THE BIG SHORT 2 ELECTRIC BOOGALOO

Jared Dillian's picture
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At great risk of alienating any and all Canadian housing bulls, the more I read and study, the more I am convinced that the housing market is about to drop a daisy cutter on Canada.

I don't even know where to begin. Why don't we begin here: these guys have had rates at one percent (just like we did) for a long time (just like we did) for really no good reason (just like we did) because they had some maestro central banker that everybody trusted (just like we did) and the country is coming off of years of economic growth, really a gilded age (just like we did) which has resulted in a 10-year property bull market (just like we had) which is of course quite extended in some local areas (just like we had) and prices were up triple digit percent in some areas (just like what happened here) and now people are flipping houses and condos (just like what happened here) and there are tens of thousands of units being built (just like what happened here) and household debt is at all time highs (just like what happened here) and of course the real estate industry is more bullish than ever (just like what happened here) and are constantly going around telling people that there is no bubble (just like what happened here) and homeownership rates have reached all time high levels (just like what happened here) and the quality of construction is starting to decline (just like what happened here) and home prices have gone down for five months straight and people are saying that it's different this time and that the high prices are justified by immigration or X, Y, and Z (just like what happened here) and the banking industry is trying to tighten lending standards ex post facto (just like what happened here) but the genie is already out of the bottle (just like what happened here) and people are going around saying that houses are a better investment than stocks or bonds (just like what happened here) and the smart guys, like Shiller, are ringing alarm bells (just like what happened here) and it's different this time and it's different this time and it's different this time, but let me tell you how the situation is different, you want to know how it is different? Canada is different because they have no room to lower rates, so they are even more screwed than we were!

So let me tell you what is going to happen next. This is easy because we have seen this movie before. Liquidity is going to dry up (just like what happened here) and prices are going to start to go down (just like what happened here) and the last guys in are immediately going to have negative equity (just like what happened here) and the debt service is going to be too high (just like what happened here) and prices are going to go down more (just like what happened here) and the banks are going to tighten lending standards even more (just like what happened here) and that is going to dry up demand even more (just like what happened here) which is going to create a vicious cycle, resulting in even less demand and lower prices (just like what happened here) and then there are going to be defaults (just like what happened here) which are going to bankrupt the most leveraged lenders (just like what happened here, except this time is different, of course, how could I forget) and of course dividend yields are going to go to like 20% (just like what happened here) and the stocks are going to be impossible to borrow (just like what happened here) but it might be the trade of a lifetime, anyway (just like what happened here) but from a social standpoint, the bankers are going to get blamed for everything (just like what happened here) forgetting momentarily what the central bank did to facilitate the bubble (just like what happened here) and pretty soon there is going to be Occupy Bay Street (just like what happened here--wait a minute, that already happened) and they are going to go after rich people and legislate steeply progressive income taxes (just like what happened here) and there is going to be unbelievable levels of class warfare (just like what happened here) and the phenomenon of odious debt, where it is the banks' fault for lending the money, instead of the borrowers' fault for borrowing it (just like what happened here) and the politics are going to move very far to the left (just like what happened here), except the difference is--do you want to know the different? The difference is that Canada has historically been well to the left of the United States, so they are even more screwed than we were!

All of what I have said so far is true. Let me give you a few nuggets to chew on long after you have filed this in deleted items or left it on the floor of the bathroom. First of all I will say that over the last year, home sales are down 19.5 percent in Toronto and 31.1 percent in Vancouver. Okay, nothing to see here, move along. A recent story on CTV: "Experts Predict B.C. Real Estate Bubble Will Remain Intact." Nothing to see here, move along. From the Vancouver Real Estate Anecdote website, 3 Feb 2013: "I just opened an account with National Bank to trade bulletin board stocks...I know it's super risky, but I need the money to buy a condo." Nothing to see here, move along. According to a recent article in the Toronto Star, "Move-up buyers took advantage of the softening market last year as a chance to buy a bigger home in 14 of 16 major markets surveyed by ReMax, the exceptions being Victoria and Vancouver, where sales slumped significantly." Nothing to see here, move along. Charlotte went on a real estate website in Toronto, looking for foreclosures, and found none! Nothing to see here, move along. Oh, and by the way, the average price of a house in Vancouver is 730,000 CAD. Nothing to see here, move along. There is a website called crackshackormansion.com. Nothing to see here, move along. Here is another quote from a real estate agent: "The leapfrogging currently underway allows purchases to gain greater equity with each move, accumulating wealth in the interim...they recognize that very few financial vehicles allow them to do that with the security, tangibility, and dual purpose that homeownership represents. Nothing to see here, move along. No matter who you talk to, even Shiller, everyone thinks that there is going to be a soft landing. Since when has there ever been a soft landing, anywhere in any market, in any security, in any lifetime, in any generation, anywhere, anyhow, anything, in any universe or galaxy or quasar? Never!

The obvious pushback is that the banking system is stronger. I don't care! Nothing will obliterate a banking system faster than a property bubble. The risk lives somewhere. The game of musical chairs is about to end. A Quebecoise recently said to me, you're kind of a Canada bear, right? You guys have no idea what kind of Canada bear I am. We are about to find out if they are going to make the same mistakes that we made or different ones, possibly worse ones. I am bearish up to and including complete and utter financial collapse. As usual, the fast money community has made an easy trade hard by being early, and therefore wrong. I'm not saying my timing is perfect, but arguably it is a lot better than it was a year ago. But I have had it up to here with this soft landing stuff. Nothing ever has a soft landing. The question is (as Greenspan correctly suggested) how you clean up the mess.

