Big banks urge tighter mortgage rules

Nero pointed out this article in the Globe and Mail about the Big Six Canadian banks urging the government to tighten up mortgage rules to control runaway speculation in the Canadian real estate market.  Just to be clear, these are the same banks that are making pretty much risk free income from these government insured mortgages.  About 40% of their loan portfolio is Canadian mortgages.  As Nero says:

In what world do the banks have to tell the government to rein in lending and squeeze profits?

The article points out that the banks aren’t so much concerned about people defaulting on their mortgages (the government owns that risk), what they’re really concerned about is mass foreclosures affecting peoples ability to pay off their credit card bills and other loans, since THOSE debts are not government insured.

So these are the big banks, why don’t they just tighten up their own lending standards? Patriotz summed the issue up nicely:

The banks are essentially facing a prisoner’s dilemma problem. They know that if the bubble continues, and collapses, they all will be worse off. But there is no incentive for any individual bank to restrict lending, because its competitors would just take the business, and thus that bank would end taking the biggest hit.

Also an agreement among the banks to restrict lending, even if it could be arrived at, could be viewed legally as a conspiracy in restraint of trade.

So the banks must appeal to a higher level to restrict lending to all of them equally.

So will Flaherty listen to the banks and tighten up mortgage lending standards and if so, what form will that take?  One point to remember is that this issue is about a national housing bubble, and I don’t believe there’s another major market in Canada that is as detached from local incomes as Vancouver.

update: Patriotz points out that Flaherty has made his decision, and somewhat sensibly decided to stick with the ‘warn them mildly and let them dig their own grave’ approach.

“In terms of Canada, we’ve been watching and monitoring carefully and we continue to do that. There are certain tools available to the government if we choose to use some or all of them. As you know, we did so in 2008, and we’re continuing to watch. Right now, there is no compelling evidence of a housing bubble in Canada. There are some signals in the market that are concerning,”

Mark Carney of the Bank of Canada feels the same way:

The central bank has no immediate worry about a housing bubble. However, Mr. Carney reiterated that households should be cautious about taking on home loans at current rates, which will inevitably rise.

“We’ve alerted to this issue, the broader issue of household debt,” Mr. Carney said. “We want to ensure people manage their affairs recognizing that the current situation with interest rates is extraordinary and extraordinary won’t persist.”

Both Mr. Carney and Mr. Flaherty have been urging consumers to act cautiously when buying homes for several months now.

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Drachen
Drachen
10 years ago

@Starving Artist:

I know what you were going for but "doth" is third person singular, "bulls do" in old English, "a bull doth".

Now watch the slings and arrows of outrageous grammar hounds hit me from all angles for calling someone on old English grammar while messing up modern English. 🙂

patriotz
10 years ago

@arit: ” Keeping foreclosures off the market by the banks” Is a method used by US banks to prevent prices from falling. Aside from the fact that it doesn't work (at pointed out above), banks in Canada have no financial incentive to keep prices from falling, as CMHC is guaranteeing the principal. Their incentive is to foreclose and sell as quickly as possible, to get their money back. Any program to keep houses off the market would have to be paid for by CMHC, and that would ultimately jeopardize the Feds' credit rating, as I have pointed out. And that truly would be the nightmare scenario. Frankly I think the Cons are not going to go a damn thing about the bust, just as governments did not do a damn thing about the Ontario bust of the 90's and the… Read more »

Starving Artist
10 years ago

Methinks the bulls doth protest too much.

VRNGD
VRNGD
10 years ago

HOUSING STATS are moving up from the MIND BLOWING success of CANADIAN REAL ESTATE,Developers are in need of MORE shipments,MORE trucks to haul construction material.Oil prices start moving up to fuel the pick up of inflection point beyond January 2010.Gauge will be countinue in process to assist Vancouver Boom2.

domus
domus
10 years ago

Some more about the fight between Realtors Inc. and the competition Bureau: http://www.theglobeandmail.com/report-on-business… Before the 2007 changes, some discount brokers offered to list homes on MLS for a fee, typically less than $700. The homeowner then handled the sale. The CREA changes required all agents to inspect homes before listing them on the MLS and work with other agents throughout the sale. As a result, discount brokers say they could no longer offer their low-fee services and had to charge more to carry out the various CREA requirements. Mr. Neil, for example, charges customers $299 to list their home on MLS, plus $79 for each week the house is listed. When the house is sold, he charges a fee of 0.25 per cent of the sale price. Mr. Neil said if the bureau wins its case, he would likely lower… Read more »

logic
logic
10 years ago

"I have a hunch" that Van RE is fucked. According to Dave, this is now gospel.

ReductiMat
10 years ago

@Phil: There is no law that would force their hand either way. It's up to them. Any type of answer would be pure conjecture.

VRNGD
VRNGD
10 years ago

Conservatives hold lead: poll

because vrengd.

Phil
Phil
10 years ago

If the fed budget introduced changes to mortgages, when would they be effective? Immediately?

