While housing remains an important component of the Canadian economic system, a veteran markets analyst argued that the real estate sector is not immune to a crash similar to—or even worse than—that experienced by the United States nearly a decade ago.
In a January 30 piece for The Motley Fool Canada
, Chris MacDonald stated that the willful blindness to facts and unbiased analyses among several Canadian observers will eventually prove fatal to the national market as a whole.
“Whether it is a real estate association or a group of investors with long positions in risky real estate stocks, some people just don’t want to see what is right in front of them,” MacDonald wrote. “What’s worse, these same people are creating a bubble that will be even more catastrophic when the time comes for the market to correct.”
The analyst cautioned against the prevailing (and misplaced) thought of the Canadian system’s robustness compared to the U.S. situation.
“Many Canadians I’ve spoken to love to point the finger at their U.S. counterparts, noting that it was largely hubris that drove the financial crisis of 2007/08,” MacDonald said. “[But] if you were to pick two countries in the world that were the most similar, it would be hard to find two markets that resembled each other more on a fundamental level.”
“The reality is, right now, the household debt levels of Canadians are much worse than those in the U.S. before the housing crash,” he added. “High levels of foreign investment in Canada’s real estate market mean that a significant percentage of loans made with Canadian banks could be reneged on should the foreign investors stand to lose more than their down payments, making the potential for a ‘cascading waterfall’ of foreclosures similar to what happened in the U.S. much more likely.”
Portfolio insurance seems to be a reliable buffer should the worst case scenario come to pass, MacDonald suggested.
“Stay wary of those who say that an economic event that occurs every few decades is an impossibility. The market will correct itself, and when it does, make sure you’re insured.”
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