Mortgage lender woes may cool Canada housing market, finally

Tue May 2, 2017 4:35pm EDT
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By Fergal Smith and Andrea Hopkins

TORONTO/OTTAWA (Reuters) - The funding crisis at mortgage lender Home Capital may spark a welcome cooling in Canada's housing market and take pressure off policymakers confounded by the hot market - as long as the crisis does not turn into contagion, analysts said on Tuesday.

The troubles at Home Capital Group Inc are about liquidity rather than mortgage quality - it is not a U.S.-style subprime mortgage crisis - but the shift in sentiment just a week after Ontario unveiled more measures to cool housing has investors in the mood to sell.

The Canadian dollar has weakened to a 14-month low, and expectations of a possible rate hike by the Bank of Canada have disappeared as the housing worries add to fears of a trade war with the United States and low oil prices.

A housing slowdown is just what many have been hoping for, with concern about a real estate bubble at a fever pitch.

"A little cooling is not a bad thing," said Craig Wright, chief economist at Royal Bank of Canada. "It's a confidence game to some degree, and if people are nervous they tend to get out until they get a clear line of sight."

Bank of Canada Governor Stephen Poloz warned last month that prices have become divorced from fundamentals and speculation is likely playing a role in the Toronto housing market.A housing slowdown would take some pressure off policymakers who want to wait to see how a new foreign buyers' tax and rent controls announced by Ontario in April will affect supply and demand, but the relief could come at a cost.

Home Capital, Canada's biggest alternative mortgage lender, has seen nearly three-fourths of its high interest savings deposits being pulled out. Its shares have shed 72 percent of their value since March 27. Potential suitors are studying bids for the company, sources told Reuters on Tuesday.

While the Home Capital crisis could take some air out of the Canadian housing market - something policymakers have been trying to accomplish in repeated attempts - the risk is it turns into a contagion, the spark that many have been waiting for to burn the sector down.   Continued...

The entry to the Home Capital Group's headquarters is seen at an office tower in the financial district of Toronto, Ontario, Canada May 1, 2017. Picture taken using a wide angle lens. REUTERS/Chris Helgren