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April 28, 2017 | Lessons

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


A year ago a single share in Home Capital traded on Bay Street at $39. Today it was $8 – and this was actually a good day for the failing subprime lender. There are several lessons in this story which this week gripped the mortgage industry, the financial sector, regulators and depositors.

First, if you need another good reason not to buy individual stocks, here she be. Retail investors never actually know what’s going on inside the boardroom, despite all the regulatory requirements about disclosure. Home Capital was an investment-grade entity a few months ago, and this week had to take a $2-billion loan at outrageous interest just to keep the doors open. The stock collapsed almost 80% in a year, and 64% in a single day.

So while this is a loser company with a failed management team that has been shorted to death by people betting against our housing bubble, it still has hundreds of thousands of investors with shares in their RRSPs and TFSAs – where losses cannot even be written off. Lesson: diversify. Own the whole market through an index-based ETF and never think you are smart enough to pick winners. You’re not.

Second, Home Capital runs Home Trust and Home Bank, and has billions of savers’ money in its vaults. Well, actually, it doesn’t have any (or much), since it was all given out in the form of mortgages to people too financially dodgy to qualify for loans at the banks. Most of the $13 billion in GICs is locked in, so depositors cannot get at their money to move it. But the funds in high-interest accounts continue to bleed away – another $300 million yesterday.

Home responded by upping its rate on deposits by a half a percentage point which these days is big money. This move promises to makes its balance sheet a little stinkier than it already is, but the outfit has little choice. All that money being removed needs to be covered. Why did so many people entrust billions and billions to a company now held together with bungee cords? Because it was paying a little more interest than the Big Five on deposits.

Lesson: Know where you’re putting your cash and never be seduced into handing over money because of a pathetic premium on the deposit rate. The more you receive in interest, the more risk you embrace (that’s why they pay more). Yes, we have deposit insurance in this country, but the limits are constrained and the process lengthy. Nobody needs that stress – especially risk-averse, wussy investors who would opt for brain-dead, illiquid GICs in the first place.

Third, the collapse of Home Capital (the carcass is now for sale) and the spray it got all over other subprimers like Equitable Trust (owner of EQ Bank) won’t immediately result in the GTA or YVR housing bubbles being shot from the sky. But it hurts.

This is one more nail in a coffin of inevitability. Ontario’s 16-point plan last week to piddle on the housing fires was one. BC’s election, resulting (possibly) in an NDP government, will be another (God help us). Rising interest rates, falling taxes and protectionism in Trumpland will be another. Nosebleed prices, a 33% one-year appreciation and buyer shock in Toronto yet another. A surge in listings as more people understand the party is ending, a big one. And the implosion of the country’s largest Alt lender the latest nail.

Lesson: This is a dangerous time to buy and a fading chance to sell. In fact, you may already be too late. Bidding wars are winding down, realtor auctions resulting in no bids, asking prices being moderated, buyers backing out and the media turning critical. Of course, most people have yet to clue into the change, and we’ll continue to see lineups for new developments or pre-sale condos plus competition for scarce homes in demand areas. But if you don’t need to purchase, wait. If you really need to sell, pounce. In both cases, be aggressive.

We may forget about Home Cap in a year or two. But we will not avoid the consequences. Might as well learn something.

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April 28th, 2017

Posted In: The Greater Fool

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