How to Play the Canadian Housing Bubble?

There is a large bubble in the Canadian housing market. Of this I am convinced and this article operates on that assumption, but how can you profit from it?

There have been countless articles written describing and proving this bubble’s existence. I might write a similar article eventually, but it feels like retreading. There is a bubble and it will pop eventually. Anyone who pretends to know when it will pop is a snake oil salesman (people like Garth Turner. Read the archives on his blog. He’s always pretty sure when the bubble will pop). That being said, there have been recent signs that indicate that it might happen soon. Sales are slowing and prices are declining in certain hot regions. However, other regions are seeing double digit year over year price increases, so it’s impossible to say.

But yes, there is a bubble. And when this bubble pops anyone who owns a house in Canada, but most especially in the superheated metropolitan markets, is going to lose a ton of equity (or go deep underwater). While there have been many articles written about the existence and the scope of the bubble, I can find few that offer any suggestions on how to profit from it. I have few ideas that I would like to share with you today

How to play the bubble depends largely on your situation. If you currently own a home in Canada – especially in Vancouver, the GTA, or a handful of other superheated markets – the best way to play the bubble is to sell it on the open market and rent a home. Pretty simple. You can permanently realize any gains you’ve experienced and use that money to again buy a house once the market has collapsed. Even if you own a home and you don’t currently have an equity in it, you should sell it and rent because you do not want to go underwater.

If you don’t own a home, another good bet is to invest in non-Canadian dollar denominated assets, like US stocks. If you’re concerned that the oil sector might rebound and the Canadian dollar will bounce back, be sure to invest in the US Oil sector. If the Oil market improves, these stocks will likely rise a the USD falls against the CAD, offsetting your losses.

This is a riskier one: short or buy put options against stocks that are closely related to the bubble. Two that come to mind are Genworth Financial, a mortgage company and Home Capital Group, Canada’s largest subprime lender. I would not recommend shorting Canada’s big 5 banks as they are mostly quite diversified with assets in the USA and many other income earning streams. And they have the ear of the federal government, so it’s never a good bet. However, I do believe they will lose a lot of value when the bubble pops. But I also believe the TSX as a whole will decline. For this reason, it might be a good play to buy an inverse TSX ETF like HIX. If you’re not sure which stocks to bet against, you can bet against Canadian equities as a whole.

In conclusion there are not really any slam-dunk plays to profit from the housing bubble unless you own a very overpriced home. What your goal should be is to avoid the plummet by diversifying your assets to the USA and/or elsewhere

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