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Ed Devlin, the head of Canadian portfolio management for Pimco, recently told the Financial Times that Canadian house prices could drop between 10 to 30 per cent over the next two to five years.
The interview comes alongside reports of the global investment management firm’s waning holdings in Canadian debt. Twelve months ago, the $237 billion Total Return Fund’s holdings of Canadian debt made up nearly 4 per cent of its portfolio, according to data from Morningstar. After reducing its exposure over the course of the year, its holdings were halved to 2 per cent by the third quarter.
Though the Canadian concern isn’t off-script for Devlin, who has been bearish on the market for some time, he did tell the Times, “The change this year would be that I actually think it starts this year.”
Devlin suggested a cooling housing market was in the cards for Canada in an insight he published in January. However, he has emphasized there wouldn’t be a full-scale meltdown, but a correction.
In order for a bubble to burst, Devlin believes one of three things would have to happen this year: interest rates would have to rise significantly, unemployment would need to be much higher and the supply of mortgage credit would have to be disrupted.
Pimco’s perspective in in line with other institutions that have warned of overvaluation in the market. In December, the Deutsche Bank suggested the Canadian housing market was the most overvalued in the world and Capital Economics aired concerns over a prolonged correction.
At the end of 2013, the Bank of Canada also named the housing market as a risk to the health of the country’s financial system, but expected prices to moderate.