“A primary reason for the considerable short interest is that U.S. hedge funds are betting on a U.S.-style housing meltdown sweeping Canada’s real estate market. They believe this would take Canada’s banks to the brink of collapse because of their considerable exposure to housing,” columnist Matt Smith wrote in his analysis for The Motley Fool Canada
The conclusion that Canada is running headlong towards a housing crash similar to what the U.S. experienced during the subprime mortgage crisis a decade ago is “fanciful at best”, Smith added.
“[The] characteristics of Canada’s housing market, the structure of its financial system, and management of risk within Canada’s banks are very different to what was witnessed in the U.S. during the run up to the housing meltdown,” the analyst explained.
“[The country’s] households are not as vulnerable to economic shocks as the extremely high household debt-to-income ratio of 171% indicates,” Smith explained. “Furthermore, on average, Canadian households have 73% equity in their homes, giving them considerable wiggle room if they experience financial difficulties.”
In addition, Canada’s far stricter stance on loans has prevented the proliferation of subprime mortgages.
“These factors coupled with the banks’ conservative lending criteria significantly mitigate the financial impact on Canada’s banks if there is a sharp or protracted downturn in the housing market,” Smith concluded.
The shorting of Canadian banks’ stocks by investors—who are wary of the risks that the country’s housing sector is facing—is founded on a “fundamental misunderstanding” that conflates Canada’s situation with that of the U.S. a decade ago, according to an industry observer.