(Yeah, the font is too small to read exactly, but, you get the idea.)
Massive and risky home loans are increasing in number across Metro Vancouver, while mortgage fraud cases are also on the rise, connected to the growth of so-called “shadow banking,” a Postmedia investigation shows.
The trend of increasingly risky loans underlying Metro Vancouver’s high home prices is illustrated by Bank of Canada figures that show the rapid growth since 2014 of large mortgages made to people with relatively low incomes.
This is a growing danger for Vancouver’s real estate market, because under new tighter lending standards introduced for banks in fall 2016, the Bank of Canada says that many of these big mortgages can no longer be insured, and won’t be issued again by federally regulated lenders.
As a result of the tighter federal lending rules, borrowers trying to buy million-dollar-plus properties in Vancouver’s market are increasingly taking out dangerous loans from shadow bankers in a fast-growing and poorly regulated financial market.
There is also evidence of growing links between shadow banks and traditional banks, according to the Bank of Canada’s June 2017 report, as people borrow large amounts from shadow lenders to use as down payments in order to qualify for lower-interest loans from federally regulated banks.
“Price increases in Vancouver and Toronto have an element of speculation to them,” Bank of Canada Governor Stephen Poloz said last week, while issuing the bank’s biannual financial system review. The review showed “riskier characteristics are increasingly evident” in new mortgages.
A December 2016 Bank of Canada report estimates shadow lenders now account for $1.1 trillion in debt — about half as much as the traditional banking sector — and that over the past decade “these new players have become more important and have changed the face of the Canadian mortgage market … (as) tightening bank regulation can lead to migration of activity from the traditional banking sector to the shadow banking sector.”
Postmedia’s review of over 30 regulatory or civil court cases shows a trend of allegations that home buyers and real estate professionals are involved in deceptive mortgage applications that include exaggerating the incomes of borrowers, forged documents of home ownership used by multiple borrowers to obtain mortgages, phoney claims of offshore assets used to back home loans, falsely inflated collateral accepted by subprime lenders to fund real estate development loans, and falsified CRA tax return documents.
For Hilliard MacBeth, an Alberta-based author and wealth manager, the Bank of Canada loan risk statistics and the related growth of shadow banking in Vancouver and Toronto herald a crisis.
“These properties in Vancouver are so expensive that you need people either laundering money or loan fraud or people borrowing such large amounts of money that should never be allowed, in order to keep it going,” MacBeth said. “If everyone is reporting their incomes honestly in Vancouver, there is no way that housing prices can stay where they are.”
– image and excerpts from ‘Risky mortgages, shadow bankers threaten Vancouver housing market’s stability’, Sam Cooper, Vancouver Sun, 16 Jun 2017 [hat-tip to The Auteur; and hats-off to Sam Cooper for pursuing this]
(* The author has exercised their right to poetic license in the writing of the title of this post.)
But, seriously now folks, notice how none of the mainstream players and commentators consider the option of a price crash as a solution to most of Vancouver’s housing problems.
A price crash, a real price crash, would flush out all speculators and all appetite for speculation for about two decades, perhaps even three. The price of accommodation in our fair city would drop to fair fundamental values (perhaps lower for a brief period). All housing would be used, as there would be no pie-in-the-sky jackpot for those who wanted to hold ‘units’ like poker chips. Lending would tighten to the point that one would have to be able to support a purchase with demonstrated income (novel idea!).
Sure, people would get hurt, but people are hurtin’ now, and who is to say who should be hurtin’ and who shouldn’t?
Real estate and related activity would drop from, what?.. its current inflated 30% of the economy to a more historically normal less than 10%. Kids would go to classes rather than smoking weed while tacking cheap shingles to roofs without harnesses. We’d be able to talk about things other than RE at BBQs (I know this may be difficult, but we can do it!). Our minds (and behaviours) would stop being blown and distorted by stories of professionals making more money via their modest house than that saved and invested from an entire 40 year career of honest earnings.
