Commentary: Lender’s troubles a strong warning for the national housing sector

by Ephraim Vecina01 May 2017
With the dramatic 60-per-cent decline of Home Capital Group’s stock last week, a markets observer noted that industry players should remain attentive about the lender’s ongoing troubles while keeping in mind the U.S. and British housing bubbles.

The stock price crash was spurred by a Canadian regulator’s probe of allegations that Home Capital misled investors.

“The lender, which competes in the market for less well qualified borrowers, has hired bankers to help it explore its strategic options. Its shares rose nearly 18 percent on Thursday,” Reuters columnist James Saft said, but quickly added that “this is Canada, and while there is undeniably a housing bubble, the interesting points won’t be just the extent to which this echoes the last housing bubble and denouement but how it differs.”

“To be sure, Canada’s mainline banks, which were noted for escaping the great financial crisis largely unscathed, are generally held to be well managed and capitalized, and thus not likely candidates for a significant round of funding pressure,” Saft added.

“Still, as was true in the U.S. and Britain a decade ago, it is very hard to look at Canada’s real estate market and not become disturbed by the implications.”

A particular area of concern is the fact that Home Capital’s troubles have had a chilling effect on the share trading of other similar lenders.

“[We] believe the issues at HCG may be spreading into the broader broker GIC (Guaranteed Investment Certificate) and alternative mortgage markets. We believe regulators may move quickly to protect the alternative mortgage market confidence and depositors,” GMP Securities analysts wrote in a client note.

The takeaway should be a more introspective worldview that takes into account that home prices and credit availability can go “down as well as up,” Saft concluded.

“It is hard to look at other housing bubbles and not conclude that once doubt creeps in, the self-reinforcing cycle of borrowers reaching to buy more house and prices rising goes into reverse. That almost never fails to have a sizable impact on the rest of the economy.”

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