From a trading standpoint, the whole point of The Big Short is that you had this group of guys that had conviction in the trade and added and added and added to the short. If you short something at 80 bucks and it goes to zero, you make 100 percent. If you short it again at 40 bucks, and it goes to zero, you make 100 percent. If you short something at 20 bucks, and it goes to zero, you make 100 percent. The trick is to manage the inevitable squeezes, possibly by buying protective calls on the way down. We will deal with that when the time comes.

Oh, and before we go, let me tell you a story about the biggest white elephant of them all: Cityplace, in Toronto. Amazing location, lake, Rogers Center, and...it's like a Chinese government stimulus project gone awry. Just look at it. The prices are crashing. They can't give these things away. The construction quality is bad. It's dead. Nobody lives there. Most of the owners are investors, not residents. It's a complete disaster. Whoever built this thing is going to take a giant bath on it. Instead of Cityplace, they should call it "top tick." I've never seen anything so grandiose, not even during our housing bubble. Lots of people are going to be surprised at what happens next in Canada, but not me. I have a longer memory than a gosh darn goldfish.

Comments (11)

Mar 11, 2013

The funny thing is that most people I've spoken to are aware of this reality. They realize that the housing market is a bubble waiting to burst.

I don't know about the rest of Canada, but in Ontario, specifically Toronto and the GTA this is common knowledge.

Most people are just riding out the good times and waiting for the crash.

Mar 11, 2013

Agreed. In Vancouver it is also common knowledge. YoY, the past two months have seen a near 50% decline in new housing starts in the Metro Vancouver area.

However; the one thing that speaks for a "softer" landing than what happened in the US is that there are less NINJA loans, teaser rates etc.

Mar 11, 2013

Although I generally agree with your thesis, I disagree that it will be as much of a calamity as you predict. The use of securitization and opaque financial products is much lower than in the US, so although you may have a housing correction, it likely won't develop into a complete collapse of the financial system for this reason. You also have much higher lending standards than in the US and no "teaser" rate loans that were given to people that probably shouldn't have been given loans.

This argument, while thorough and thought out, reminds me of a discussion I recently had with a colleague about the incentives of market commentators to always be more extreme than everyone else. The idea is 1) that if you follow the herd, there is no value added to your analysis and thus you have no product to sell. And 2) if you predict some extreme scenario, such as a massive collapse in the Canadian housing market, and you are right, you are heralded as being extremely intelligent and may have a book written about how smart you are for seeing something everyone else missed. If you are wrong, no one cares because people have forgotten about your doomsday scenario and it is lost in internet archives. This post reminds me of that so I take it with a grain of salt - although I appreciate the analysis and am hoping to read your book "Street Freak" soon.

Mar 11, 2013
nl886:

This argument, while thorough and thought out, reminds me of a discussion I recently had with a colleague about the incentives of market commentators to always be more extreme than everyone else. The idea is 1) that if you follow the herd, there is no value added to your analysis and thus you have no product to sell. And 2) if you predict some extreme scenario, such as a massive collapse in the Canadian housing market, and you are right, you are heralded as being extremely intelligent and may have a book written about how smart you are for seeing something everyone else missed. If you are wrong, no one cares because people have forgotten about your doomsday scenario and it is lost in internet archives. This post reminds me of that so I take it with a grain of salt - although I appreciate the analysis and am hoping to read your book "Street Freak" soon.

Nothing new here. Seems like every other writer is predicting a massive collapse in the Canadian real estate market. Seems like they're all oblivious to a certain phenomenon called demand and supply...

"And the last thing, how much do you charge for a career consultation and would you accept a check?"

Mar 11, 2013

Of course this guy uses Vancouver as an example! One of the most volatile real estate markets in North America! Funny how he omitted all the Asian money that flooded the Vancouver market in the past few years driving up prices like crazy and the prairies which have seen a huge influx of cash due to the oil sands. Then there's Montreal that is heating up but isn't that bad because of all the french bs keeping investors away. Oh and he also forgot to mention how stronger regulations were put in place last summer meant to cool down the market and how the insane subprime loans that were being handed out are almost non-existant in Canada. Why would anymore pay this guy for his newsletters?
Oh and just to clarify, there will most probably be a correction but its nowhere near the bubble that took place in the states.

"And the last thing, how much do you charge for a career consultation and would you accept a check?"

Mar 11, 2013

I was going to write a much longer comment, but I'll just say that I love the Breakin' 2 reference. Good work.

Mar 11, 2013

Two issues that lead to the US Housing Collapse that are much less of an issue in Canada.

1) Non-Recourse Mortgages
2) Sub Prime Mortgages

Mar 12, 2013
OB23:

Two issues that lead to the US Housing Collapse that are much less of an issue in Canada.

1) Fraud
2) Massive Fraud

Fixed*

If the glove don't fit, you must acquit!

Mar 12, 2013
OB23:

Two issues that lead to the US Housing Collapse that are much less of an issue in Canada.

1) Non-Recourse Mortgages
2) Sub Prime Mortgages

Yep, I stopped reading somewhere.
I probably won't touch cityplace in this market...though I admit it looks hot.

The Auto Show

Mar 13, 2013

Why is Montreal's market still doing well?

Mar 16, 2013
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