Category Archives: Canada

Bubble mostly driven by risky lending conditions

A UK firm is saying that Vancouver house prices are being primarily driven by low interest rates and lax lending standards rather than foreign buyers:

In an effort to explain why Vancouver and Toronto have experienced sharper increases in home prices compared to other Canadian cities, the paper looks at lending conditions for insured mortgages.

It states that last year in Montreal and Ottawa, about 10 percent of insured mortgages had a loan-to-income ratio of more than 450 percent.

Meanwhile, in Toronto, about 40 percent of insured mortgages were made at that risky quotient, and in Vancouver approximately 33 percent of insured mortgages had a loan-to-income ratio of more than 450 percent.

“We’re reliably informed that the mortgages in Toronto now stretch to 600% of combined gross income,” the newsletter reads. “So two people both earning $100,000 gross can borrow $1,200,000. What has really changed in the past 12 months is not a big increase in foreign buyers, but a further decline in interest rates, which has allowed lenders to relax lending standards even further.”

The paper concludes with an alarming statistic related to Canada’s gross domestic product (GDP).

It states that while real estate ownership-transaction costs still only account for 1.8 percent of GDP, since the first quarter of 2014 commissions on real-estate sales accounted for 21 percent of Canada’s overall gain in nominal GDP.

Read the full article in the Georgia Straight.

CRA plans increased ‘lifestyle audits’ in Vancouver

The CRA suspects some people in Vancouver might not be paying tax on all world-wide income and are going to be taking an extra hard look at big spenders who aren’t big tax-payers.

Over at the Globe and Mail Christine Duhaime a lawyer who focuses on financial crimes explains how it works:

“They all follow what we call the same typology. … They all want an expensive Lamborghini or a Ferrari, they want a really expensive house, they send their kids to the most expensive private schools they can get in Vancouver,” she said. “So when you try to find money launderers, that’s what you look for. Who went to the Ferrari shop? And that’s what they mean by the ‘lifestyle audit.’”

Ms. Duhaime said while many people think of money laundering as something done by drug dealers, in fact the activity is more often associated with white-collar crime and usually involves tax evasion.

Will going after tax cheats have any effect on the overinflated housing market in Vancouver?  Read the original article here.

Damage from bubble bursting worse than affordability issue

What’s worse?

Working people not being able to afford a home or losing your life savings during a housing bubble burst?

This opinion piece at the Vancouver Sun says it’s not a question of if, but when – and when it does burst the damage to the economy will be far worse than the current affordability question.

The damage will be huge. In 1989, the Toronto bubble burst, and six years later house prices had decreased 50 per cent. Many speculators lost all of their life savings. Financial institutions were in crisis. All home building activities stopped. Unemployment increased. The flow of immigrants decreased sharply. A general economic recession developed.

Governments cannot prevent the bursting of the Vancouver bubble. They can only adopt policies to slow its growth. But these will be opposed by the many who benefit from the price increases and who, as is the case during all euphoric phases, insist that “this time, things are different”.

Read the full article here.

Canadian Banks could absorb losses in US-style housing crash

Good news for your monday morning!

If Canada saw a ‘US-style housing crisis‘ the big 6 banks could generate enough capital in a few quarters to cover losses.

If Canada were to experience a U.S.-style housing crisis, with house prices falling by up to 35 per cent, mortgage lenders including the country’s big six banks could lose nearly $12 billion, according to a new report from Moody’s Investors Service.

CMHC would also take a hit of about $6 billion if they challenge and reject claims, but if they decided not to they would take about half the loss as it would be more evenly split between the banks and CMHC.

You probably don’t have to worry about a US-style nationwide housing crash, because we have a different mortgage market that is explicitly backed by the government. The main concern would be rate increases and job losses as Canadian debt loads continue to increase:

There was almost $1.6 trillion in mortgage debt outstanding at the end of March, including home equity lines of credit, more than double the amount outstanding 10 years ago.

Read the full article over at the Financial Post.

Vancouver market now a national problem

Most people in Canada don’t care about the Vancouver housing market, but that doesn’t mean they would be unaffected by a bursting housing bubble here.

Canadian Business argues that what we need is a national regulator to deal with risks in the financial system:

In 2013, the International Monetary Fund called on Canada to create a federal entity with a clear mandate to monitor threats to the financial system. The IMF earlier this month scolded Ottawa for so far ignoring its advice.

The Vancouver house-price surge is exactly the sort of thing the independent agency should handle. It is a national issue: everyone knows who will be called on to clean up the mess if it bursts. The banks would feel it and likely would curb lending. CMHC would feel it because it has insured most of the mortgages Vancouverites have used to buy their inflated assets.

Unfortunately as a politician anything you could do about the housing market would most likely be political suicide. Owners are voters and nobody wants to see the value of their home drop.  Read the full article here.