Joanne Lee-Young
The Province
The Bank of Canada has held on to its overnight interest rate in part because it doesn’t want to inadvertently add fuel to the Vancouver housing market.
It’s “right up there in terms of the leading reasons (the BOC is) extremely reluctant” to touch that benchmark, said Bank of Montreal chief economist Douglas Porter. “Unless there is a major economic shock, it’s going to sit on the sidelines because there is (already) a lot of buildup in household debt” in Vancouver, but also Toronto.
A few weeks ago, Porter described the overheated Vancouver housing market as being at a “four-alarm level.”
Now, he says, it’s “fire-breathing.”
“We’re running out of superlatives to describe it,” said Porter. “It’s nothing new. This is a slow-moving beast, but it’s a beast. Higher home prices in Vancouver are putting more pressure on household debt. Younger folks have to take on a boatload of debt in order to buy. It’s not a healthy situation.”
The Bank of Canada said prices in Vancouver are rising sharply because of strong demand due to population and job growth, but also because people are afraid of being left out in a fast-moving market.
On the ground, mortgage brokers are seeing a diverging of scenarios.
Vancouver-based Vida Mohammadian of TMG The Mortgage Group says people buying homes as investments in the “$1.5-million range with 30- to 50-per-cent down are not concerned about rates. They look more at prices and are feeling panicky that prices are going to go up before they get in.”
However, for first-time homebuyers looking at properties “in the $500,000 to $1 million” category, “we have to make sure that if there are any changes in the next five years that they can still afford to make their payments. It’s our responsibility to educate them. Most of my clients are professionals, doctors and engineers, and there are no issues because they have incomes. I also work with people with regular, ordinary jobs, making $40,000 to $50,000 (a year) and I have to make sure they are not at any risk.”
She’s been in the business for 18 years and said this past one has been one of the most exhausting. With bidders clamouring over homes with ever climbing prices, “it’s been very long hours, working until midnight, making sure people qualify so they can hand in subject-free offers. There’s lot of due diligence.”
Another mortgage broker, Surrey-based Luisa Hough of Xeva Mortgage, said in recent weeks, some would-be first-time buyers have been watching to see which way rates will go. “Some have been gifted down payments and they are able to afford a mortgage, but they are (still) facing multiple offer situations over asking prices and are unable to win the bids. If rates went down, there would be more fury with more people trying to get in.”
Last month, a BOC report predicted worst-case scenarios for heavily mortgaged homeowners. It said if home prices were to drop by 15 per cent, about one mortgage in eight — or about 600,000 mortgage holders — would go “underwater,” meaning the homeowner would owe more to the bank than what the property is worth.
And if home prices dropped by 25 per cent, nearly one in four mortgages — or more than one million mortgage holders — would head into this negative zone.
These most troubled of mortgages, said the bank, are held by some of the already most indebted households in Canada. It added that B.C. has a disproportionate share of these largest mortgages, which, in some cases, were outpacing annual household income by more than 450 per cent. These have been on the rise in B.C. with a third of mortgages taken in Vancouver last year categorized as being in the heavily indebted category.
This month, the country’s top financial services regulator spelled out tighter guidelines for mortgage underwriters. It said as risks intensify because of low interest rates, high levels of household debt and rapid increases in housing prices — particularly in Toronto and Vancouver — there is a need to look more closely at a range of factors, including how incomes are verified.
It’s not clear yet how missives like this will intersect with the segment of the mortgage market that is geared at wealthy clients buying higher-priced, luxury homes, where approvals are based on knowledge of a buyer’s wealth rather than his or her income. Last November, RBC scrapped its $1.25 million cap on loans to borrowers with no local credit history so as to be able to better service affluent newcomers to Canada who want to buy more expensive homes.
BMO’s Porter generally explained in a June note that “excess global savings sloshing around have driven many asset prices rocketing higher in recent years — bonds, commercial real estate, infrastructure, private equity, residential real estate in Manhattan and London — and now that wave has washed upon Canada’s biggest cities.”
Porter said measures to tighten borrowing standards in Canada “will simply crowd out the domestic buyer and leave the field wider open for foreign capital inflows. It’s also worth making a distinction here between landed immigrants and those simply seeking to park capital — the former are not of particular concern given the economic contributions they bring, but the latter (think vacant homes in tight markets, potential risk of capital flight, etc.) do deserve the attention of policymakers.”
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