Category Archives: debt

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.

Realtors waiting to see impact of foreign buyer tax

There are more anecdotes of a market slowdown caused by the new foreign buyer tax in Vancouver.  This latest batch from the North Shore News:

Local real estate agents say they know of several multi-million-dollar real estate deals collapsing and predict the hot North Shore housing market will cool slightly in the wake of a new 15-per cent provincial tax on property purchased by foreign buyers.

“It’s one of the most shocking events that’s ever arrived in our industry,” said Brent Eilers, a longtime West Vancouver Realtor with Re/Max. “Nobody really knows how it will unfold.”

Eilers said the new foreign buyers’ tax is bound to have an impact, particularly in markets like West Vancouver and North Vancouver, which have been “incredibly dependent on offshore money or new money” that’s come from sales to foreign buyers in other areas of the Lower Mainland.

Read the full article here. So far it looks like sales are dropping and listings rising over the last few months. According to zolo, the average sales price in Vancouver has dropped by a few hundred thousand dollars since March.

Lack of home inspection leads to no surprises

At least it should come as no surprise that buying a home with no inspection leads to numerous nightmare scenarios when you actually inspect the property after purchase.

“Recently, I had one house that was so catastrophic, it needed some $350,000 in repairs. They were not expecting that at all because it was newly renovated. But that only concealed all the issues. It was lipstick on a pig. It needs a new foundation, piping, you name it, it needs to be done,” said Anderson, who has been an inspector for six years and was a builder for 25 before that.

A million bucks doesn’t get you what it used to in east van:

Last October, the 40-year-old and his spouse bid $955,000 on an older home in Hastings-Sunrise. It was listed at $899,000 and “we heard there were five bids. We were in the middle. We expected this and wanted to have a differentiating factor.”

Ahead of taking possession, “we had asked if we could get in to do some measuring for our furniture, but they wouldn’t allow it,” said Girard.

On moving day, they arrived to find “an absolute disaster,” said Girard, who described the home as being “not safe for our one-year-old daughter. That was the biggest problem.”

There were also holes in the wall, exposed electrical lines, flooring that didn’t meet walls, kitchen cabinets sitting unevenly over dirt floors covered in rodent droppings. The house, when they had seen it, had been “staged. They had positioned things to cover up problems. Drywall had been ripped out. There weren’t enough circuit breakers for things like the stove to be powered. We had to MacGyver things to make them work.”

Unsurprisingly, the Home Inspectors Association of BC recommends that you get a home inspection before buying.  Read the full article over at the Financial Post.

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.