Baby, we got a bubble!?

[interested]

My wife is a banker and she deals with high net worth clients. I can tell you that compliance has become a big thorn in her side and the banks go out of their way to make things difficult. Now she is not dealing with clients who have CMHC insured product but they are very picky as to how much loan to value they will lend (I believe 80% of appraised value maximum but I may be wrong) and only 50% on cottage/vacation property.

I agree there is a "moral hazard" when the banks can have CMHC insure the mortgages, and especially when CMHC was accepting 5% down and in some cases even less possibly. But the majority of Canadian mortgages I am sure are not CMHC insured and are more conventional, which should save us somewhat compared to the US (though not completely) if there is a meltdown.

Like the US however, with the advent of mortgage brokers shopping the market and the banks not always doing their due diligence as when the bank officer had to justify the client lending, there is definately more risk today than say a decade ago.

Let's hope CMHC doesn't go the way of Fannie and Freddie in the US.

 

[Eug]

My wife is a banker and she deals with high net worth clients. I can tell you that compliance has become a big thorn in her side and the banks go out of their way to make things difficult. Now she is not dealing with clients who have CMHC insured product but they are very picky as to how much loan to value they will lend (I believe 80% of appraised value maximum but I may be wrong) and only 50% on cottage/vacation property.

Has it really changed? Cuz people were encountering that 4 years ago too. With high dollar homes, the 20%-down-to-avoid-insurance-fees rule often doesn't apply, regardless of how stable the income is. Some lenders were asking for 30-35% for example, or else you may have to pay CMHC insurance. In fact, the CMHC website has tiers for 35% down - a premium of 0.5%, or 0.8% for self-employed buyers.

 

[interested]

Has it really changed? Cuz people were encountering that 4 years ago too. With high dollar homes, the 20%-down-to-avoid-insurance-fees rule often doesn't apply, regardless of how stable the income is. Some lenders were asking for 30-35% for example, or else you may have to pay CMHC insurance. In fact, the CMHC website has tiers for 35% down - a premium of 0.5%, or 0.8% for self-employed buyers.

Eug,
wouldn't that just support that people have even more equity if they would ask 30-35% down and therefore the overall market would be at less risk.
I will ask my wife when she gets home tonight about this.

 

[PinkLucy]

Anecdotally, it has changed. We banked with the same branch for 25 years and knew all the staff. We had considerable, solid holdings there and always did with no debts. When we began investing in property, we were given pre-mortgage approval on the spot. However, more recently, we were told we would need appraisals and higher-level approval for mortgages, despite having holdings higher than mortgages we would want and no debt. We were told it was new policy and branch-level staff could no longer give approvals or offer special conditions regardless of how well they knew the customer/previous track record, etc.

 

[interested]

Pink Lucy's comments echo what I have heard from my wife.

I think things have changed but clearly there was a 1 and 1/2 to 2 year window in which very low down payments were accepted.

Investors like Pink Lucy don't worry me because they have the financial wherewithall to withstand a downturn. Those investors made prudent investments that they could withstand some adversity.

It is those who spec'ed multiple condos with 5-20% down on each who worry me, especially those who planned to use the gains from previous sales to finance the new condos coming due.

 

[EXgeMMy]

Interesting to hear about these new bank policies when 1 of the major banks still advertise liar loans and another major bank allows you to borrow the 5% you need for CMHC insurance.

 

[cdr108]

Interesting to hear about these new bank policies when 1 of the major banks still advertise liar loans and another major bank allows you to borrow the 5% you need for CMHC insurance.

the problem is inconsistency, which is why in the above article, some CEOs want the Minister of Finance to toughen the rules to make sure EVERYONE is under the same standards.

sometimes what happens is bank A has looser standards than bank B, resulting in loss of market share.
when all is good, you have upper mgmt and share holders saying why aren't you as the company maximizing profits, etc.
when things go bad, its the other way around and bank B can say they acted conservatively, blah, blah, blah.

