previous.

Marc Faber, the contrarian investor and publisher of the Gloom, Boom & Doom Report shares similar thoughts, telling Canada's Globe and Mail newspaper on Wednesday that the real estate market is key to his sour outlook on Canada.

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"I don't think Canada is very inexpensive any more. I travel there all the time, it's rather on the expensive side. I think there's significant risk to the Canadian economy," he told the newspaper.

The Canadian housing market may very well be in bubble territory, he said, adding that in addition to Toronto and Vancouver, other cities such as Calgary were also seeing significant price gains.


But not everyone agrees that a bubble is brewing. "The correction in the domestic residential real estate market is completely overhyped outside of the imploding Vancouver and Toronto condo markets," David Rosenberg, chief economist and strategist at Canadian wealth firm Gluskin Sheff said in a research note Thursday. "For the fourth month in a row, starts have come in below underlying demographic needs of around 185,000 units per year, and that is a critical part of the process in terms of having prices find a bottom, sooner rather than later."

Bob Stein, deputy chief economist at First Trust Advisors believes Canadian home prices appear to be well above fair value, but won't go as far as saying we are in bubble territory.

"I'll leave putting a 'bubble' label on it to others, but I would expect Canadian home prices to decline over the next 3-5 years," he told

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Mortgage loans in Canada are mostly "recourse" loans, Stein said, so borrowers cannot just walk away from their homes if they get underwater and larger borrowers are made to buy mortgage insurance through the government.

Stein added that the striking rise is household debt is not necessarily Mark Carney's fault. The governor joins the Bank of England in July with an economy that has a far higher level of governmental debt and a significant budget deficit.

"Canada is a commodity producer, and commodities have done very well in the past decade, so, in part, strong price gains in Canadian real estate might be a side effect," he said.

By's Matt Clinch; Follow him on Twitter @ mattclinch81