Don’t Let Canada’s Housing Bubble Ruin Your Retirement

The possibility of something very bad happening to Genworth MI Canada Inc. (TSX:MIC) or Home Capital Group Inc. (TSX:HCG) means they’re too risky for a retirement portfolio.

| 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

It’s obvious Canada is in a housing bubble.

The Toronto and Vancouver markets are particularly nuts. According to recent data, it costs nearly 10 times the average family’s income in Toronto to buy a pretty normal house. In Vancouver, it costs even more. The average family in B.C.’s largest city will have to shell out 11.2 times their income to be able to afford an average place to live.

It gets worse. In Vancouver the price-to-rent ratio downtown is a whopping 22.5 times. That works out to a cap rate of 4.4%, a number that doesn’t even include expenses like taxes or basic maintenance, never mind mortgage interest. Once a landlord pays those things, I doubt there’s much profit at all. Toronto’s price-to-rent ratio is similar.

The question is how bad the carnage will be when it inevitably pops. Many investors think the results won’t be pretty with predictions as dire as a repeat of the 2008-09 financial crisis, a once-in-a-century event that shook the world’s financial markets to their very core. These investors are convinced Canada’s largest banks will have to, at a minimum, cut their dividends. Some think a few of the weaker banks could actually go to zero.

I am not one of those investors. I certainly agree that some markets are expensive. But at the same time, Canada’s banks have used CMHC mortgage default insurance to move the risk from high-ratio mortgages onto the balance sheet of the federal government. Add in factors like money from China continuing to flow into Canada and an improvement in commodity prices, and I see a scenario where the banks can escape from this without much damage.

I’m just not sure that’s enough for investors to touch the sector, especially names like Home Capital Group Inc. (TSX:HCG) and Genworth MI Canada Inc. (TSX:MIC). Here’s why.

The big risk

On the surface, both Home Capital and Genworth Canada look insanely cheap.

Genworth trades at $27.05, even though it has a book value of $37.25 per share. That’s a 27% discount. Over the last 12 months it has earned $4.19 per share, putting it at just 6.5 times earnings. It pays a 6.2% dividend, which is easily covered by earnings. There’s an argument to be made that it’s the cheapest stock in Canada.

Home Capital is almost as cheap. After reaching a low of $23 each in January, shares of Canada’s largest subprime lender have rallied some 40% to today’s price of $32.25. Even after that huge rally, shares still trade hands for less than eight times trailing earnings.

There’s a reason for both of these companies’ valuations though. Home Capital Group has disclosed some $2 billion worth of mortgages on its balance sheet may have been obtained fraudulently. The company no longer does business with the group of mortgage brokers who sent in these loans, and, as a group, the borrowers aren’t defaulting. Still, bearish investors think that much fraud getting through is an indication Home Capital’s underwriting standards are too lax.

Home Capital is also very exposed to Toronto real estate, and much of its loan portfolio is not protected by default insurance. If things get very bad in Toronto, Home Capital is in a world of trouble.

Genworth has similar issues. I’ve heard rumblings from folks in the industry that Genworth often will insure mortgages CMHC will not touch. If Genworth’s balance sheet is filled with riskier mortgages, then it’s easy to argue that it’ll get hit hard if a wave of defaults sweeps Canada.

Genworth has $184 billion worth of mortgages it has insured compared to $3.4 billion in equity. A 1% default rate would do some serious damage, even if the average loan-to-value ratio is approximately 50% on these loans.

The bottom line is this: there is a chance Genworth and Home Capital blow up spectacularly. There’s also a chance that today is a terrific buying opportunity for two massively undervalued stocks. When it comes to retirement savings, I’m not sure investors should be taking a chance on stocks where there are very real dangers, even if those dangers are remote.

Should you invest $1,000 in Dundee Corporation right now?

Before you buy stock in Dundee Corporation, 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 Dundee Corporation 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 $20,697.16!*

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 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

How to Turn Your TFSA Into a Gold Mine Starting With Only $10,000

It doesn't have to be complicated or scary. You can turn any portfolio into a major gold mine.

Read more »

ways to boost income
Dividend Stocks

Passive Income: How to Invest Your TFSA Limit in 2025

This TFSA strategy can reduce risk and boost yield.

Read more »

coins jump into piggy bank
Dividend Stocks

Here’s the Average Canadian TFSA and RRSP at Age 25

Are you not meeting the average? Then check out this ETF that can bridge the gap.

Read more »

Person holding a smartphone with a stock chart on screen
Dividend Stocks

3 Canadian Multi-Sector Stocks to Buy and Hold for Built-In Diversification

Here are three of the best dividend-paying Canadian stocks with built-in diversification.

Read more »

grow money, wealth build
Dividend Stocks

Why I’d Allocate $15,000 to Canadian Stocks Now for Building Generational Wealth

With $15,000, a thoughtful allocation across small-, mid-, and large-cap Canadian stocks could offer the right blend of growth, income,…

Read more »

Caution, careful
Dividend Stocks

3 Major Red Flags the CRA Is Watching for All TFSA Holders

The CRA is watching, so make sure you're investing well and avoiding these problems.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 2 Top TSX Stocks With Decades of Dividend Growth

These stocks have great track records of delivering dividend growth in challenging economic conditions.

Read more »

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

TFSA: Invest $15,000 in This TSX Stock and Create $884 in Annual Passive Income

This TSX stock certainly has quite the long-term outlook -- one that could create passive income now and decades to…

Read more »