Finance billionaire Smith is sure Canada’s real estate market decline will not last long

Falling housing sales and prices in Canada are making one of the country’s major financial-industry investors bet $1.7 billion (US$1.3 billion) that it will not be a long-lasting issue.

Smith Financial Corp., the family holding company of First National Financial Corp. co-founder Stephen Smith, offered $44 per share for Canadian mortgage lender Home Capital Group Inc. He did it after a 40% drop in Home Capital’s shares that happened amid growing interest rates pushing home prices down by 10% from their peak.

This offer is a little bit lower than Home Capital’s prices we’ve seen a year earlier. “We see headwinds in the macro environment right now,” – he explained. “So I believe that provided an opportunity to buy the company.”

Smith knows for sure that Canada’s housing market can go up and down. He co-founded mortgage lender First National in 1988 – only two years before the market’s strong decline. He is still a First National’s executive chairman, and his 37% stake in the company is worth approximately $792 million currently.

In addition to it, he built up a family holding company with a total of $5 billion in assets, which include stakes in Fairstone Bank of Canada, Canada Guaranty Mortgage Insurance Co., EQB Inc., Glass Lewis & Co. and private-equity manager Peloton Capital Management.

According to Smith, he started purchasing Home Capital shares (with a perspective of a potential takeover in time) in January-February, when the prices had already begun to fall as global central banks signaled a switch to tightening their monetary policy.

In August, Home Capital announced that it had rejected a takeover offer from an unidentified buyer because the bid was too low. Smith didn’t answer whether it was him.

Following this news, the shares showed a temporary increase, but then kept going down. On Monday, they were up by 59% from that point and were trading at $42.37 as of 12:54 p.m. Toronto time.

Smith is sure the market’s turn against mortgage companies is too much. In his opinion, the health of lenders depends more on the unemployment level, which shows consumers’ ability to keep paying for their properties. This number is at historical lows right now.

“As long as people are working, they pay off their mortgages,” – Smith added. “If you purchase a house and its price goes down by 10%, will you stop making your mortgage payments? No, you’ll continue to pay for your home.”

Smith says that in a longer-term perspective, Canada’s housing supply will remain restrained and its high immigration levels will raise demand, pushing prices up and helping them recover from today’s decrease.