A never-ending housing boom wiped out all short sellers


(Bloomberg) – In December, Aaron Moore bought a nondescript three-bedroom home in Brampton, a suburb of Toronto, and immediately brought it back to market after repainting and laying new hardwood floors.

In March he found a buyer. The price tag: C $ 810,000 (approx. C $ 649,000), a staggering 28% more than he had just paid.

Ordinarily, this type of quick speculation would be interpreted by economists, policymakers, and financial types as the undeniable sign of a housing bubble. But Moore has been a professional house pinball machine in the Toronto area for more than a decade, where a seemingly endless line of famous doomsday hunters have taken the other side of their real estate bet in word and deed only to prove wrong.

One of the earliest was Mark Carney, then Canada’s central bank governor, who soon took over the Bank of England, which in 2012 described the country’s reliance on home ownership as “unsustainable”. Then, one after the other, followed the wave of American financiers whose collective bet on a Canadian real estate crash received its own nickname: “The Great White Short”. Many of them, like Steve Eisman of The Big Short, applied the lessons they learned years ago when the US housing bubble burst.

When Covid-19 hit, even Canada’s own national housing agency seemed certain this was finally the end, predicting a drop in home values ​​that ranged from bad to catastrophic. Instead, the market moved on to another record year, even outperforming profits in the red-hot US market. The housing agency’s leader had to reach out to Twitter shortly before his replacement to say he’d done something wrong.

Throughout all of this, Aaron Moore just kept buying and shooting.

Standing at the Brampton house days before his listing, Moore seemed puzzled as he reflected on all of the dire predictions he’d heard over the years. They found him strange. “It would take something crazy like a communist government to lose my confidence in the Toronto market.”

According to the Bank of International Settlements, buying, selling and building homes in Canada now makes up a larger portion of the economy than any other developed country. It also raises a greater proportion of the investment capital than any other Canadian company.

Canadians’ mortgages helped create one of the largest consumer debt levels in the world, and the financial system’s exposure to these loans is double that of the US, 30% annual growth in many communities across the country.

Yet the bears who so boldly predicted the party’s end have largely fallen silent – apparently afraid to draw further attention to their money-burning calls. As they fade, a new and in some ways even more troubling question is being raised in Toronto and Ottawa political circles: what if the bubble doesn’t burst? What if prices keep rising?

Their concern is that this would only divide the belongings in Canada further apart. In the past two decades, the country’s major cities have seen the worst deterioration in housing affordability among major metropolitan areas in the world, according to urban planning consultant Demographia. This makes the traditionally surest route for Canadians to middle-class stability – home ownership – inaccessible to many who are not yet in the market, and exacerbates the inequality gap.

The least affordable cities

As more and more of the economy is devoted to housing, there is growing concern that there will be less room for more productive use of capital.

“The real estate market is on fire and there doesn’t seem to be anything to put out the fire,” said Sal Guatieri, a senior economist with the Bank of Montreal. “We spend a lot more to have a roof over our heads than to machines, factories and AI. A much larger part of our economy is now devoted to housing as opposed to non-residential or just direct spending on machinery and equipment. This is basically not healthy. “

For both real estate bulls and the reformed shorts whose bearish bets have failed, Canada’s unusual ability to accept immigrants is often high on the list of why the real estate market has not and will not collapse.

White hot north

Before the pandemic, the country welcomed more than 300,000 new arrivals annually and almost single-handedly ensured the fastest population growth of any industrialized nation in the Group of Seven. These aggressive immigration destinations are popularly backed, but all of these newcomers need housing, and in the big cities they arrive they encounter the other pillar of Canada’s housing boom: housing shortages.

Toronto and Vancouver have long struggled with some of the lowest vacancy rates in North America as slow reallocation processes resulted in new housing stocks constantly lagging demand. And when it comes to houses on the ground floor, the restrictions become even stricter. Cities are surrounded on one side by large bodies of water, and regulations limit urban sprawl.

In Canada’s metropolitan areas, Tony Soprano’s advice to buy land “because God doesn’t make it more” may be even truer than it is in northern New Jersey, thanks to local regulators. It is this lack of housing, combined with the falling interest rates caused by the pandemic – the average rate on a joint fixed-rate mortgage in Canada was 1.97% at the end of 2020 – that has actually pushed house prices to new levels as immigration has fallen. The data released on Monday showed the frenzy was only picking up steam. February saw the largest monthly increase in national home reference prices.

Refuel the fire

“Canada has zoning rules that restrict development in major metropolitan areas and keep supply under control,” said Rod Bolger, CFO of the Royal Bank of Canada, the country’s largest mortgage lender, whose internal base case expects prices to rise another 25% the next five years. “On the demand side, once immigration resumes, these two factors combined should continue to cause the traditional economy to drive higher housing inflation in Canada over the long term.”

This has concerns about shifting from a market crash to one that is rising too quickly. Things are starting to get a little crazy: In Toronto, a detached garage – without the house – recently went up for sale for $ 729,000. In Woodstock, Ontario, a city of approximately 40,000 residents southwest of Toronto, the average increase in house values ​​over the past year has been greater than the annual income of most residents.

Speculation could also increase: In January, 6% of all homes for sale in Toronto’s suburbs were purchased in the last 12 months, up from 4% last year, according to real estate agency Realosophy.

All of this has resulted in people’s ability to afford housing deteriorating rapidly. That year, Demographia named Vancouver the second lowest affordable city in the world, followed by Hong Kong. As early as 2006, the city was 15th on the list. Toronto’s rankings rose from 37th to fifth place.

And thanks to the pandemic, the two cities are now exporting their housing problems to small towns across the country as urban dwellers who are now free to work move further away in search of bigger homes and raise prices beyond what locals can afford .

These problems are starting to cause an outcry. Canadian policymakers, from Prime Minister Justin Trudeau to Toronto Mayor John Tory, have signaled that they are considering introducing new taxes to make homes more affordable. And economists at the country’s major banks have begun to warn that the market could be overtaken by a speculative frenzy if the government fails to act.

However, in Canada’s long real estate boom, there have been policy changes before that, from changes in down payment rules to taxes on foreign purchases and ownership. Ultimately, these measures turned out to be fluctuations in the speed of the long surge in Canadian home values. And with the housing stock across the country at its lowest point in history and the Trudeau government setting immigration targets to make up for last year’s slack, there is every reason to believe the trend will continue.

“Everyone has an interest in keeping this up, that’s the part I didn’t realize,” said Jared Dillian, an investor, financial newsletter writer and contributor to Bloomberg Opinion, who launched his own bet against the real estate market in 2013. He started his own bet against the real estate market pulled the plug last year. “There have been a lot of people who have said Canada is different and there are a lot of immigrants and all sorts of reasons why the Canadian real estate market is different. You were right. “

To contact the authors of this story: Ari Altstedter in Toronto at [email protected]

Kevin Orland in Toronto [email protected]

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