VANCOUVER — Large Wall Street investors who made billions when the U.S. housing market collapsed in 2008 are now betting real estate values in Vancouver and other Canadian cities will crash, financial insiders say.
The 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 that Canadian banks, mortgage insurers and “subprime” private lenders will lose money on unpaid loans when property prices fall.
“The cross currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates,” said Marc Cohodes, once called Wall Street’s highest-profile short-seller by The New York Times. “A house is something you live in, but in Vancouver you guys are trading them like the penny stocks on Howe Street.”
He says Vancouver real estate has reached peak insanity, and any number of factors could trigger a collapse.
Local real estate professionals predicted the U.S. investors are likely to lose their shirts betting against Vancouver property, which they described as a special market thriving on international demand.
But one Canadian housing analyst who advises U.S. clients, including Cohodes, said major investors are currently “building positions” against Canadian housing targets. They are forecasting a raise in historically 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 Canadian 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.”
This is although housing markets in Vancouver and Toronto have continued to rocket higher since international short-sellers started circling in 2013.
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, because they believe 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 Cohodes, take the opposite approach.
He has come out of semi-retirement on his chicken farm in Northern California to make targeted bets against “subprime” Canadian lenders, who make loan to borrowers rejected by traditional banks.
The Canadian housing analyst noted 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 recently reported.
While short sellers point to Vancouver as the most extreme housing bubble in Canada, the analyst noted that some investors believe a massive flow of investment from Mainland China makes the market impervious to corrections.
Others speculate that if China’s economy slows dramatically, Vancouver housing will 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.”
However, one of the world’s most influential investors — Laurence D. Fink, head of the world’s largest asset fund, BlackRock Inc. — recently declared 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,” he told a conference of investors in Singapore.
Jonathan Cooper of MacDonald Realty Vancouver says evidence is mounting 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 added he understands short sellers are betting against Vancouver, but he believes the speculators will lose.