In a letter to the shareholders of Fairfax Financial Holdings Ltd., businessman Prem Watsa warned that the grave symptoms of a breaking point similar to the 2008-09 financial crisis have manifested in Canadian markets.
Watsa, considered by many as Canada’s version of Warren Buffett, said that the country will not escape the effects of the commodity crashes.
“Canadian housing prices, particularly in Toronto and Vancouver, have gone up significantly, driven by lax policies at CMHC (Canada’s equivalent to Fannie Mae and Freddie Mac). Canadians have accessed their increasing real estate wealth through lines of credit easily available from the banks,” Watsa wrote, as quoted by The Motley Fool Canada
The Fairfax Financial CEO said that this is the exact situation encountered by the U.S. just before the crisis: A fundamentally unstable bubble that is buoyed only by easy credit and low interest rates.
Recent developments are especially alarming, since the ROI in Vancouver investments is only a little over 4 per cent. The price-to-rent ratio in the city also shot up to 22.5 times, with Toronto having a similar proportion.
“If history is any guide, this will reverse and we continue to be shocked at the massive debt levels incurred by young people (below 45 years old), with no financial buffer against hard times,” Watsa stated.
Other experts begged to differ, however, pointing at the sustained strength of market performance in heavyweights such as Toronto and Vancouver. While the cost to purchase an average house in the two cities is 10 to 11 times the benchmark family income, continuous demand in the sector will fuel the national economic engine for years to come.
“With these two cities remaining quite popular with immigrants, there’s the argument that like New York, London, or Hong Kong, the value of real estate in these cities will remain sky high simply because there’s so much pent-up demand,” analyst Nelson Smith wrote in a piece for The Motley Fool Canada