The Canadian Housing Market Continues to Stay Strong: Here’s 1 Stock Taking Advantage

The Canadian housing market has been a lot more resilient than many expected and the biggest beneficiary of that has been Home Capital Group Inc (TSX:HCG).

| More on:
edit Back view of hugging couple standing with real estate agent in front of house for sale

Image source: Getty Images

The Canadian housing market has been extremely resilient these last few years. After booming and expanding rapidly in the first half of the decade, many economists and experts believed it will have to cool off as the growth was unsustainable.

Whether that happens remains to be seen, but the market has stayed stronger for longer than many expected, much to the detriment of those who were looking to get into the market and have had to either rent, find other accommodations or buy into the market at these extremely high prices.

During the 80s and 90s, the average price of a home in Toronto and its surrounding area would cost a buyer roughly 3.5 times the median income. Today, that number is closer to 8.8 times the median income, reflecting just how hot the market has been.

The evidence can further be witnessed through the residential REIT sector. Almost every residential REIT is significantly at their all-time highs as the market for housing, especially in most major cities (excluding Alberta) suffers serious housing problems for those who need shelter.

Many blame the lack of supply and increase in short term rentals as the leading problems that have caused the major shift in supply and demand.

One company that has been largely impacted by the market all together is Home Capital Group Inc (TSX:HCG).

Home Capital is predominantly a mortgage issuer — one that is willing to take on mortgages that don’t meet bank standards, in other words, riskier mortgages.

That doesn’t mean the mortgages are necessarily that risky, just that they may not meet the banks’ criteria.

This has caused Home Capital to become one of the number one tools investors are trading in an attempt to play the mortgage market.

Going back to 2014, experts were calling the collapse of the Canadian housing market and Home Capital’s stock began to tumble. This led to other problems, however, including a run on deposits that required the company to bring on Warren Buffett as an investor.

This was significant, as it re-established trust in the stock for many investors and provided the needed liquidity for Home Capital to get through that tough stretch.

It’s important to note, however, that there weren’t any major impacts to its operations; rather, the problems were caused by depositors and short sellers.

Its stock has since traded mostly flat for two years before investors began to realize just how undervalued it was earlier this year. Now with interest rates looking like they could possibly be cut again, and the housing market showing little signs of trouble, Home Capital is once again an investor favourite.

Year to date, its stock is up more than 120% and it could continue to appreciate if the market stays strong and Home Capital continues its stellar operations.

Its net interest margins have been increasing considerably, and with its share repurchases, the company managed to report earnings per share of $0.72 in the third quarter, an increase of more than 75% from the same quarter in 2018.

The increasing in earnings has led to a nice jump in return on equity for Home Capital and the larger increase on a per share basis has helped keep the price to earnings ratio in check as the company’s share price exploded.

If it continues to post numbers similar to the third quarter, Home Capital will almost certainly continue on this trajectory; however, many investors are still skeptical and wary of what could happen.

This makes its stock price specifically prone to more volatility than usual, so if you’re considering an investment, proceed with caution.

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 Daniel Da Costa has no position in any of the stocks mentioned.

More on Bank Stocks

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

Is TD Bank Stock a Good Buy Now?

Here’s why TD Bank stock looks even more attractive to buy for the long term after its upbeat second-quarter earnings.

Read more »

consider the options
Bank Stocks

Is TD Bank Stock the Best Bank Stock for You?

TD Bank stock is reflecting a lot of the negative news. It remains a top bank stock trading at attractive…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Prediction: These 2 Canadian Bank Stocks Are Next in Line to Pop

National Bank of Canada (TSX:NA) and another bank stock look ready to roar higher in the second half of 2024.

Read more »

analyze data
Bank Stocks

Should You Load Up on TD Bank Stock?

TD Bank (TSX:TD) stock has bounced back a bit since its recent lows, but the best may be on the…

Read more »

Businessperson's Hand Putting Coin In Piggybank
Stocks for Beginners

3 Dividend Stocks Every Investor Should Own

Heading into earnings season, which bank stocks are best for dividend income?

Read more »

stock research, analyze data
Bank Stocks

Should Investors Buy the Correction in TD Stock?

TD stock is down more than 25% from the 2022 high. Is it finally time to buy?

Read more »

thinking
Bank Stocks

Could Royal Bank Stock Reach $200?

Growing rate cut hopes and improving analysts’ expectations from Royal Bank’s financial results could help its stock maintain strong upward…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Bank Stocks

1 of the Best Dividend-Paying Bank Stocks to Buy Now and Hold Forever

Here’s a very reliable, dividend-paying Canadian bank stock you can buy at a bargain right now and hold for the…

Read more »