I've been following the slide of Home Capital Group (TSX:HCG) since it began it's gradual decent in the beginning of April this year. A quote that has always stuck with me (which I think is attributable to Warren Buffet) is to 'Be cautious when others are greedy and greedy when others are cautious.' I definitely tend to be a contrarian investor, which so far hasn't really had any big payoffs because I have not been investing for long enough to see results, but HCG is probably one of my biggest bets on this strategy to-date.
I think it's important to invest based on reality not rumour, and on fact instead of emotion. Perhaps I'm not yet jaded enough, but I'm clinging to the idea that the stock market, like any system, can be read, understood and predicted with enough patience, experience and skill. HCG is plummeting because of fear in Canada's housing bubble, and a loose comparison to current events that at first glance might reflect those that happened in the great recession, although as we dig deeper into them I think it's safe to say that our housing bubble in Canada isn't going to 'burst' the way it did in the United States in 08/09.
Canada's Housing Bubble
Comparing Canada's housing market to that of the United States is really apples to oranges. Real estate, like anything that can be bought and sold, is valued as a factor of supply and demand.
In the 2008 housing bubble, demand was increased greatly by systematic, predatory credit practices whereby the market of home buyers expanded rapidly, leading to an under-supply and higher house prices. In Canada right now, interest on debt could increase slightly if the BOC increases prime (which they won't for some time because the housing market is currently the main thing driving the Canadian economy) but that 0.5-1.0% increase isn't comparable to the kind of increases in variable-rate mortgages seen in the United States as a part of the aforementioned predatory credit practices seen in the 2008 housing bubble.
So why is Canada's housing market so hot in it's cities? Naturally it comes down to supply and demand, specifically the demand to live in a city in Canada. The US has 10x our population, so if an American decides they want to live a city they have a ton of choice. Sure they could look at San Jose, Honolulu or San Fran, all of which the average price of a 4-bedroom detached home is north of $1m USD, but they also have options like Indianapolis, Memphis or Detroit where you can buy a house for less that a 10th of that. There is a huge price gradient in the US, and you can find a city in the that will accommodate your budget.
In Canada, that option doesn't exist to the same extent. There is high demand to live in a city and that's driving up the price of real estate in our cities, not cheap debt. Yes, we have higher household debt per capita than in many other countries right now, but again we are a huge country with a small population and I don't know that a direct comparison of our household debt to that of the US with a much denser population is relevant.
Home Capital Group
HCG is an alternative mortgage lender, who is going through an ongoing issue where a portion of their brokers weren't doing an adequate job of income verification for customers receiving mortgages funded by HCG. These allegations and concern over the effect they would have on HCGs ability to meet their revenue objectives caused an approx. 15% decline in stock value over much of April.
On April 19th, the OSC (in a badly-judged play) announced that they would be investigating the HCG and some if it's executives, which is going to be a several year process and really doesn't mean much in terms of the commercial viability of HCG as a business or the state of Canada's housing market. This announcement was sensationalized by the media (with multiple, opinion based stories pretending to be articles coming out and claiming this was the needle that would pop Canada's 'housing bubble') and that caused a run on the bank where HCG saw massive withdrawals. These withdrawals are problematic as HCG is required to have a certain amount of capital available, and the announcement came that HCG would require additional credit to meet these requirements.
HCG has bounced around a bit since then, however the company is still a strong, viable business with a steady income stream from existing customers and strong market share. The current stock prices are not an indication of the state of the company, the market, or the OSC investigation.
My Prediction
HCG will recover much of it's previous value over the next year, my expectation is to see this stock hit $14.00 within the next year.
I think it's important to invest based on reality not rumour, and on fact instead of emotion. Perhaps I'm not yet jaded enough, but I'm clinging to the idea that the stock market, like any system, can be read, understood and predicted with enough patience, experience and skill. HCG is plummeting because of fear in Canada's housing bubble, and a loose comparison to current events that at first glance might reflect those that happened in the great recession, although as we dig deeper into them I think it's safe to say that our housing bubble in Canada isn't going to 'burst' the way it did in the United States in 08/09.
Canada's Housing Bubble
Comparing Canada's housing market to that of the United States is really apples to oranges. Real estate, like anything that can be bought and sold, is valued as a factor of supply and demand.
In the 2008 housing bubble, demand was increased greatly by systematic, predatory credit practices whereby the market of home buyers expanded rapidly, leading to an under-supply and higher house prices. In Canada right now, interest on debt could increase slightly if the BOC increases prime (which they won't for some time because the housing market is currently the main thing driving the Canadian economy) but that 0.5-1.0% increase isn't comparable to the kind of increases in variable-rate mortgages seen in the United States as a part of the aforementioned predatory credit practices seen in the 2008 housing bubble.
So why is Canada's housing market so hot in it's cities? Naturally it comes down to supply and demand, specifically the demand to live in a city in Canada. The US has 10x our population, so if an American decides they want to live a city they have a ton of choice. Sure they could look at San Jose, Honolulu or San Fran, all of which the average price of a 4-bedroom detached home is north of $1m USD, but they also have options like Indianapolis, Memphis or Detroit where you can buy a house for less that a 10th of that. There is a huge price gradient in the US, and you can find a city in the that will accommodate your budget.
In Canada, that option doesn't exist to the same extent. There is high demand to live in a city and that's driving up the price of real estate in our cities, not cheap debt. Yes, we have higher household debt per capita than in many other countries right now, but again we are a huge country with a small population and I don't know that a direct comparison of our household debt to that of the US with a much denser population is relevant.
Home Capital Group
HCG is an alternative mortgage lender, who is going through an ongoing issue where a portion of their brokers weren't doing an adequate job of income verification for customers receiving mortgages funded by HCG. These allegations and concern over the effect they would have on HCGs ability to meet their revenue objectives caused an approx. 15% decline in stock value over much of April.
On April 19th, the OSC (in a badly-judged play) announced that they would be investigating the HCG and some if it's executives, which is going to be a several year process and really doesn't mean much in terms of the commercial viability of HCG as a business or the state of Canada's housing market. This announcement was sensationalized by the media (with multiple, opinion based stories pretending to be articles coming out and claiming this was the needle that would pop Canada's 'housing bubble') and that caused a run on the bank where HCG saw massive withdrawals. These withdrawals are problematic as HCG is required to have a certain amount of capital available, and the announcement came that HCG would require additional credit to meet these requirements.
HCG has bounced around a bit since then, however the company is still a strong, viable business with a steady income stream from existing customers and strong market share. The current stock prices are not an indication of the state of the company, the market, or the OSC investigation.
My Prediction
HCG will recover much of it's previous value over the next year, my expectation is to see this stock hit $14.00 within the next year.