 

[X2 Buyer]

Eug,
wouldn't that just support that people have even more equity if they would ask 30-35% down and therefore the overall market would be at less risk.
I will ask my wife when she gets home tonight about this.

In 2009 for an investing property I was asked for 30 to 35% down plus appraisal so I think Eug means is there a real change from rule tightening. It seemed some of the lenders might have always asked for 30 to 35%. So does anyone remember how long the loosen period existed ie Zero down or 5% down on investing properties? Or does it still exist today, so it really is an inconsistency problem?

 

[simuls]

Australia has shown that a mortgage finance system can operate successfully without government backing of mortgage insurance or any other form of government guarantee while U.S. experience has shown that even just implicit guarantees can create a giant fiscal black hole for taxpayers. Despite a lack of government guarantees, Australia's mortgage finance system has contributed to high levels of home ownership comparable to the rates both in Canada and the U.S., showing that such guarantees simply are not necessary.

- Neil Mohindra is director of the Centre for Financial Policy Studies at the Fraser Institute.

a) Let's remember who Neil Mohindra is working for and it's not surprising he would want less government intervention. It's a mantra at the Fraser Institute.

b) More importantly, Australia is in the midst of an absolutely MASSIVE real estate bubble. While it's true they had little downturn (similar to Canada), their RE is phenomenally overpriced and due for a very severe correction ala the United States.

I can understand Flaherty's frustration - especially with the head of TD Bank - but it's a clear cut and well known fact that no industry can self-regulate effectively or won't (unless there are serious penalties or it's the lesser of two evils). It doesn't make good business sense to self-regulate unless all the players are on the same page - and that would be anti-market and anti-competitive, so the role falls to government.

 

[w.ll.am]

Not really worthy of it's own thread...

http://blogs.forbes.com/robertlenzn...-delinquent-mortgages/?boxes=Homepagechannels

Interesting little tidbit on shady goings-ons in with US banks and foreclosed homes.

 

[EXgeMMy]

Doesn't this article contradict what Royal LePage released last week? Surprising that this one is coming from the CREA

http://www.moneyville.ca/article/921851--home-sales-expected-to-slide-in-2011

Home sales expected to slide in 2011
A house for sale in the Beach area of Toronto.

A house for sale in the Beach area of Toronto.
DAVID COOPER/TORONTO STAR FILE PHOTO

By Sunny Freeman | Fri Jan 14 2011

Low interest rates should continue to stabilize Canada’s resale housing market but the average national price and sales volumes will likely decline from last year, the Canadian Real Estate Association said Friday.

“The hand off to 2011 for sales activity in the fourth quarter suggests that the continuation of low interest rates will further support the housing market,†said Gregory Klump, CREA’s chief economist in a release Friday.

About 447,000 homes traded over CREA’s Multiple Listing Service last year, down 3.9 per cent from 2009. The annual average home price rose 5.8 per cent to $339,030.

In an earlier forecast, CREA had projected sales volume would fall 4.9 per cent in 2010, while annual average home prices were expected to rise by 3.1 per cent across the country, reaching $330,200.

In its 2011 forecast on Friday, CREA said housing resales will slide a further nine per cent this year due to lacklustre economic and job growth, weak consumer confidence and interest rate hikes that are expected to resume in the middle of this year.

The average national price is projected to fall by 1.3 per cent to $326,000 this year, although actual individual prices vary widely depending on type of housing and location.

Seasonally adjusted sales in December edged down 0.6 per cent from November, ending a four-month string of gains.

The national average home price in December was $344,551 — stable with October and November and up two per cent from December 2009.

In December, actual sales were down 14.4 per cent compared to record-setting sales during the month in 2009, but rebounded from a trough reached in July when sales were down as much as 30 per cent year-over-year.

The summer market was struck by the impact of two months of interest rate hikes by the Bank of Canada, the introduction of the harmonized sales tax in B.C. and Ontario and new mortgage qualifications.