Homes would become homes again.
Vancouver would never be cheap, or ‘free’.. nobody’s expecting that. But ‘honest’ prices, determined by those who actually want to use properties and are prepared to fund them from their own actual funds, would be a very good thing for the longer term health of the city.
How many times should we say it? Don’t build residential towers. Don’t make or let people live in them, least of all families. They are antisocial, high-maintenance, disempowering, unnecessary, mostly ugly, and they can never be truly safe. No tower is fireproof. No fire engine can reach up 20 storeys, period.
Towers are again raising their heads across the urban landscape, creatures of egotistical architects, greedy developers and priapic mayors. We gasp at their magnificence, their extravagance, their sheer height. Yet like Grenfell they are alien creatures in a British city. They do not converse with their context, they thumb their noses at it.
There is no need to build high at all. The developers’ cry, that cities must build high to “survive”, is self-serving rubbish, the more absurd when their towers are left half-empty. The principal reserve of residential space in British cities is derelict land and the under-occupation of existing houses. Unless we wish to build at the squalid densities of Mumbai and Hong Kong, high buildings require space round them and extensive ground servicing.
Hence the most “crowded” parts of London are not around towers but in eight-storey Victorian terraces. The boulevards of central Paris have treble London’s residential density without towers. Westminster council’s aborted Paddington Pole, at some 60 storeys, had fewer housing units than the high-density street housing suggested by its opponents. The tall blocks wanted by Boris Johnson for Clerkenwell’s Mount Pleasant estate are at a lower density than the low-rise town houses proposed by the consultants Create Streets.
Besides, people are entitled to the city they want. When in the 1980s Liverpool’s Militant movement asked Everton’s inhabitants what should be done with their towers, the reply was pull them down and give us back the streets. It was done.
Today’s surge in tower building – some 400 are in the pipeline of London’s uncontrolled property market – is driven by a quite different demand. It is from high-income migratory couples and foreign buy-to-leave investors. These people do not want a neighbourhood. Their social life is dispersed. They want a locked gate, a concierge and a pied-à-terre with a view. They want a gated community in the sky. When I moved from a tower flat to a street flat, I encountered a completely different city, exchanging what amounted to a self-catering hotel for a community of neighbours.
– image and excerpt from ‘The lesson from Grenfell is simple: stop building residential towers’, Simon Jenkins, The Guardian, 15 Jun 2017
The red square on the map above represents the amount of space it would take to provide every household in Canada with a 66ftx122ft lot (which is twice the size of a standard Vancouver lot).
Population density (people per square km):
Hong Kong 6,644
South Korea 513
United Kingdom 268
South Africa 43
United States 33
Canada 4 (yes, four — not a typo)
C’mon people! Open your eyes! Think!
Did you know that Vancouver Island is bigger than Belgium?
If the entire population of Canada moved to Vancouver Island, the population density there would be 1,145 people per square km.
If the entire population of Canada moved to the island of Newfoundland, the population density there would be identical to that of Japan (330 people per square km) and less than that of the Philippines, Israel, India, the Netherlands and South Korea.
Related post: ‘Land: Not Making Any More; Don’t Need To’ (2011)
The amount of space it would take to provide every person on the planet with a standard Vancouver size lot.
“Here, in a nutshell, is what Saretsky has learned. The reason most Vancouverites can’t afford a home is because of three related trends. The first thing you need to know is that low interest rates make it easier than ever to borrow money and invest in real estate. The second is that buyers from China and elsewhere are investing in the market at record levels. The third is that as real estate prices across the city skyrocket, a surge of domestic speculators — including first-time buyers worried they’ll miss their chance to buy a home — is causing prices to go even higher.
Or in Saretsky’s words: “I would boil it down to low interest rates creating an easy credit environment, slash foreign capital coming in and distorting the market, and ultimately, as prices went up, it fuelled a fear-of-missing-out speculation.”
