Home Capital Group Inc HMCBF

RBC Notes

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Canadian Mortgage Industry

Whatcha gonna do when House-amania runs wild on you? Canadian Mortgage Industry Q2/21 Scorecard

Our view: Canadian housing activity continues to accelerate with home sales at all-time highs and home prices in many cities at their all-time high (cue the Hulk Hogan reference). We think housing and mortgage activity is likely to remain strong in the near term, driven by continued pandemic-related desires for larger living spaces and historically low mortgage rates. However, we believe housing activity will gradually slow in part due to deteriorating housing affordability and potentially higher mortgage rates in 2022.

Key takeaways from our report:

• Investment thesis: We maintain our positive view on our mortgage coverage universe, as we believe it offers attractive valuation upside, reflecting: (1) continued favourable housing/mortgage activity; (2) stronger EPS growth driven by improving loan growth, loan loss reversals, non-interest income plus positive operating leverage; (3) OSFI potentially lifting its ban on share buybacks, dividend increases and special dividends sometime over the next year - this could lead to significant share buyback activity and dividend increases given increased excess capital generated during the ban; and (4) improving valuation multiples reflecting the factors above. We view HCG and EQB as the best ways to play this theme.

• Existing home sales in Canada were +53% Y/Y in Q1/21 (up from +36% in Q4/20), driven by continued historically low mortgage rates and pandemic-driven desires for larger living spaces. For Canada’s major cities, Q1/21 home sales were +91% Y/Y for Vancouver; +89% for Calgary; +69% for Toronto; and +5% for Montreal.

• Detached home prices continue to accelerate, while condo prices remain weak but are showing some early signs of improvement. On a Y/Y basis in March 2021, detached home prices in Canada’s major cities were +29% for Montreal; +23% for Toronto; +18% for Vancouver; and +7% for Calgary.

• Detached home price appreciation continues to outpace condos, but condo prices showing early signs of “turning the corner.” Detached prices are at all-time highs in Toronto, Vancouver and Montreal and within 5% for Calgary. On a Y/Y basis at March 2021, detached home prices were +29% for Montreal, +23% for Toronto, +18% for Vancouver and +7% for Calgary. Condo prices in Toronto and Vancouver were flat to down through the pandemic, but saw condo prices increase by +6% during Q1/21, likely reflecting expectations of increased demand for condo living when the pandemic is over.

• Residential mortgage credit was +7.0% Y/Y (February 2021), higher than both the 20- and 10-year averages. Residential mortgage credit growth has accelerated +200bps in the last year.

• Delinquency rates have returned to historical lows following a brief uptick this past summer, helped by both mortgage deferrals and government income support programs. The delinquency rate was +1bp Y/Y in Ontario (0.10%), +1bp Y/Y in B.C. (0.16%), flat Y/Y in Alberta (0.52%) and -2bps Y/Y in Quebec (0.24%).