Warren Buffet’s Investment in Home Capital Group Inc.

Published on 3rd August 2017

I’m not usually sure how intimately everyone in Toronto follows real estate. I find some people are even more involved than me as a professional and some people just simply don’t care. Whether you’re on either side of the spectrum, this story is quite juicy, I would have to say. Let me give you the cliff notes of what’s been happening before I dissect it for you.

Home Capital Group (HCG) is a mortgage lending company that is about 5% of the total mortgage market in Canada. They are what you would classify as a “B” lender, with the major banks like TD and BMO as “A” lenders. These B lenders use mortgage brokers to underwrite their mortgages (connects home buyers to mortgage lenders).

Timeline:
Early 2015 – Rumblings of HCG accepting shady mortgages
July 2015 – HCG cuts out brokers publicly
Early 2017 – Ontario Securities Commission (OSC) filed formal allegations
March 2017 – News breaks
March 24 2017 – $600 million dollars of HCG withdrawal via investors
April 24 2017 – HCG borrows $2 billion from pension plan
May 2017 – Apr sales stats come in lower than expected
May 2017 – Real Estate headlines read “THE CRASH IS HERE”
June 2017 – Buffet buys most shares of HCG, becomes majority owner
June 2017 – Buffet lends HCG $2 billion at lower rate than pension fund

So underneath all the media shroud, what do I make of all this? Well..
The temporary collapse of the HCG was very unfortunately timed.
Even if HCG collapsed, that wouldn’t have spelled the crash of Toronto Real Estate.
Buffet didn’t save the day, he almost doubled his money by making that move.
The Real Estate market is still here.
Despite still seeing a frenzy in certain real estate nodes and Buffet’s injection of money in HCG, the questions I keep asking myself are:
Is the current real estate market the calm before another storm?
Did Buffet just make that move to double his money? (Or does he actually believes in the Canadian real estate market?)
Occam’s Razor tells me yes to both. Which is troubling because it’s contradicting. We’re in a time right now where we should be prepared for prices to drop 30% or double again in the next 5 years. Make sure you are prepared for both!
Until next time, Happy Real Estate-ing!
Zhen

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