Bloomberg Financial Report shows that the property market in Toronto is unusually strong
Goldenwise Capital, Canada’s largest Chinese hedge fund investment company, is aggressively shorting the Canadian real estate sector, according to sources.
The Goldenwise Capital headquarters is located in Toronto, Ontario, Canada. It is a low-key hedge fund investment company, managing hundreds of millions of dollars of assets. It is reported that the investment team at Goldenwise Capital is mainly Chinese background, most of whom with renown overseas school and Wall Street work background. It is currently Canada’s largest Chinese hedge fund investment management company, serving the global financial institutions and high-net-worth investors for management of their investment. The Goldenwise Capital team’s historical performance is outstanding. From 2008 to present for nine consecutive years, whether bearish or bullish market, they kept earning every year. Especially in the past few financial crisis, the team is not only profitable, but with excellent earnings.
Goldenwise Capital has strategically laid out in Canadian real estate industry for a while. The company’s press release shows that their investment research team in the real estate sector has increased significantly over the past year. Recently, there are two senior real estate industry investment fund managers to join in: one is from Canada’s largest insurance investment company Fairfax – Maple Finance (a large Canadian listed insurance company, its founder known as the Canadian Buffett, is the BlackBerry’s controlling shareholder), and the other is from an Italian real estate PE investment fund company.
Into 2017, real estate market in Toronto, Canada is unusually strong; the house price in the core regions is calculated and updated everyday in the past two months while almost every house is facing biddings between many buyers. Many real estate buyers sitting on the fence and the housing market short-sellers have unanimously changed their mind, acknowledging that house prices in Toronto will continue to rise. At this point of time, the Goldenwise Capital’s unusual move to the real estate industry does incite investors’ imagination. It is easy to reminiscent of the US real estate market before the financial crisis in 2008.
“The Big Short” (Movie)
“While the banks were having a big old party, a few outsiders saw what no one else could.”
This is a true portrayal of hedge fund predators in the movie “The Big Short”. If you have seen the movie, or read the original, you will understand what a moment it is to make money before the real estate bubble is broken.
The hedge fund investment genius with unique vision, piercing through the real estate bubble under the false prosperity before the eve of the US financial credit storm in 2007, have gained huge by shorting real estate subprime mortgage and become a very small number of profittors with a large amount of profit in the 2008 global financial crisis. Ten years later in Canada, shall the same historical opportunity recur?
Intensified Canadian real estate bubble?
A lot of data show that the Canadian real estate bubble seems to have been at stake, and there are too many similarities to the US market ten years ago.
The real estate bubble began in Vancouver. In the past three years, housing prices in Vancouver soared rapidly, as it is in Toronto today. And now, under the government’s regulations, the sales volume of Vancouver’s housing market has been largely frozen… Data from Canadian Real Estate Association show that, after two consecutive years of climb, the Greater Vancouver Area average housing prices in January 2016 reached 1.04 Million Canadian dollars. But the housing price trend turned around from mid-2016. As of January 2017, the average housing price reduced to only 878,000 Canadian dollars; housing prices fell 19% within only a year.
In Toronto today, as previously in Vancouver, the real estate bubble continues to inflate. After the housing prices rising 15% the year before last year, they rose another 22% fanatically last year. Till January 2017, the average house prices in GTA rose to 771,000 Canadian dollars, 140,000 Canadian dollar increment compared to the same period last year.
Real estate investment dream is about to extinct?
In North America, once house prices rise faster than the income level of residents, usually they will not continue for too long. The high household debt ratio, resulting from the house price increase over-pacing the residents’ income, is exactly the same market situation as that before the US subprime crisis outbreak in 2007. Now we see the same scene in Canada.
The following chart shows us the average price of housing prices in the United States and Canada, relative to the median income of residents (multiples); the higher the price, the higher the index (multiple). As seen from the figure, the US housing prices in 2005 to 2007 soared to nearly six times the average income of residents. And now in Canada it has reached a similar situation, the index (multiple) up to 5.76.
Investment guru Oakett Capital’s Chairman Howard Marks has said that there are two conditions for an asset bubble burst: both the price and leverage are high enough. The leverage Canadian residents carry is considered high enough in any standards, and the price has reached a very high level. It is very difficult to predict the bubble burst in time; and we hope that in accordance to the real estate bubble bursts in Japan and the United States, usually it will go through 6-7 years rapid growth and 2 times to 2.75 times price increase. The second chart below (in Chinese) illustrates GTA’s gains in the past seven years or so, about 2.3 times. If history can tell some things, the Canadian real estate bubble burst seems to have been visible at all times. Some often say “This time is different”; and as we see it, when the asset bubble bursts, This time is still the same.
In addition, some non-bank mortgage institutions have long been preys in the hands of Wall Street hedge funds. Home Capital Group Inc. is one of them. The company receives short-term loans from banks and other financial institutions and then lends them to buyers very aggressively. Under the pressure of hedge funds, the company last year admitted to the release of at least 2 billion Canadian dollars of Fraud Mortgage, and also executives suspected of insider trading. The stock price has fallen sharply over the past two years, with the market value shrinking by nearly half (See figure below). Another company worthy of attention is Canada’s largest mortgage insurance company Genworth MI Canada. The amount of short sold company stocks has reached the historical high.
Reference reading: Meet the Wall Street Short Seller Betting Against Canadian Real Estate