Top Canadian economist defends country’s housing market as U.S. hedge funds whip up fears of major correction

By Garry Marr, Financial Post, April 10, 2014 - Benjamin Tal never imagined himself the defender of the Canadian housing market, but the deputy chief economist at CIBC is doing exactly that as he squares off against a U.S. commentator calling out what he sees as a bloated real estate market.

The Thursday morning debate, closed to the public, is part of a global investor conference, held in conjunction with the International Monetary Fund spring meetings in Washington D.C. The conference will also include a presentation from Alan Greenspan, the former chairman of the U.S. Federal Reserve.

Mr. Tal is facing Seth Daniels, managing Partner of JKD Capital, who believes Canada is set for a significant housing correction followed by a recession — something driving the “short Canada” philosophy that evolved in the U.S. and globally.

“Everything is relative because I’m not exactly the most bullish guy [on housing],” said Mr. Tal, who has called for a 10% to 15% correction in prices. “The only issue is the magnitude.”

The difference is important because investors abroad shorting the Canadian market have the ability to impact the economy by creating enough negative sentiment to impact consumers in the country, said Mr. Tal.

He’ll be presenting his argument to a virtual who’s who of leading U.S. hedge fund managers and some leading economists. Among the audience will be Paul Leff, managing director of Perry Capital and Myron Samuel Scholes, a Nobel Laureate in Economic Sciences famed for the Black-Scholes model which provided a framework for valuing options.

The theory among those who want to short Canada is that a credit bubble is forming here and that could lead to an economic collapse that is much bigger than the actual bubble. The critics will point to debt levels which are still almost at all time-highs with household debt about 164% of disposable income.

Mr. Tal says part of the problem for people shorting Canada is they don’t have access to the same information he has about the market because the government is not providing enough publicly accessible information.

“It’s not just good enough to look at the credit you have to see what kind of credit we are talking about,” said Mr. Tal, who made headlines this month with his calls for more data on the housing market and jobs. As a CIBC economist, he can get a pretty good read on the credit of Canadians because his bank has a sizable chunk of the market across the country.

While the home prices continue to reach all-time highs month after month, Mr. Tal says that, in itself, is not a reason to believe a collapse is imminent.

He says the whole issue of overbuilding is based on simplistic reports of people seeing cranes everywhere and adds new home construction was only 10% above household formation over the past 10 years while in the U.S. it was 170% before the market collapsed there.

In Mr. Daniels, he will be facing someone who firmly believes the Bank of Canada and the federal government are responsible in part for a collapse he says is coming.

“The role of government sponsored credit insurance in exacerbating the artificial credit boom is unique to Canada – I’m not aware of any other economy in the world that has been distorted to such a degree by credit insurance. So a large part of the Canadian credit bubble can be traced to the existence of the [Canada] Mortgage and Housing Corporation,” he said, in a recent interview.

Consumers with less than a 20% down payment in Canada must get mortgage default insurance — a market that CMHC retains majority control of. That insurance is backed by the federal government with a potential liability of up to $1-trillion.

Mr. Tal will point to defaults in Canada being well under 0.2% and even in the United States defaults at their worst reached only 6% to 7% of all mortgages.

“All these managers, I can tell you at sometime in 2006, somebody told them ‘don’t worry about sub-prime’. So they’ve been burned,” said Mr. Tal, adding the key is the Canadian market is much different than its U.S. counterpart.

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