Canadians rushed into the market in late 2009 and early 2010 to take advantage of the central bank’s historically overnight rate, which was 0.25 per cent before the hikes began last June — driving up the price of variable-rate mortgages and making it more expensive to get new fixed-rate mortgages.

However, the rates were implemented gradually and after raising the bank lending rate to a still low 1.0 per cent, the central bank put hikes on hold.

The Bank of Canada is widely expected to leave the overnight rate unchanged at its next announcement on Tuesday and economists expect rates to remain at one per cent until the middle of this year.

Offsetting the low cost of borrowing is the relatively high level of consumer debt that Canadians have amassed as well as uncertainty about the strength of the economic recovery and a stubborn unemployment rate.

“The Canadian housing market appears to have achieved a perfect soft landing after its flying start in the recovery. The market is relatively well-balanced and prices are still meandering ahead,†Douglas Porter, deputy chief economist at the Bank of Montreal, said in a report.

“We expect no fireworks in 2011, with rates poised to slowly grind higher later in the year, job growth decent but not spectacular, and buyers potentially constrained by concerns over record household debt levels.â€

In December, sales were up in half of local markets, led by Calgary, Winnipeg, and Hamilton.

Meanwhile, sales in Canada’s largest urban centres and once white hot real estate markets, Toronto, Vancouver and Montreal were among the markets that posted a small monthly decline.

Overall, seasonally adjusted sales rose 12.1 per cent in the fourth quarter compared to levels recorded in the third quarter of 2010.

“Sales may be starting to plateau in some of Canada’s most active and expensive housing markets. Combined with a pickup in new listings and further interest rate increases, the stage is being set for smaller price gains and a further deceleration in the growth of mortgage debt,†Klump said.

The number of new listings in December rose by less than one percentage point. New listings remain 14.2 per cent below the recent peak reached in April 2010.

The housing market continued to hover in balanced territory and those regions still considered sellers markets could become better balanced as more owners list their properties in the first half of 2011, Klump said.

“With activity having returned to healthy levels and a firm floor under prices, many sellers who shied away from the market heading into the summer are expected to list their properties heading into the spring,†he said.

“Sales in the months ahead are not expected to continue trending upward as steeply as they have in recent months, so an increase in new listings may return many sellers markets to balanced territory.â€

The number of months of inventory — which represents the number of months it would take to sell all the houses currently listed on the MLS — stood at 5.8 at the end of December, unchanged from November.

 

[interested]

http://www.financialpost.com/news/rules+would+condo+buyers/4105580/story.html

I am sorry but I can't copy the article to place it here. I hope the link works.

From the Financial Post.

I note the condominium industry Stephen Dupuis, and Brad Lamb (as developers) are against it because it means less clients.

I believe if nothing is done, then we run the risk of a US style debackle. Trying to do something may not prevent, but if introducing these minor changes, and especially making sure condo owners can afford the full maintenance fee, something alot of buyers don't appreciate until they have been in condo ownership for a while, then the market would just collapse that much harder, just at a more removed date.

Having experience with condos, the one thing to note is that the costs are much more than on a house in 1 regard. In a house, alot of expenses can be postponed until one's finances are in order to do them. In a condo, when the board elects (with even majority approval to do improvements), individual owners do not have the luxury of postponing that expense.

We could argue the whole fairness of condo pricing and expenses, but the reality is that experience has taught me that it is not the cost to buy the property which is the problem in most incidences(assuming you can afford it). It is rather the ongoing expense which in alot fo cases especially for condos is disproportionately large compared to the running of a house fo comparable value. I know people will say you have to budget for the expenses while the condo corp does this proactively with their reserve fund, but there are alot of maintenance issues and costs with a condo (including HST on condo management (the condo management itself is often a significant cost) that do not exist with a home.

 

[cdr108]

http://www.financialpost.com/news/rules+would+condo+buyers/4105580/story.html

I am sorry but I can't copy the article to place it here. I hope the link works.

