TORONTO/OTTAWA, May 2 (Reuters) - The funding crisis at mortgage lender Home Capital may spark a welcome cooling in Canada's housing market and take pressure off policymakers confounded by the hot market - as long as the crisis does not turn into contagion, analysts said on Tuesday.
The troubles at Home Capital Group Inc are about liquidity rather than mortgage quality - it is not a U.S.-style subprime mortgage crisis - but the shift in sentiment just a week after Ontario unveiled more measures to cool housing has investors in the mood to sell.
The Canadian dollar has weakened to a 14-month low, and expectations of a possible rate hike by the Bank of Canada have disappeared as the housing worries add to fears of a trade war with the United States and low oil prices.
A housing slowdown is just what many have been hoping for, with concern about a real estate bubble at a fever pitch.
"A little cooling is not a bad thing," said Craig Wright, chief economist at Royal Bank of Canada. "It's a confidence game to some degree, and if people are nervous they tend to get out until they get a clear line of sight."
Bank of Canada Governor Stephen Poloz warned last month that prices have become divorced from fundamentals and speculation is likely playing a role in the Toronto housing market.
A housing slowdown would take some pressure off policymakers who want to wait to see how a new foreign buyers' tax and rent controls announced by Ontario in April will affect supply and demand, but the relief could come at a cost.
Home Capital, Canada's biggest alternative mortgage lender, has seen nearly three-fourths of its high interest savings deposits being pulled out. Its shares have shed 72 percent of their value since March 27. Potential suitors are studying bids for the company, sources told Reuters on Tuesday.
While the Home Capital crisis could take some air out of the Canadian housing market - something policymakers have been trying to accomplish in repeated attempts - the risk is it turns into a contagion, the spark that many have been waiting for to burn the sector down.
Concern about the housing market has now become an "equally important" driver for foreign exchange players who typically look at oil prices and trade flows, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
"The view that housing itself now is poised to slow, I think, is taking hold more forcefully and that's causing the currency to weaken," Chandler said.
A rate hike by the central bank also appears off the table, which could deter investment in Canadian dollar assets as U.S. policymakers raise interest rates. The market now sees more risk of a rate cut this year after having discounted a one-in-four chance of hike as recently as Friday.
"I think it resonates with that sector of the market, hedge funds and the sort of leveraged players who have been looking at Canada for quite some time as being vulnerable," said Shaun Osborne, chief currency strategist at Scotiabank.
Already, realtors and mortgage brokers are expecting more sellers to list houses before the market starts to fall, and buyers may take to the sidelines in anticipation of lower prices, waiting for a selloff to take hold.
Toronto mortgage broker Calum Ross, who does not do subprime lending himself, has advised clients who are real estate investors to sell their Toronto real estate holdings because the combination of price gains and rent control make it a poor investment.
"I sincerely hope the market is going to cool, because anyone who doesn't think that double digit rate of appreciaation in real estate is problematic clearly doesn't understand real estate economics,"Ross said. (Reporting by Andrea Hopkins; Editing by Nick Zieminski)