Drachen
Drachen
10 years ago

@Dave:

"…is believed by some…"

Those are excellent weasel words. You might as well throw away the whole argument if your whole evidence lies in the belief of a few.

It's believed by some that aliens landed at Roswell Dave. Utterly useless.

Dave
10 years ago

@ReductiMat:

Whistler is believed by some to be counter-cyclic. Sales have dropped due to the US recession and housing market. It's neither good or bad that sales have been from Vancouver. I have a hunch that number will be dropping.

ReductiMat
10 years ago

Dave, I hear you. People will finally hear about the backwater hill known as Whistler.

Speaking of which, any idea why sales volumes has halved two years in a row there? And is it a good thing or a bad thing that in 2009, 75% of all sales were to Lower Mainland-ites?

Betamax
Betamax
10 years ago

#74 realpaul – best post I've read in a long while. Well said.

pricedoutfornow
pricedoutfornow
10 years ago

@Vansanity:

Good point. Flaherty can deny there's a "housing bubble in Canada" since median prices are only $300kish. However, I think we all know that housing bubble in Vancouver is a reality, and perhaps he would not deny that.

Vansanity
Vansanity
10 years ago

I keep hearing the term the "Canadian Housing Market". Is there such a thing?

I recall hearing story after story about the US Housing Market and how strong it was and how it had no bubble. Meanwhile bloggers like most the bears on here saying that there is no US housing market, rather each pocket in the US is its own market. Well we all know how that went down. Once again the blogger's were right.

So, sure there's no Canadian Housing Market bubble, because there's no such market. But there is a Vancouver RE Bubble, n'est pa?

Dave
10 years ago

@Disbelief:

The Lower Mainland.

Dave
10 years ago

@logic:

They aren't just developers. That is only part of their business. I looked at their financials back in 2005 and thought their balance sheet was pretty sketchy and that was during the boom years. Their debt levels and obligations have always been relatively high. From what I recall, the only thing that kept them from going bankrupt for the last number of years was their ability to sell off/develop land assets. The market correction and difficulty is obtaining capital was the nail in their coffin.

Developers and development are a different game altogether.

In any case, how does the health of Intrawest relate to Whistler being a premium market?

Disbelief
Disbelief
10 years ago

I guess we'll have to wait and see. What about the poor stupid schmucks that would buy in at $200k in the valley where are they from???

logic
logic
10 years ago

"Whistler is unique and is a premium market"

—————

Which is why Intrawest (developers) went bankrupt, hey? Start speaking sense or STFU Dave.

Dave
10 years ago

@Disbelief:

All of the above. Money isn't a barrier to everybody. Whistler is unique and is a premium market. A lot of people who will attend the Olympics come from a demographic with lots of money. Real estate prices are sometimes a secondary issue. People will spend a million or two and might only use their place for a week a year (if at all).

Squamish and Pemberton will also appeal to a different demographic.

Dave
10 years ago

@Drachen:

Nah. Things are good. The future looks good. At least that's the case from my little perch.

If I'm wrong, then you can bail me out.

Drachen
Drachen
10 years ago

@arit:

Well then if it's proven ineffective at propping up prices and only slows down the fall (at best) in the states why would it have a different impact here?

Disbelief
Disbelief
10 years ago

Wow a $1.18 million home in Cloverhole on a small lot. The crack out there must be powerful or maybe there smoking horseshit out there. If that doesn't spell bubble I cannot imagine what does.

Dave seems to be speaking out both sides of his mouth. Are these rich Europeans buying a $200k condo in the valley or a piece of recreational property in Squamish or Pemberton maybe. They are two very different animals one is possible the other is doubtful.

arit
10 years ago

Hi Drachen Mortgage Moratorium means whatever you define it to be: It can be this: "A method for creating a moratorium period for a mortgage, comprising the following the steps: creating an equity loan amount to be loaned based upon the value of a mortgagee's property; determining the monthly payment on the loan; determining a period of months which the mortgagee desires to avoid personally making monthly payments; placing a portion of the loan amount equal to the monthly payments for the desired period of months into a fund; and making the monthly payments for the predetermined period from the fund. Read more: http://www.faqs.org/patents/app/20080255985#ixzz0… Or any other method for postponing a foreclosure. " Keeping foreclosures off the market by the banks" Is a method used by US banks to prevent prices from falling. They artificially hold the foreclsed home to… Read more »

Drachen
Drachen
10 years ago

@arit:

"1. First home buyer tax credit.

2. Second home buyer tax credit."

Will only have a maximum effect of increasing market levels to the amount saved.

"3. Mortgage moratorium."

What does that mean?

"4. Home-owner bailout plan, refinances plan paid by taxpayer."

Won't keep prices afloat, just keeps them from falling too fast.

"5. Keeping foreclosures of the market by the banks."

What?

"6. Return to 0/40."

Minimal impact, maybe draw things out 'till next year at best.