Genworth MI Canada (TSX:MIC) stock was down 9.1% in 2018 as of close on December 20. Over the course of the last month, the stock has plunged 9.2% largely due to broader weakness in the Canadian financial sector. Earlier this week, I chose Genworth as one of my top two housing stocks to watch as we leave 2018 behind.
A recent report released by Statistics Canada revealed just how important real estate has been in building Canadian wealth over the past decade. Total national wealth reached $11.4145 trillion in the third quarter. Of that total, real estate wealth made up $8.752 trillion, which represents 76% of the figure. This is the highest concentration since the second quarter of 2007, which may be setting off alarm bells for investors.
On the bright side, Canadian real estate wealth growth has been far more stable than its U.S. counterpart over the past decade. Real estate as a share of national wealth dipped sharply during the financial crisis in Canada, but total real estate wealth was largely untouched, even in the worst periods of the crisis. Canadian policymakers introduced tougher regulations in 2016 and 2017 in response to ballooning valuations in the major metropolitan areas in Vancouver and Toronto.
Bank of Montreal has forecast that Canadian home prices will grow by less than 1% in 2019 and only 2% in 2020. The Canadian Real Estate Association (CREA) projects that home sales will rise 2.1% in 2019, while home prices will keep up with inflation at 2.7%. It projects that prices in Ontario will climb at a rate of 3.3%.
How will this affect Genworth going forward? Volumes are likely to decline at lenders and insurers, but rising rates should maintain positive margins in 2019. The big banks are projecting that interest rates will rise between 2.25% and 2.75% in 2019. Operating investment income at Genworth rose $10 million year over year primarily due to the higher interest rate environment.
Genworth continued to benefit from the normalization of the housing market in the third quarter of 2018. Economic fundamentals in Canada remain relatively strong heading into 2019, but some forecasts now see GDP growth falling below 2%. In any case, Genworth’s dominant position as an insurer in Canada means that it is a stable option for investors looking to leverage Canada’s dependence on the real estate sector.
Genworth stock last had an RSI of 31 as of close on December 20. This is just outside oversold territory, but the stock is now hovering around 52-week lows. Value investors should find its income-yield particularly enticing as we look ahead to the new year. Genworth declared a quarterly dividend of $0.51 per share on the same day it released its third-quarter results. This now represents a 5% yield.
The housing market in Canada will be tested by economic headwinds in 2019, but high demand combined with low supply will likely keep prices steady into the next decade. Lower volumes are a concern, but if CREA projections come to fruition, sales will continue to bounce back at a slow pace next year.