Realty industry gripped by Home Capital spiral
Report will provide glimpse of mortgage lender’s impact on broader housing market
As Home Capital Group Inc. spiralled downward last week, a group of Canadian real estate brokers relaxing in Mexico brooded over whether the mortgage lender’s woes would seep into the housing market and trigger the kind of crisis the country averted in 2008.
“Home Capital was on everybody’s lips,” Dominion Lending Centres’ Jason Georgopoulos said about the industry retreat in Los Cabos, Mexico.
In between margaritas and golf, he saw Home Capital’s stock plunge and its debt rating cut to junk from investment grade. “People were surprised because a lot of them have had a very positive relationship with the company over the last 30 years.”
Georgopoulos and other real-estate watchers will get an early glimpse of Home Capital’s potential impact on the broader housing market Wednesday, when the Toronto Real Estate Board reports home prices for April.
The numbers cover about10 days of the Home Capital crisis, as well as steps announced by the Ontario government to cool the market that’s been a key driver of the world’s fastest-growing developed economy.
“Canada’s reputation as a boring-but-stable financial system took a bit of a hit this week,” Alex Bellefleur, head of global macro research and strategy at Pavilion Global Markets Ltd. in Montreal, wrote in a note Friday. He predicts lending will slow across the industry, hurting cash flow into housing, and weakening inflation and the Canadian dollar.
Toronto’s soaring housing prices are raising concerns that it may inflate a bubble that’s at risk of bursting. In response, Finance Minister Charles Sousa announced a 15-percent tax on foreign buyers and expanded rent controls to dwellings built after 1991.
Sousa’s move came a day after the Ontario Securities Commission accused Home Capital of misleading investors by not informing them about fraudulent loans brought in by outside brokers. Home Capital’s stock has plunged by two-thirds since then, leading to a $1.6-billion run on deposits and sparking fears of contagion to other lenders in the housing market.
The key question is whether evaporating deposits at Home Capital will trigger other bank runs, or if homeowners would need to see their house prices drop significantly before they begin to panic.
Jim Hall, chief investment officer at Mawer Investment Management Ltd., said Home Capital’s $2-billion emergency loan at an effective rate of 22.5 per cent is making him rethink the odds of the company’s problems rippling into the wider economy.
“The probability has gone from infinitesimal to possible — unlikely, but possible,” Hall said in an interview. “If depositors or bondholders start to lose faith in their banks, well then that becomes systemic.”