...

posted the article for you:

Garry Marr, Financial Post ·
Thursday, Jan. 13, 2011

The federal government’s efforts to get tough on borrowing are now focused on the condominium sector, with new rules in the works to make it more difficult to qualify for a loan on a high-rise apartment, the National Post has learned.

Sources say rules now being discussed would add 100% of condominium fees to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage. Currently, only 50% of the fee is considered. The move has the potential to squeeze thousands of consumers out of the market.

“I know for a fact they are talking about it,” said one source close to finance officials who asked not be identified, about the proposal which is part of series of a new rules that the government is described as “seriously considering.”

It is almost a guarantee that the government will once again lower the maximum length of amortizations for a mortgage, down to 30 years from 35. Longer amortizations lower monthly mortgage fees making it easier for consumers to borrow more.

The Canadian Association of Accredited Mortgage Professionals says 30% of new mortgages last year were for amortizations of 35 years, so a considerable percentage of Canadians are taking advantage of the current rules.

About three years ago, amidst a battle for customers between federal Crown agency Canada and Mortgage and Housing Corp and private mortgage default insurers, amortizations lengths rose almost overnight from 25 years to 40 years before Ottawa cracked down. “Going from 35 years to 30 does almost nothing,” said the source, adding that’s why the government is looking at the changes to condominium qualifications.

Ottawa is also still considering a far more controversial proposal to increase the minimum downpayment required to buy a home but it is unlikely to go from the current 5% to 10%, as some have speculated. A 6% to 7% range seems more likely, said the source.

The proposals only affect those Canadians who require mortgage default insurance. Anyone borrowing from a financial institution covered by the Bank Act must get insurance if they have less than a 20% down payment.

“I’m concerned and disturbed if they are making changes, particularly to condos,” said Stephen Dupuis, chief executive of the Toronto-based Building Industry and Land Development Association. “They have already imposed stricter rules and that was plenty.”

In April, 2010 new mortgage rules went into affect that forced consumers to qualify based on a higher interest rate than was on their actual contract. It also required all housing investors, as opposed to people who use a home as principle residence, to have a 20% down payment which mostly affected the condo industry.

Mr. Dupuis said he can live with the amortization period being shrunk but any attempt to increase the minimum down payment will only hurt the market. “There seems to be a fatal obsession with real estate and engineering the real estate market which may be an unhealthy obsession.”

But Ottawa has coming under increasing pressure from the financial industry to tighten mortgage rules. Ed Clark, chief executive of Toronto-Dominion Bank, has called on the federal government to take steps to curb consumer access to bank loans.

The government is said to have looked into imposing new rules on lines of credit but that would be tougher to implement because it would require a change to the Bank Act, said a source.

The condominium proposal would have an immediate impact because the average condominium fee on an existing home is 55¢ a square foot in Toronto, according to research firm Urbanation Inc. which says the average condominium apartment in Toronto is 900 square feet.

Currently only half that approximate $500 in monthly condo fees counts toward monthly expenses for qualifying purposes. To qualify for a mortgage only 32% of gross income can go towards housing, which also includes mortgage payments including principle and interest, taxes and utilities.

Vince Gaetano, a vice-president with Monster Mortgage, said he too has heard the discussion of condominium fees being included in debt calculations and figures it makes sense.

“Yeah, condos provide extracurricular activities like swimming pools, gyms tennis courts and all that stuff. But the reality is you are paying the fee so why make it 50% it should be 100%,” says Mr. Gaetano. “This is going to put some pressure on people. The rules have not changed in ages and this is way before the proliferation of condos.”

Brad Lamb, a real estate broker and developer, said the practice would discriminate against condominium owners. “When you buy a house you don’t put any future maintenance costs [in your debt calculation],” says Mr. Lamb.

