Interest Rate & Economic Changes: How are Private Mortgage Investments Impacted?
The Good
1. It’s better to lend than own right now.
In 2020 investors would have likely faired better to buy real estate rather than lend against it. 2022 and 2023 is likely a time where it will be better to lend and collect a fixed return compared to owning the asset. Low risk first mortgages create the biggest opportunity to make a positive yield, even if home values decline.
2. Hosper MIC is growing.
We are exceeding our targets of monthly MIC subscriptions as investors are strategically shifting capital to park their money in lower risk, fixed income investments. MIC investments offer instant diversification, which is especially appealing in an uncertain market. A larger MIC means more diversification for shareholders.
3. Investor rates are rising.
Yields are increasing in both our MIC and Direct Mortgage Investment (DMI) program. Private mortgage rates, like bank rates, are cyclical and tend to fluctuate over time. We are currently in a rising interest rate environment which is giving us the ability to generate higher returns for investors. It is important to note that our pricing is not tied to the BoC rate, however, competitive forces, like supply and demand of capital and the pricing of our competitors, dictate our pricing.
4. New loans at lower risk.
While declining home values represent a risk for “in-flight” loans, it simultaneously lowers the risk for new originations. If we lend against an asset today that has declined in value by 10% in the past 6 months, then we are lending against its new value, not peak value (provided the appraisal is accurate). If the value dropped another 10% during the term of our loan (tolerable by most LTV buffers) the property would experience a 20% decline from peak to trough, but only a 10% erosion of our LTV buffer.
The Bad
1. Low sales volumes and decline in average sale price.
BoC's drastic policy change has had a significant and immediate impact on Ontario’s housing market. Despite the fact of underlying fundamentals, supply & demand of Ontario housing is still supporting an upward trend in home values; yet we are seeing sellers holding out as they are still wishing for their neighbour's sale price from earlier this year, while buyers are waiting to see if further rate hikes will lead to a better deal before they buy.
This, of course, is an oversimplification, but is a crude explanation for why we are seeing very low sales volumes, leading to a decline in average sale price in many markets in Ontario. Remember Hosper always takes an LTV buffer, primarily to allow for market decline (so long as the decline does not erode the entire LTV buffer before our exit).
2. Leveraged investments seeing compressed spreads.
Bank rates have risen faster than our rates, which means levered investors (those borrowing to invest) are seeing their spread temporarily compressed. The good news is we are working to expand the spread as much as possible as we attempt to push rates up.
The Timely
All Hosper loans are short term loans by design (6-12 month terms). This mitigates the risk of locking in at a certain rate for a longer time frame and allows us to spread originations evenly over the year. This is especially true within each of our 3 MIC Funds, where we spread hundreds of loans evenly over a 12 month period.
Time (along with location and property type) is the 3rd dimension of diversification. If you assume an even distribution of loans, only one twelfth of loans would be originated in the "peak" month. The analogy that comes to mind here is dollar-cost averaging. Though "the peak” only become clear with hindsight, we are buying mortgages evenly across the year in months where home values are increasing, decreasing, or remaining flat.
If you have any questions about the above information, please contact your Hosper Investment Representative. No question is too big or too small – We’re happy to help!