EQB Inc. T.EQB

RBC

[retiredcf]

February 1, 2022

Canadian Mortgage Industry

I'm just a person...standing in front of a house...asking myself if I can

afford it: Canadian Mortgage Industry Q1/22 Scorecard

Our View: Adapted from the <insert your preferred descriptive word here> movie Notting Hill, our report title refers to the Canadian housing and mortgage market remaining red hot with housing affordability continuing to deteriorate nationwide, particularly in Toronto and Vancouver. Although home sales activity is slowing vs. the peak from this past summer, low housing inventory, low mortgage rates, continued demand for larger living spaces and to a certain extent, fear of missing out (FOMO) has driven detached home prices to all-time highs in almost all key markets across Canada. In the short term, we will be monitoring the potential for higher interest rates and potential for government and/or regulatory changes impacting the housing and mortgage market. Bigger picture, although we expect mortgage loan growth to slow in 2022, we have a positive outlook for our mortgage coverage universe.

Key takeaways from our report:

• Investment thesis: We think many of the tailwinds seen in the housing and mortgage market in H2/20 and 2021 are likely to persist in the near-term although likely a moderating trend. We think the share prices for our mortgage coverage can do well in this environment. Specifically, we think the group offers strong EPS growth potential driving mid-teen or higher ROE; return of capital potential driven by significant excess capital; and attractive valuation multiples. The key risk in our view is a recession and/or severe housing downturn. We view EQB and HCG as the best ways to play this theme and FN as a more defensive play given its lower credit risk.

• Existing home sales in Canada were down -7% Y/Y in Q4/21, but +26% higher vs. Q4/19. For Canada’s major cities, Q4/21 home sales were +31% Y/Y for Calgary; -3% for Vancouver; -6% for Toronto; and -21% for Montreal. Months of inventory stood at just 1.6 in Canada, the lowest level ever recorded, demonstrating high demand and low supply of homes for sale. It’s a strong seller’s market, with the sales-to-new listings ratio for Canada at 0.80, above the 0.55 long-term average (0.35 to 0.50 is considered a balanced market).

• Detached home prices continue to set new highs, while condo prices showing signs of accelerating. In 2021, detached home prices in Canada’s major cities were +34% for Toronto; +25% for Montreal; +22% for Vancouver; and +11% for Calgary. Condo prices are showing signs of accelerating, after significantly lagging the increase in detached home prices in 2020. In 2021, condo prices in Canada’s major cities were +24% for Toronto; +17% for Montreal; +13% for Vancouver; and +3% for Calgary.

• Residential mortgage credit was +10.4% Y/Y (November 2021), higher than both the 20- and 10-year averages. Residential mortgage credit growth has accelerated +320bps in the last year.

• Delinquency rates have returned to historic lows, with all provinces having lower delinquency rates Y/Y. The delinquency rate was -3bps Y/Y in Ontario (0.07%), -3bps Y/Y in B.C. (0.13%), -1bp Y/Y in Alberta (0.48%) and -12bps Y/Y in Quebec (0.14%).