Should You Buy or Sell the Surge for Alternative Lenders?

Home Capital Group Inc. (TSX:HCG) and Equitable Group Inc. (TSX:EQB) continue to rise amid pessimism for the housing market in the beginning of 2018.

| More on:

Equitable Group Inc. (TSX:EQB), one of the top Canadian residential and commercial alternative lenders, rose 1.54% on December 20 to close at $71.81. It is fast approaching the all-time high reached in February of $74.66. Home Capital Group Inc. (TSX:HCG) was up 1.05% on the same day and has reached above the $17 mark for the first time since the Berkshire Hathaway Inc. asset purchase in June.

In a recent article, I’d discussed whether or not investors should be prepared to take profits from alternative lenders as 2018 draws closer. I’d argued that alternative lenders were still a hold in anticipation of a year that may surprise those calling for a deeper correction next year.

Experts and analysts have been sounding bearish signals for the beginning of 2018, as new mortgage rules implemented by the OSFI are set to come into practice in January. The consensus is that the new rules will slow down activity in the first months of next year before the market balances in the second half. However, alternative lenders are picking up steam just before 2017 comes to an end.

New data from Statistics Canada released on December 19 shed some much-needed light on the state of housing. Real estate industry experts appeared to be vindicated by the data that revealed foreign ownership was below 5% in Toronto and Vancouver markets. A foreign buyers’ tax of 15% instituted in both Ontario and Vancouver was thought by some to be predicated on the assumption that foreign ownership had been one of the largest, if not the largest, factor in the inflation of asset prices.

This new data calls that assumption into question. However, properties with a single residential unit owned by non-residents were higher valued than those owned by residents on average. In Toronto, single-detached properties owned by non-residents were 12.3% more expensive than those owned by residents. This may explain the increased activity seen in lower-valued brackets in recent months, as the housing market began to balance in the fall.

In November, I’d covered alternative lenders and speculated that a late rush could develop, as uninsured buyers tried to finalize their purchases before the new rules came into play.

Equitable Group reported net income of $37.9 million in the third quarter — a 7% increase year over year. Year to date, it reported mortgages under management of $22.8 billion compared to $19.9 billion at the same point in 2016. Home Capital Group saw total loans under administration dip to $23.2 billion compared to $26 billion in Q3 2016. Total mortgage originations fell from $2.54 billion to $385 million, as the company undergoes a dramatic restructuring of its processes.

There are other headwinds in 2018 beyond the new OSFI mortgage rules. The Bank of Canada is eventually expected to continue its gradual rate hikes as economic data has remained strong. Still, a good deal of loan growth is already baked in for lenders due to new construction.

The first half of 2018 will be one of clenched teeth for the real estate industry and lenders. The Re/Max Housing Market Outlook predicts a 6.8% rise in Toronto housing prices in 2018. If patient investors in alternative lenders can stomach what is shaping up to be a turbulent beginning to 2018, they will likely be rewarded.

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. The Motley Fool owns shares of Berkshire Hathaway (B shares).

More on Investing

ETF stands for Exchange Traded Fund
Investing

Here’s the Average TFSA Balance at Age 54 in Canada

Here are two ways to optimize your TFSA for either growth or income via ETFs.

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

An investor uses a tablet
Tech Stocks

Canadian Tech Stocks to Buy Now for Future Gains

Not all tech stocks are created equal. In fact, these three are valuable options every investor should consider.

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

Asset Management
Stock Market

3 of the Best Canadian Stocks to Buy Right Now

Are you looking for stocks that could be a major bargain right now? These three Canadian stocks could provide some…

Read more »