– from ‘A Realtor’s Revolt – Why Steve Saretsky is exposing the truth about Vancouver’s real estate industry’, Geoff Dembicki, The Tyee, 12 Jun 2017
Gee, this guy sounds like us.
Note how he correctly classifies first-time buyers as domestic speculators.
All buyers here are speculators, have been for many years. – vreaa
May 2017 – REBGV New Average Sale Price Highs:
– image from ‘Lamborghini collides with fire hydrant at downtown Vancouver intersection’, by Harrison Mooney, Vancouver Sun, 30 May 2017
What has this got to do with Vancouver RE? you might ask.
An excellent question, dear readers.
Ok, so the references are oblique, and we don’t fully understand them ourselves.
And, while we’re talking about elusive understanding, we don’t understand why anybody would spend a gazillion dollars to buy (lease?? test drive???) a car that is shorter than a fire-hydrant is tall…
I mean, think about it.. the fire-hydrants are looking DOWN on you when you drive past lying down in that thing…
Nostalgia for go-karts may have something to do with it.
We’ve never understood the appeal of these cars.. their engines sound like sewing machines..
Anyway, believe it or not, but this incident became a full article in what’s left of our city’s only newspaper.
Slow news day?
Back to possible RE associations:
Going too fast. Hubris. Unexpected obstacles. Superficially powerful but actually very fragile. Look at me I’ve got lots of money. Vulnerable. Walk away from deposit.
During the first two weeks in May, according to preliminary data from Toronto Real Estate Board, home listings surged 47% from the same period last year even as sales plunged 16%. The average selling price dropped 3.3% from April – and this, after a 33% year-over-year spike in home prices in March and a 25% surge in April. Something is happening to Toronto’s blistering house price bubble.
It comes after Bank of Canada Governor Stephen Poloz warned in April that home prices are in “an unsustainable zone,” that the market “has divorced itself from any fundamentals that we can identify,” that there was “no fundamental story that we could tell to justify that kind of inflation rate in housing prices,” and that “It’s time we remind folks that prices of houses can go down as well as up. People need to ask themselves very carefully, ‘Why am I buying this house?”’
“We are seeing people who paid those crazy prices over the last few months walking away from their deposits,” Carissa Turnbull, a Royal LePage broker in the Toronto suburb of Oakville, told Bloomberg. She said they didn’t get a single visitor to an open house over the weekend. “They don’t want to close anymore.”
“Definitely a perception change occurred from Home Capital,” Shubha Dasgupta, owner of Toronto-based mortgage brokerage Capital Lending Centre, told Bloomberg.
“In less than one week we went from having 40 or 50 people coming to an open house to now, when you are lucky to get five people,” Case Feenstra, an agent at Royal LePage Real Estate Services Loretta Phinney in Mississauga, Ontario, told Bloomberg. “Everyone went into hibernation.”
In Canada, the theory has spread that real estate values can never-ever go down in any significant way – on the theory that they always go up – because they didn’t take a big hit during the Financial Crisis, and because the prior declines have been forgotten. So optimism about rising home prices had been huge. Now weekly polling data by Nanos Research for Bloomberg is showing the first signs of second thoughts. Two weeks ago, the share of people saying home prices would rise in the next six months was a record 50.1%. The following week, it dropped to 47.7%. In the most recent poll, it dropped to 46%.
But those who are able to sell at what appears to be the very tippy-top of the market are not complaining. Bloomberg cites business school professor Michael Hartmann who put his north Toronto home up for sale on May 17 sold it on May 22 for C$1.65 million, C$10,000 above asking price. He and his wife are planning to rent and see.
– from ‘All Heck Breaks Loose in Toronto’s House Price Bubble’, Wolf Richter, 24 May 2017
Prices haven’t started to drop yet, so can’t really say… But, could be.
I particularly like the BOC Governor’s suggested question from April: “People need to ask themselves very carefully, “Why am I buying this house?”
Exactly! Regular readers here will know we’ve been discussing this point for years.. If even part of the answer is “because the price will go up”, the buyer is a speculator.