Everybody knows that Canada has a housing bubble. Soon it will pop like the American one from the mid-late 2000s. Devastation will follow and it’s why hedge funds and American investors are short Canada.
Recently the IMF noted that Canada is the fastest growing G7 Nation. I got that call right in this previous post. That sounds good but remember the housing bubble. Oil, precious metals and base metals seem to be perking up which tend to be good for Canada. But remember the housing bubble. The Bank of Canada is raising rates and the currency has been strengthening. That should pop the bubble.
The idea portfolio has been long Canada all of the year based on my view that commodities bottomed back in 2016. I wrote about it in the Reflation Trade Thesis (here too). This blog suggested the Loonie would trade to 80-81 cents and was long right up to the rally where I made the mistake of second guessing myself based on another persons opinion (here, here, here, here, here). I have written consistently that the Canadian economy is stronger than others believe. You can find all my Canada posts here. I tend to write a lot about my home country.
The long Canada trade has not worked, yet. As seen in the below chart, Canada has been one of the worst performing markets this year. It is up, but not as much as others.
I think the reason why is the housing bubble narrative. Until today I have not challenged that view. I have continued to believe that the notion was just early. However, it just won’t blow up.
George Soros once said something like “to outperform in markets, (I cannot find the quote because it seems when you Google Soros all you get is conspiracies about how he runs the world and is funding everything from protests to migrant movements) that you have to figure out what is wrong with the narrative everyone believes.”
Today I made the below chart. Either I am just about to high tick the Canadian housing market and its all down hill from here or I just figured out what is wrong with the consensus view.
When compared to Real Disposable Income, Canadian house prices have just started to rally like the US markets did in the mid 2000s. In fact compared to disposable income Canadian home prices have only surpassed 1993 levels.
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