A new alternative solution tied to Canadian housing

Talking about the markets these days, one gets a sense that we’re all waiting for the other shoe to drop. It’s been a bull market for so long, now, that we’ve got to see a realignment. The trouble is that the bond market we’d normally flock to as a haven is producing a lot more risk than returns. So where can a savvy advisor turn?

Buoyed by a resilient economy and consistent demand, Canada’s housing market might be a safe place to park some cash, but real estate is a big zone, full of its own pitfalls. Where do you turn when you have too many options?

A recently published whitepaper by the CMI Mortgage Investment Corporation makes the case for mortgage investment corporations (MICs) as the place to invest when looking for an alternative tied to the Canadian housing market. Consistently high demand for homes and a wider shift towards private equity have made for the largest growth in private mortgage lending since 2012. Without institutional backing, though, private mortgages can be tough on lenders. That’s where MICs come in, private companies that pool capital to invest in mortgages rather than the properties themselves. For private lenders, MICs bring the institutional heft and knowledge to back up a private lender. For investors, MICs represent an especially safe way to invest in the housing market.

“Investors get a passive investment opportunity backed by real property,” said Julian Clas, VP capital markets and funds at CIM. They get risk mitigation through the diversification of mortgages and they get a low barrier to entry, they can take advantage of an experienced underwriting and credit risk team to invest with a nominal amount of funds.”

The whitepaper highlights the resiliency of the Canadian real estate market. This year’s dip in value resulted from new regulations that didn’t change the fundamentals of the housing market. Driven by a culture of home ownership and a resilient economy, Canadian house prices should rise again to meet their past peak as soon as 2020.

Even if the market does take a downturn, Clas isn’t worried.

“A MIC with a strong management team, an established book of business and a well-diversified portfolio is better able to weather a market downturn than one that is oversaturated or less varied in its composition,” Clas explained to WP. “A MIC’s mandate to invest in a pool of mortgages mitigates the likelihood that any given investor will experience significant capital loss (compared to owning single mortgages), even with a market downturn.”  

The paper goes into detail on private lending, and the reasons for its growth in Canada. Stringent mortgage rules and an expensive market have all but disqualified first-time buyers from mortgages, rental prices are surging, and people with growing families can’t upgrade to larger homes. Private lenders have filled these gaps in the market, they have less restrictions and more flexibility to lend. Private lending has seen its market share double since 2015. Now private lenders hold 6.7% of Canadian mortgages. 

MICs might be the way to safely invest in these private lenders. MICs are backed up by the hard security of home collateral without being directly tied to property values themselves. Because MIC deals always involve real property, they’re assured at a level not normally available in other investments. Because they aren’t publicly traded, or directly tied to collateralized properties, they aren’t as susceptible to fluctuations in the stock market and real estate price slumps. They’re offering the best of both worlds.

CMI isn’t saying we should dive, wholesale into MICs for all our investment solutions. But in a time when safe harbours are hard to find, MICs represent a way to invest in the Canadian housing market, without exposure to some of that market’s risks. They merit consideration as ballast for any portfolio.

“Advisors should consider MICs for clients looking to maintain a typically predictable income stream,” Clas said. “Clients looking for a passive investment with strong historical returns, clients who want to diversify with real estate while mitigating risk, and clients who want an alternative investment outside of stocks and bonds.”