What are you buying today?

[Danger Zone]

Initiated a position in PM

[PatientCheetah]

DISCK

[Lance]

EWP (iShares MSCI Spain Capped ETF)

Thanks,
Lance

[KCLarkin]

HCG.TO

Are you not worried about the CDN housing market? What will happen to HCG earnings  if the market corrects 40-50%?

I'm not done buying yet. So yes I am very concerned. Please short HCG!

 A few reasons why I think the concern is overblown:
- Most mortgages in Canada are full-recourse. Strategic default isn't an option so a dramatic, nationwide drop (like the U.S.) is very unlikely. It also means that unemployment is the key metric to watch. As long as borrowers are employed, HCG would be able to recover a significant portion of any defaults even if houses were underwater.
- HCG has a Loan-to-value ratio on its uninsured portfolio of 65%. That means that house prices would need to drop 35% and borrowers would need to default before their would be significant losses.
- Why would house prices drop 40-50%? The most likely cause would be a dramatic spike in mortgage rates. Do you see any evidence of that happening anytime soon?
- Unlike U.S. lenders, HCG keeps most of its loans on its own books. It has a very large incentive to maintain credit quality.
- Most of HCG's loans are in Ontario. Ontario should benefit from the low Canadian dollar.

Am I worried about Canadian house prices? I have been worried since at least 2000. In the meantime, HCG has grown 24% per annum.

At a 10x PE for a stock growing 15% per year, I think I am getting compensated for the risk. I just wish it was cheaper. In 2013, I think I was buying it at 8x not 10x.

[no_free_lunch]

Thank KClarkin for your analysis. 

I would just add this has been consistently one of Jason Donville's top picks for years and for essentially the reasons that you listed.  I wasn't aware though that they were more focused on Ontario, it definitely strengthens the thesis.

[KCLarkin]

Thank KClarkin for your analysis. 

I would just add this has been consistently one of Jason Donville's top picks for years and for essentially the reasons that you listed.  I wasn't aware though that they were more focused on Ontario, it definitely strengthens the thesis.

78% of loans are in Ontario. Only 5% in Alberta. Geographic concentration is a risk but the limited supply of detached homes in GTA (due to provincial policies) does partially justify the astronomical prices in Toronto.

[ERICOPOLY]

- Most mortgages in Canada are full-recourse. Strategic default isn't an option so a dramatic, nationwide drop (like the U.S.) is very unlikely.

So it's just like Florida, which is also a full-recourse mortgage locale.

Yet Florida had a large decline.  I think it was one of the hardest hit US markets.

Would the US decline have been less severe if the entire country was full-recourse, just like Florida?  I can't see what to make of the full-recourse aspect if Florida was one of the hardest hit states. 

[Hielko]

I also find that part of the argument non-convincing. The Netherlands (my home country) has full-recourse mortgages, but in the eighties we had a nice 50% drop in house prices. The drop since 2008 has been a lot more gradual and is currently at -20%, but its still sizable. I bet there are plenty examples of countries with full-recourse mortgages and large price swings. I don't know if the intuitive idea of full-recourse is higher risk is supported by the historical data.

[Granitepost]

Please allow me to draw your attention to the large appreciation in Toronto real estate prices in the Spring of 1974 (about 35% in a few months I think), which prompted the Government of Ontario to enact the Land Speculation Tax Act, 1974.   This Act provided tax on capital gains on houses in excess of 100% of the gain and resulted in the killing of the market for houses for an extended period.  The resultant lack of liquidity and uncertainty about market price of properties caused a major disruption in the market as speculators who had bought several houses were unable to sell.  Other periods like 1989 were not as severe as 1974 in many respects.   It is not mentioned these days because it was an Ontario centric event and was before many of our Board members were born, but is indicative of the fact that you just never know what will happen in any market and what will be the cause a disruption.   The 1974 Act was I believe repealed a few years later and after a while the market gradually recovered.   I remember speaking to a real estate agent at the time.  When I asked her what the market was like, she simply said there was no market.

[KCLarkin]

Why didn't the Canadian housing bubble collapse in 2008? And if it didn't collapse in 2008 during a worldwide financial panic, why would it collapse in 2015?

America's sub-prime lender (Countrywide) had delinquent loans of 11%, 15%, 19% in 2004, 2005, 2006. Canada's sub-prime lender (Home Capital) had delinquent loans of 0.35% in 2013.

"The bubble in America was caused by some combination of megalomania, insanity and evil in, I would say, investment banking, mortgage banking,” Charlie Munger.