05/09/2013 03:07 EDT | Updated 05/09/2013 03:11 EDT

Canadian Housing Bubble? Steven Eisman, Hedge Fund Manager, Issues Warning


A hedge fund manager who became widely-known for predicting and making money off the bursting of the U.S. housing bubble is warning that Canada’s real estate market may be repeating America's mistakes.

Steven Eisman, who was featured prominently in The Big Short, a book about investors who made money off the recent economic crisis, told a conference in New York City Canada’s lenders are vulnerable to a slowdown in the housing market.

Eisman blamed “misaligned” government policies for creating a potential bubble in Canada’s housing market, the Wall Street Journal reported.

He said Canada’s government-backed mortgage insurer, Canada Mortgage and Housing Corp. (CMHC), has insured too many mortgages and is now coming close to a $600-billion cap on the value of mortgages it can back.

When something gets that big, even governments get nervous,” he said, as quoted at the New York Times.

He echoed a point made by some other critics in recent years that the CMHC has become too loose in handing out mortgage insurance, and has helped create a housing bubble by making it relatively risk-free for banks to hand out mortgages to consumers. (The CMHC — and, by extension, taxpayers — are on the hook if an insured mortgage goes bad).

Eisman singled out Home Capital, a Canadian mortgage lender that loans money to people rejected by banks (what in the U.S. would qualify as a “subprime” loan), as a company that could be in deep trouble amid a housing downturn.

“If housing rolls over, this company is going to have problems,” he said.

(Home Capital’s problems haven’t yet appeared, though: The company this week reported a 13.7-per-cent increase in earnings and said it’s confident in Canada’s housing market.)

Eisman’s comments come as new data paints a conflicting picture of Canada’s housing market, but clearly shows that a bursting housing bubble hasn’t materialized, at least for now.

While data from CMHC shows housing starts fell a whopping 25.4 per cent in the year to April, 2013, StatsCan’s new house price index, released Thursday, shows house prices remain stable, rising 0.1 per cent to April from the month before, a slightly slower pace of growth than seen in earlier months.

That has led some observers to conclude Canada’s housing market is experiencing a “soft landing,” not a U.S.-style crash.

The nature of the slowdown “suggests we are not crashing, people are not panicking, especially condo builders," CIBC World Markets chief economist Benjamin Tal said recently.

So Who’s Right?

A clear divide in opinion is growing between Canada’s institutions and international investors on the state of the country's housing market.

While the “soft landing” theory is generally espoused by Canada’s banks, real estate groups and mortgage brokers, many investors — particularly hedge funds — are betting heavily against Canada's economy, and predicting that Canadian banks and the loonie will suffer from a slowing housing market.

A California-based hedge fund recently went “all-in” against Canada’s economy, placing 95 per cent of its clients’ assets into bets bank stocks and the loonie will slide amid a housing slowdown.

Marc Faber, publisher of the notoriously pessimistic Gloom, Doom and Boom Report, told a discussion panel at the Globe and Mail Wednesday he believes Canadian housing may have entered a bubble, and not just the famously expensive Toronto and Vancouver markets, but Calgary and other major cities as well.

Yet here at home, investors are much more positive.

Peter Munk, the founder of Toronto-based Barrick Gold, the world’s largest gold producer, recently decided to put his money into financing Toronto condo projects.

The Globe described it as a “contrarian” move, considering condo sales in Toronto fell 55 per cent in the first quarter of this year, compared to the same period in 2012.

“That’s the wonderful thing about the markets; if all of us had the same view, we couldn’t afford to buy anything,” Munk said. “It’s wonderful to have opposing views.”

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