Watsa, Who Models Buffett, Sees Housing Bubble: Corporate Canada

Prem Watsa, the Canadian investor who predicted the downfall of U.S. banks tied to real estate, now sees more opportunity in the U.S. housing market than in Canada.

“When you see all these towers going up in Toronto, it feels like it’s going too far,” said Watsa. Our approach “is always to be away from where speculation takes place.”

Watsa, chief executive officer of Fairfax Financial Holdings Ltd., echoed comments made by Finance Minister Jim Flaherty that Canada’s housing market has become overvalued as consumers add to record debt levels. House prices in markets such as Toronto and Vancouver have almost tripled over the past decade.

“I just know that whenever you have a bubble, most people need to think that it’s going up,” Watsa, 61, told reporters after Fairfax’s annual meeting in Toronto yesterday. “The real estate housing market in the U.S. -- 2003, 2004, 2005 -- everybody thought it was going up.”

Low vacancies and increasing demand are prompting developers to build almost 9 million square feet of office space in Canada, the most since the first quarter of 2010, according to CBRE Group Inc.

Gerald McCaughey, chief executive officer of Canadian Imperial Bank of Commerce said yesterday the high level of homebuilding could create a stockpile, leading to a correction.

“You can see that, in a number of cities in Canada, you have unprecedented levels of construction activity, particularly around residential and particularly in the area of condo construction.”

Prefers Stocks

Watsa founded Fairfax in 1985, modeling his management style after billionaire value investor Warren Buffett, investing in the assets of out-of-favor securities. Profit before one-time items reached a record $1.69 billion in 2008 as the company recorded investment gains on credit-default swaps on U.S. banks and insurers. The swaps became more valuable as the subprime mortgage market collapsed and banks began to fall.

The native of Hyderabad, India wrote in a 2003 annual report to shareholders he was concerned “about the risks in asset-backed bonds, particularly bonds that are backed by home equity loans, automobile loans or credit card debt.”

During a three-hour meeting at Roy Thomson Hall in which he answered questions from dozens of investors, Watsa said he prefers stocks over bonds in the “short-term.”

He also favors “good companies” that have the potential to double in value, such as Wells Fargo & Co., Johnson & Johnson and U.S. Bancorp. Watsa said Fairfax, with about $24 billion in investments, plans to hold those companies for five to 10 years.

The Toronto-based insurer more than doubled its stake in BlackBerry maker Research In Motion Ltd. in January to 26.85 million shares. RIM has fallen 90 percent since its mid-2008 peak as the company loses market share for its products to Apple Inc. and Google Inc.

RIM Turnaround

Watsa was named a director of the Waterloo, Ontario company in January as part of a management shakeup that included the replacement of former co-Chief Executive Officers Jim Balsillie and Mike Lazaridis and the naming of Thorsten Heins as CEO. Fairfax is the third-largest investor in RIM.

Watsa, who has known Lazaridis for “years,” said he’s confident RIM will turn around its fortunes over the next three years to five years.

“All you can do as a member of the board is to let them focus on the long-term, don’t second guess the management,” said Watsa. “In Thorsten Heins, they’ve got terrific management.”

While Watsa said there is “always a possibility” that RIM might collapse, as did Nortel Networks Corp., the Canadian phone-equipment maker, he said RIM is in much better health.

“Different set of circumstances,” he said.

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