Could a Late Surge in 2017 Home Sales Power Alternative Lenders?

Alternative lenders like Home Capital Group Inc. (TSX:HCG) and Equitable Group Inc. (TSX:EQB) could see a big boost in business in the final two months of 2017.

| More on:

The Toronto Real Estate Board released improved home sales numbers on November 2, which prompted some experts and analysts to declare that a bottom had been reached in the housing correction, which has stretched since the late spring. Home sales jumped 12% from September to October, and prices were also up 1% month over month.

Vancouver, which experienced its own sharp correction following a 15% foreign buyers’ tax instituted in 2016, also reported interesting developments last month. Foreign nationals represented 5% of home purchases in Metro Vancouver in September, up from less than 1% in August 2016. The numbers are still significantly less than results in July 2016 before the tax was instituted, which showed over 20% proportion of foreign purchases.

Equitable Group Inc. (TSX:EQB) was my top stock pick for October. Shares of Equitable Group rose 7% in October, also benefiting from a broader rise in the S&P/TSX. Home Capital Group Inc. (TSX:HCG), another top alternative lender, ended the month of October largely flat. Shares have been stagnant, hovering around the $14 mark or below since August.

Alternative lenders voiced concern in recent quarterly conference calls that new mortgage rules introduced by the OSFI would potentially put a dent in new loan growth. I covered why the mortgage rules could be a huge factor for Canada housing in 2018. To briefly recap, the new rules include a stress test for uninsured borrowers — those who wish to avoid a CMHC premium by putting down 20% or more on a new purchase.

Major Canadian banks have also focused in on the new rules and stated that it is possible alternative lenders could see a windfall from potential borrowers who were turned away from prime lenders. However, both institutions are confident that the new rules will help with retention rates.

Will there be a late-season rush?

The market is showing some bounce back, which was predicted by industry experts. Investors should not be surprised to see more pronounced numbers in the final two months of 2017. New buyers will still have the opportunity to avoid the new uninsured stress test, which comes into effect on January 1, 2018.

Prime and alternative lenders alike could see a significant surge in activity from savvy purchasers, who will undoubtedly be made aware of the new rules by agents and brokers. With sales and prices on the rise, speculators could also be thinking about aggressively re-entering the market.

Investors should also keep a possible caveat in mind when it comes to the stipulations published by the OSFI. Some real estate experts have noted a possible loophole, one that would allow lenders to extend amortization and qualify more borrowers than would be originally permitted with the stress test interest rate.

However the market reacts to the forthcoming rules, investors should still be careful not to burn themselves on alternative lender stocks. The industry is still tackling new regulations introduced by Ontario, and the new rules in 2018 will put added stress on an anxious real estate market.

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 Ambrose O'Callaghan has no position in any stocks mentioned.

More on Investing

An investor uses a tablet
Stocks for Beginners

If I Could Only Buy 2 Stocks in the Last Half of 2024, I’d Pick These

I’m looking to buy two stocks over the next month. Here’s a look at my picks and why you should…

Read more »

gift is bigger than the other
Investing

Millennials: 1 Growth Stock Set to Shine in 2025

Shopify (TSX:SHOP) stock could be worth betting on as it goes for growth in the new year!

Read more »

up arrow on wooden blocks
Stock Market

2 Stocks I’ll Be Adding to My RRSP — Even With the TSX at All-Time Highs

Calian Group and Pan American Silver are two TSX stocks trading at an attractive multiple that can generate market-beating returns…

Read more »

dividends can compound over time
Investing

Here Are My Top 2 TSX Stocks to Buy Right Now

Shares of these fundamentally strong TSX companies have significant room for further growth, making them compelling investments right now.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Is Brookfield Infrastructure Partners a Buy for its 4.75% Yield?

Brookfield Infrastructure Partners (BIP) has a 4.75% dividend yield. Is it worth it?

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Monday, November 4

In addition to the ongoing corporate earnings season, the U.S. presidential election and the Federal Reserve’s interest rate decision could…

Read more »

calculate and analyze stock
Investing

2 Top Value Stocks I’d Happily Scoop Up in November

Here are two top value stocks I'm seriously considering adding this month. They are likely to continue to accumulate over…

Read more »

A data center engineer works on a laptop at a server farm.
Tech Stocks

3 No-Brainer Data Centre Stocks to Buy With $500 Right Now

Data centres are going to be a huge growth opportunity in the next decade. And these are the top buys.

Read more »