(The opinions expressed here are those of the author, a columnist for Reuters)
By James Saft
April 27 (Reuters) - Those who remember the collapse of the housing bubbles in Britain and the U.S. might want to tune in to the saga of troubled Canadian alternative lender Home Capital Group Inc HCG.TO .
HCG's stock price fell nearly 60 percent on Wednesday, following the launch of an investigation by Canadian regulators into allegations it misled investors, a rush to the exit by depositors and it taking out a C$2 billion lifeline at a punitive interest rate. The lender, which competes in the market for less well qualified borrowers, has hired bankers to help it explore its strategic options. Its shares rose nearly 18 percent on Thursday.
So far, so 2007-2008, but this is Canada, and while there is undeniably a housing bubble, the interesting points won't be just the extent to which this echoes the last housing bubble and denouement but how it differs.
HCG's business model has been predicated on raising funds by offering higher rates of interest to savers and then lending it on, again at elevated rates of interest, to the very kind of borrower who struggles to get financing to swing a purchase in Canada's booming real estate market, where prices in Toronto have surged 33 percent in the past year.
Some of these loans have been "bundled" mortgages in which a primary loan conforming to safer standards and usually made by a traditional lender is packaged with a second loan at a higher interest rate, allowing borrowers to finance up to 90 percent of the purchase price. (http://www.reuters.com/article/us-canada-housing-insight-idUSKBN14V1DY)
That HCG was forced to borrow C$2 billion from an unnamed lender at an implied 22.5 percent interest rate for the first billion and a 15 percent rate if the full facility is drawn puts that whole enterprise in question. HCG has lost about 25 percent of its deposit base in little over a month.
"It's very hard to borrow money at 15-22 percent and make loans at 5 percent," investor Marc Cohodes, a noted short-seller who has been betting against HCG, said Thursday on Twitter.
In another echo of events elsewhere a decade ago, the fallout from HCG's difficulties spread this week into share trading of other similar lenders.
"Based on Wednesday's market action, we believe the issues at HCG may be spreading into the broader broker GIC (Guaranteed Investment Certificate) and alternative mortgage markets. We believe regulators may move quickly to protect the alternative mortgage market confidence and depositors," analysts at brokerage GMP Securities wrote in a note to clients.
UNHAPPY OUTCOMES ARE ALL DIFFERENT
To be sure, Canada's mainline banks, which were noted for escaping the great financial crisis largely unscathed, are generally held to be well managed and capitalized, and thus not likely candidates for a significant round of funding pressure.
Still, as was true in the U.S. and Britain a decade ago, it is very hard to look at Canada's real estate market and not become disturbed by the implications.
Beyond the one-third surge in prices in greater Toronto, fully one in eight homes sold there in the past year went to a buyer who already owns property.
The Canada Mortgage and Housing Corporation on Wednesday gave a slightly less gloomy outlook, saying overvaluation is "moderate" as compared to "strong" in January and citing overvaluation in six markets. Both Vancouver and Ontario have moved to impose taxes on foreign buyers, seeking to cool markets which have left many locals priced out. Prices in Vancouver are down 9 percent compared to a year ago but a household with a median income would still need 36 years to save enough for a downpayment on a typical row or detached house.
Speaking about Toronto prices after the Bank of Canada left rates on hold this month, central bank governor Stephen Poloz said the market had become unmoored from fundamental demand.
"There is no fundamental story that we could tell to justify that kind of inflation rate in housing prices, and so it is that gap between what fundamentals could manage to explain and what is actually happening, which suggests that there is a growing role for speculation in that."
Poloz stressed that the market lacks on overall trigger, like rising unemployment or a global downturn.
The HCG affair, however it turns out, may prove to be only a useful reminder that house price and credit availability can go down as well as up.
Still it is hard to look at other housing bubbles and not conclude that once doubt creeps in, the self-reinforcing cycle of borrowers reaching to buy more house and prices rising goes into reverse. That almost never fails to have a sizable impact on the rest of the economy.
Like unhappy families, all housing bubbles are different and all end differently. (Editing by James Dalgleish)