The state of the Canadian housing market has been a consistent source of anxiety for investors since the spring of 2017, when the crisis at Home Capital Group (TSX:HCG) spurred regulatory changes. Back in early June, I’d suggested that investors should put their faith in the Canadian housing market going forward. Today, I want to explore three reasons why housing should continue to rebound in 2020.
The housing market is out of the woods
A recent report from the Canadian Real Estate Association (CREA) revealed broadening stability in the housing market, though there are still troubled areas in specific regions. This suggests that the introduction of a foreign buyers’ tax and stress tests for insured and uninsured borrowers is doing the trick. Royal Bank senior economist Robert Hogue said that the numbers provided “further evidence” that the overall market had “passed its cyclical bottom.”
The new data should be pleasing to policy makers, whose work appears to have averted a severely damaging slump while successfully cooling an overheated market.
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Market tipped towards balance
In June, home sales rose 0.3% year over year, and average prices were up 1.7%. Scotiabank released its own broad analysis of regional housing markets, and the vast majority qualified either as sellers’ markets or balanced. There is still a significant East-West divide, with markets in Vancouver, Saskatoon, and Regina suffering from a combination of slumping sales, anemic price growth, and a drop in total listings.
Alternative lenders have thrived in this environment. Home Capital, which was on the verge of total collapse in the middle of 2017, has rewarded shareholders. Its stock has climbed 52% in 2019 as of mid-afternoon trading on July 18. Shares have jumped 25% over the past three months. In the first quarter, the lender saw total loans rise 1.7% year over year to $16.68 billion.
The story has been similar for Equitable Group (TSX:EQB). Shares have climbed 29% in 2019 so far. The company beat expectations in 2018 as sales surged over 10% from the prior year. Equitable Group credited its customer service team for the jump, but improved conditions have underpinned lenders, even in the face of the new OSFI mortgage rules in January 2018.
Equitable Group is expected to release its second-quarter 2019 results on July 30. Home Capital and Equitable Group stocks both boast P/E ratios below 20. Both are hovering around 52-week highs, which illustrates the increased faith in the overall sector right now.
Did someone order a rate cut?
When the year kicked off, I’d discussed the pressure from the real estate industry to ease up on regulations. Policy makers have remained steadfast, but the rate environment has softened into the second half of 2019. Canadian mortgage rates on a five-year fixed-rate mortgage have fallen to their lowest level in two years, according to Ratehub.
Central banks have turned dovish in 2019, and this outlook has throttled bond yields. This, in turn, has forced down borrowing costs. A move downward looks likely for the U.S. Federal Reserve in the near term, and the Bank of Canada is expected to follow suit in early 2020. The softer rate environment is a positive for the housing market as we look ahead to the New Year.
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 of the stocks mentioned. Scotiabank is a recommendation of Stock Advisor Canada.