“Warren Buffett of Canada” Issues Grim Warning for Canada Housing Bubble

Housing BubblePrem Watsa Targets Canada Housing Bubble

You may never have heard of him, but Prem Watsa is known to many as the “Warren Buffett of Canada.” He is a brilliant money manager who currently thinks Canada’s housing bubble is ready to pop. A real estate bubble is toxic, he says.

Watsa is the founder and chief executive of Fairfax Financial Holdings Ltd. Like Warren Buffett, he sends out an annual letter to shareholders. In that letter, Watsa lays out his view of the economy and where it’s headed.

Of late, he’s warning investors to stay far away from Canadian real estate. His message is simple: there’s a housing bubble with striking similarities to the U.S. before its financial crisis. (Source: “Chairman’s Letters to Shareholders,” Fairfax Financial Holdings Ltd, March 11, 2016.)

Homeowners north of the 49th parallel should be worried. Watsa is a proven forecaster, having successfully called China’s real estate bubble, the junk bond crash, and deflation in Western economies. He knows what he’s talking about.

“Canadians have accessed their increasing real estate wealth through lines of credit easily available from the banks,” writes Watsa. “Sound familiar? This is exactly what happened in the United States before the financial crisis in 2008/2009.”

This is a devastating point. Rising home prices have fooled many Canadians into overestimating their wealth. They borrow against their homes thinking real estate prices will rise forever, but it makes them vulnerable to a downturn.

Most people forget that houses are enormously leveraged. A 10% down payment means every $1.00 of yours is matched by $9.00 of debt. Everything is fine so long as home prices are on the up and up, but history has shown us that all good times must end.

After all, it was less than a decade ago when we saw the U.S. housing market come crashing down. People were buying houses they couldn’t afford. Rather than paying down their mortgage, they were borrowing more and more, piling debt upon debt.

Then came the downturn. It was a relatively small decrease in prices, but it burst the entire U.S. housing bubble, driving millions of people from their homes.

Watsa thinks Canada is on a similar path, and he may have a point. In Toronto, the median house sells for 10 times the average family’s income. In Vancouver, that number rises to 11. Both cities seem drastically overvalued.

The numbers stand in stark contrast to the rest of Canada. If you remove both Toronto and Vancouver’s real estate markets from the national total, prices actually fell 0.3% in 2015.

Those regional disparities may be a small taste of what is yet to come. If Watsa is right, Canadian homeowners are in for a rough time.