Is Canada’s Warren Buffett Right About Canada’s Housing Bubble?

Prem Watsa, the CEO of Fairfax Financial Holdings Ltd. (TSX:FFH), is not bullish on Canadian real estate. Here’s how his company is prepared to weather the storm.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Prem Watsa, the man that many call Canada’s Warren Buffett, had some harsh words to say about Canada’s housing market in his most recent letter to Fairfax Financial Holdings Ltd. (TSX:FFH) shareholders:

“As we have said a few times before, the collapsing commodity prices will not spare Canada. Canadian housing prices, particularly in Toronto and Vancouver, have gone up significantly, driven by lax policies at CMHC (Canada’s equivalent to Fannie Mae and Freddie Mac). Canadians have accessed their increasing real estate wealth through lines of credit easily available from the banks. Sounds familiar? This is exactly what happened in the United States before the financial crisis in 2008/2009. If history is any guide, this will reverse and we continue to be shocked at the massive debt levels incurred by young people (below 45 years old), with no financial buffer against hard times as the C.D. Howe report, Mortgaged to the Hilt, shows.”

Watsa is only the latest pundit to come out with a bearish prediction on Canadian real estate. It seems like countless others think the country is in a massive bubble that is fueled by low interest rates and easy credit.

But at the same time, we’ve been hearing these predictions for years. Even as far back as the Great Recession, many Canadian market commentators were saying the market was overvalued–a call that doesn’t look great in hindsight.

Is Prem Watsa right? Let’s take a closer look.

The case for Watsa

Looking back over the last few years, Watsa has been pretty accurate on his macroeconomic predictions.

In 2010 he started warning investors about a massive real estate bubble in China. In 2011 he began to talk about a commodity bubble that would eventually collapse, taking Canada down with it. In 2012 Watsa warned about the low yields in so-called junk debt. And in 2014 Watsa announced that Fairfax had taken a massive bet on deflation, buying Consumer Price Index-linked derivatives that would pay billions if deflation hit the western world in a big way.

Thus far, the predictions from 2010-12 are looking pretty accurate. The demand for commodities from China has collapsed as that nation has really cut back its spending on infrastructure and building out real estate. And yields on riskier securities are much higher than they used to be, especially in commodities.

Besides, the fundamentals scream “overvalued” in certain markets. In Toronto it costs approximately 10 times the average family’s income to buy a median house. That’s cheap compared to Vancouver, where it costs more than 11 times the average family income to buy a regular house.

Or, to put it another way, the price-to-rent ratio in downtown Vancouver is 22.5 times, with Toronto’s not far behind. That’s a return on investment of just over 4%, and that doesn’t even include any expenses. Once an investor pays the interest on the mortgage, the taxes, and a little for maintenance, there’s not much left in profits.

The case against Watsa

There’s really only one thing we can say against Watsa and all the other pundits who called for the bubble to pop long ago.

The market has been elevated for years, and isn’t slowing down–at least in Toronto or Vancouver. With these two cities remaining quite popular with immigrants, there’s the argument that like New York, London, or Hong Kong, the value of real estate in these cities will remain sky high simply because there’s so much pent-up demand.

Why Fairfax is a good choice

For investors worried about the Canadian housing market, Fairfax Financial is a solid choice.

Firstly, the company has no exposure to Canadian real estate whatsoever. Many of Canada’s other top insurers have exposure to the market, whether it’s through lending or owning physical real estate.

A marked decline in Canada’s housing market would likely be accompanied by bearish stock markets as skittish investors move to the safety of cash and near-cash instruments. Fairfax is protected against such a move, since it has hedges to cover much of its equity portfolio.

If you’re a believer that Canada’s housing market is ripe for a fall, there are worse places to be in the financial sector than Fairfax shares.

Should you invest $1,000 in BlackBerry right now?

Before you buy stock in BlackBerry, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and BlackBerry wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

Investing

$1,000 Ready to Deploy? 3 Quality TSX Stocks for Canadian Investors

Amid improving investors sentiments, the following three Canadian stocks offer excellent buying opportunities.

Read more »

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

RRSP Investors: 3 Canadian Dividend Stocks to Buy on Dips

These stocks have strong track records of dividend growth and now trade at discounted prices.

Read more »

concept of real estate evaluation
Dividend Stocks

Beyond Real Estate: These TSX Income Generators Could Deliver Superior Passive Income for Canadians

These two TSX dividend stocks could offer Canadian investors a reliable income stream and strong long-term upside, without relying on…

Read more »

Confused person shrugging
Dividend Stocks

Better TSX Dividend Stock to Own: Manulife or Sun Life?

While Sun Life stock has outpaced Manulife in the last two decades, which dividend-paying insurance giant is a good buy…

Read more »

A plant grows from coins.
Energy Stocks

Got $25,000? Turn it Into $200,000 in a TFSA as Canadian Dollar Gains

This energy stock may not have a high dividend, but it certainly has a high rate of growth to look…

Read more »

coins jump into piggy bank
Dividend Stocks

How to Use Your TFSA to Earn $1,057/Year in Tax-Free Income

Investing $5,000 in each of these high-yield dividend stocks can help you earn over $1,057 per year in tax-free income.

Read more »

data analyze research
Tech Stocks

Is BlackBerry (TSX:BB) a Buy in May 2025?

While its recent downturn might not look pretty, it might be the best opportunity to buy BlackBerry (TSX:BB) stock and…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Investing

Where I’d Invest the New $7,000 TFSA Contribution Limit in 2025

If you have $7,000 for the new TFSA contribution increase, here are three stocks I would contemplate adding to the…

Read more »