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.
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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.