“All it is is a knee jerk reaction by idiot bankers pressuring idiot politicians that don’t understand the nature of the condominium market in Canada. What is driving the condominium market in Ottawa, Vancouver, Toronto and Montreal is investors. This won’t affect them. This just attacks the lowly first-time buyer.”

gmarr@nationalpost.com

 

[simuls]

For once, I agree with Brad Lamb. This is knee jerk, idiotic and punishes only the purchaser who wants to live in the condo - as well as being discriminatory to condo purchasers vs house purchasers. Brad also let slip the real problem - investors (overseas) that are propping up the market. I think we should increase the downpayment required further to 30% and if the investor is not from the country, then they must pass harder due diligence laws and make them agree to not sell for a specified period of time (just like we do with GM or any other number of companies in giving us job guarantees, etc.) - RE is not a stock that should be allowed to be bought and sold willy nilly. Also, I think a maximum limit on number of properties owned by a single purchaser in a single building should be limited. I know of a couple buildings with 300 units and 100 belonged to a single person. This is ridiculous and a risk that the other 200 owners should know about because of the collective nature of condo ownership and living.

 

[interested]

^^^
I actually disagree with you Simuls and with Brad Lamb on one part of this point.
Yes, it does discriminate against condo purchasers vs. house purchasers but that is not addressing the inherent problem. The problem is with 5% down payments and only 1/2 the condo fee in the calculation, it is enticing 1st time buyers to get into the market when they do not have the financial wherewithall to withstand even a mild downturn. As well, since condos are becoming the choice for entry level into the market (cheaper to get in than a town house or single family dwelling(as smaller units, not necessarily on price / foot), this is where most entry level buyers go in.
Of course in my view the full condo fee should be included in any calculation.

As I pointed out in a previous post, with a condo, the individual has no control of when certain expenses are made so the individual cannot time some discretionary costs associated with home ownership to a better time for the individual to undertake them. He/she must pay the expense when the condo assesses it or it is applied to the maintenance fees when it comes in the following year.

As well, since you have said that you believe that condo prices may adjust more than 5% downwards, do you not think perhaps we should try and save those inexperienced first time buyers from the potential of significant losses.

If investors take losses, well they are investors. Some investments pan out, some do not. However I believe the investor is more experienced than most end users with purchases so it is more fair that they take risks which perhaps we should shelter first time buyers from.

I liken this to investing in derivatives or other complex products. They have Know your client prerequisites just to make sure that relatively unsophisticated investors are not sold a high risk investment which they do not understand. We try and protect people here, why not in property?

I have no problem with your idea of increasing downpayments to foreign investors. I assure you that the R/E industry and the developers will cry foul to to this too. And if this results in a decrease in property values, everyone will be upset and they will say I told you so. Of course, the other side to the coin is that if the foreign investors are driving up the market making it too expensive for locals, allowing this to continue is just continuing an artificial inflation unless one postulates that we(Canada) will always be in the future going forward a net migration for foreign capital coming in. I am sure you would agree that is quite an assumption.

For eg. In todays paper there is a quote from someone from the Chinese investment corp with billions to invest who is saying shale gas is the way to go because the oil sands are too polluting and too costly. Let's say for a moment this becomes the position of the world. The Canadian super growth story of oil commodity suddenly does not look so rosy, the C$ falls, the stability of the country as a powerhouse may not be as great, and maybe some of those investors decide there are better places to invest. I am not saying it will happen, I simply point it out as food for thought.

Finally, an investor owning 100 condos I have no problem with. However, I think the other purchasers should be made aware of this as you say at time of purchase. The problem is that this is not always known at the time when they go to premarket sales. However, I do agree with your idea of full disclosure and perhaps there should be some pressure on developers to reveal how much of a given building they will sell to end users vs. investors and perhaps put conditions to ensure that investors not be allowed to sell for a period of say 2 years after registration so that end users are somewhat protected. This is not a be all end all solution but would take away some of the risk.

Simuls and others, I would be curious as to your thoughts on my thinking. Do I have it wrong? Or is there merit in what I am saying.