• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Real Estate

Shorting Canadian Banks on Housing Fears

What follows boom is usually a bust.
By JARED DILLIAN Oct 17, 2013 | 11:00 AM EDT
Stocks quotes in this article: CM, TD, RY, BNS, BMO

I am massively short Canadian banks and the Canadian dollar. It is one of my largest positions. 

Canada has a housing bubble. It is indisputable. The only thing that investors are arguing about is how it is going to play out. To which I say: has there ever been a soft landing in anything, anywhere? 

Housing prices have risen dramatically across the country, but especially in Vancouver and Toronto, which are destinations for immigrants. Prices went parabolic in Vancouver (and have leveled off since) -- wealthy Chinese often buy Vancouver property to move money out of China and they are not terribly sensitive about price. 

In Toronto, there are more high-rise buildings under construction and more cranes in operation than any city in the world (including places like Beijing and Dubai). Tens of thousands of condos come online each year. It is not sustainable.

What's worse, debt-to-income levels in Canada have risen to levels that are much, much higher than the U.S. had at the peak of its own housing bubble. It is a classic case of over-investment and mal-investment. 

How did it happen? The usual culprit -- Bank of Canada Governor Mark Carney lowered interest rates to 1% in response to the financial crisis in the U.S. He kept them there for years, even as Canada's economy roared and housing prices ballooned. He literally made the same mistakes that Greenspan and Bernanke did -- there is no visible consumer price inflation in Canada, but considerable asset price inflation. And it looks likely that Carney's successor, Stephen Poloz, will only ease policy further. 

Canada bulls are quick to point out that the subprime market is not well developed in Canada like it was in the U.S., and that mortgage derivatives are virtually nonexistent. They also say the banks are healthy and well-capitalized. Additionally, the Canada Mortgage and Housing Corporation (the equivalent to the Federal Housing Finance Agency in the U.S.) tightened mortgage standards in the last year specifically to prevent such a crisis. 

Still, it does not take much of a house price decline to wipe out the equity in a mortgage. One could make the argument that the lack of a robust derivatives market has left all the risk concentrated on bank balance sheets. Bull markets and bubbles do eventually come to an end, and what follows boom is usually bust. 

It's hard work being short Canadian banks, for lots of reasons. 

First, they pay out massive dividends -- most of the big banks are paying 4% yields. That is a pretty steep cost of carry, especially when taking into account the cost to borrow the stock. I will point out, however, that financial stocks with high dividends make the best short candidates (think NEWC and LEND during the crisis) because the banks are slow to change their dividend policy and the high dividends serve as a defense against short sellers. 

Second, the Canadian stock market is pretty concentrated in two sectors: financials and basic materials, and the big banks are pretty much a part of every Canadian's portfolio. It seems as though there is a perpetual bid to these names. 

Third, the housing market is just some undead monster that refuses to surrender. Just the other day, the existing home sales number came out, and it's skyrocketing. It's hard to tell, but it looks to me like the Canadian housing is in blow-off phase. 

I'm short a lot of the Canadian Imperial Bank of Commerce (CM) and a little Toronto Dominion (TD), the U.S.-listed shares of each. CM has the most exposure to residential mortgage finance, and out of the Big Five, CM trades the worst. The others are the Royal Bank of Canada (RY), The Bank of Nova Scotia (BNS), and Bank of Montreal (BMO).   

I'm up a little on CM and down a little on TD. I would add to these positions if they traded lower, but I'm big enough as it is. The stocks have rallied in the last few months, making great entry points for new shorts. 

This is a high conviction idea. If the housing bubble plays out like I think it will, these stocks over the next few years will be worth something close to zero.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Dillian was short CM, short TD and short CAD.

TAGS: Investing | U.S. Equity | Financial Services | Real Estate | Stocks

More from Real Estate

Global REIT American Tower Is Poised for a Rally

Bruce Kamich
Jun 21, 2022 10:13 AM EDT

Here's what traders could do.

Dozens of Stocks Suspended in Hong Kong Due to Problems in Accounts

Alex Frew McMillan
Apr 1, 2022 9:00 AM EDT

After missing yesterday's deadline day for filing full-year 2021 figures, many Hong Kong-listed, China-focused companies saw their shares stop trade.

Chinese Property Stocks Leap But Red Flags Abound

Alex Frew McMillan
Mar 30, 2022 9:48 AM EDT

There's a mounting list of Chinese developers that say they can't file their 2021 annual accounts in time, a likely sign of deeper trouble.

Buyer Beware on China Stocks

Kevin Curran
Mar 23, 2022 3:45 PM EDT

Intrigued by the wild swings in many of these stocks? Caution is warranted.

Let This Value Investor Take You on a Wild Ride to Argentina

Jonathan Heller
Mar 4, 2022 11:00 AM EST

From time to time when it has appeared to be cheap enough, this has been a rewarding foray into a risky world.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 12:04 AM EDT PAUL PRICE

    Two Good Signs -- Especially for Small-Cap Investors

  • 12:10 AM EDT PAUL PRICE

    More Insider Buying in American Woodmark (AMWD)

    American Woodmark , which I've discussed here fr...
  • 08:55 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The 10 personality traits of successful traders an...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login