The Housing Bubble

A report from the St Catharines Standard in Canada. “After more than a year of soaring real estate values in Niagara, ‘the feeding frenzy is slowing down,’ says St. Catharines realtor Randy Mulder. Although the region’s real estate market has yet to be hit as hard as the GTA, he said the impact of measures introduced by the provincial government to rein-in escalating house prices will eventually trickle down to Niagara. Brock University business accounting professor Feyez Elayan said home values in Niagara are catching up after decades of being undervalued, which may help protect them from fluctuations in the market.”

“‘People are starting to figure out the value of the Niagara region,’ he said, referring to amenities and events that make the region a desirable place to live. ‘We are sitting on a gold mine. The prices will come down and settle, let me put it that way. But it’s not going to go back to the previous level.’”

From News.com.au. “The picturesque city of Vancouver took inspiration from Australia by clamping down on foreign buyers purchasing existing homes in the seaside city. But unlike Australia, Canada has no restriction on foreigners buying real estate — and in a country where property taxes are very low, that was driving prices skywards. So, in August last year, Vancouver’s provincial authority, British Columbia, the equivalent of our state governments, moved. From January 2016 to January 2017 house prices in Vancouver fell 18.9 per cent.”

“While foreign investment is often demonised as contributing to Australia’s escalating house prices, the University of Sydney’s senior lecturer in urbanism, Dallas Rogers, said it has been far easier for foreigners to invest in Canada than it has in Australia, hence why the new measures in Vancouver have had such an impact. On the opposite side of the country, Toronto is now also looking at introducing similar measures.”

“In Australia, he said, the major problem is the evolution of property as a means to make money, rather than as simply a place to live. ‘It comes down to the way we think about homes and the way we are still thinking about homes,’ he said. ‘From about World War II we’ve had this changing view of a house as a place to live and to raise a family, to, increasingly, thinking of it as a source of capital.’”

The Vancouver Sun. “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.”

“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. Shadow lenders identified by Postmedia through a review of B.C. civil court filings, lending documents and regulatory filings, include mortgage investment corporations, hedge funds, and private lenders such as realtors, crowdfunding companies, real estate lawyers and mortgage brokers.”

“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.’”

“Postmedia’s review of Ficom enforcement hearings shows an increase in the number of alleged mortgage fraud cases in B.C., mostly linked to private mortgage lenders and mortgage brokers. ‘We have experienced an increase in mortgage broker complaints in the last few years,’ Chris Carter, acting registrar of mortgage brokers, confirmed. ‘About a third of our investigations relate to application fraud.’”

“As a result of the flood of money pouring from Mainland China into Vancouver real estate in recent years, some financial experts say they believe Canadian banks are directly exposed to shadow lending in China and the risks of so-called ‘ghost collateral’ — meaning collateral that may not exist or is used continuously to secure loans for multiple borrowers. Postmedia confirmed that Canadian banks are allowed by the federal regulator, the Office of the Superintendent of Financial Institutions, to accept collateral from China to secure real estate mortgages in B.C.”

“One U.S. hedge fund manager, who did not want to be identified, said: ‘We all know that the ghost collateral is a huge deal, and we all know that the shadow banking and other Chinese influence in Vancouver is profound. The issue it that the ghost collateral ends up re-hypothecated and laundered. So by the time it shows up in Vancouver, it will likely just look like a rich Chinese cash buyer with a suitcase of money.’”

From Macleans. “A year after getting married, Alex Taylor and Rachel Tuttle decided it was time to buy a home and start a family. But soon after starting the hunt in 2015, their hopes were dashed. Detached homes were averaging $1.2 million, and even though Taylor and Tuttle qualified for a mortgage, they would have faced steep monthly payments of $4,000. They adjusted their expectations and set their sights on a townhouse on the outskirts of the city. Still, the cost was too high. ‘It felt very risky to put that much of your savings into one investment,”’ says Tuttle.”

“Taylor is tired of talking about the issue. ‘I know it’s mean to say and I know it would hurt those of our friends who completely over-extended themselves,’ he says, ‘but honestly, we’re praying for a crash.’”

“He’s not the only one. In May, sales dropped 20 per cent compared to the year before in the Greater Toronto Area while active listings surged 42.9 per cent from a record low. Those are the kinds of numbers that cause indebted homeowners to sweat, but serve as a balm for those on the sidelines in Toronto: like Taylor in B.C., many now openly cheer for the market to collapse.”

“The Financial Consumer Agency of Canada found the number of households with a HELOC and a mortgage against their home has increased nearly 40 per cent since 2011, prompting commissioner Lucie Tedesco to caution this month the trend ‘may lead Canadians to use their homes as ATMs.’ Last year, Canadians withdrew $12.8 billion in home equity to fund renovations, according to Scotiabank Economics, and another $3.6 billion for ‘other’ purposes.”

“‘A lot of people have these totally unsustainable lifestyles they’re only able to pull off because, by doing nothing but sit on their ass, their net worth goes up by a few grand every month,’ says Toronto resident Phillip Mendonça-Vieira. ‘I don’t think there’s anyone who doesn’t own property who’s not secretly, like, ‘F–k you, guys. This is unsustainable.’”

From The Tyee. “You’ve heard it a million times. The reason so few of us can afford Vancouver is because there aren’t enough new homes being built. This is the version of reality that real estate industry leaders and their political allies want us to believe. But an investigation of the industry by The Tyee has revealed reality to be much more complex.”

“Over the past six months I spoke at length with financial analysts, economists, industry consultants, realtors and many others to learn the true causes of Vancouver’s housing crisis and who is profiting from it. They were in broad agreement that real estate is at the centre of a massive realignment between our society’s rich and poor — and one that few leaders in the industry seem willing to publicly acknowledge.”

“Real estate has historically been a local industry. The people who buy and sell a city’s homes tended to live in that city. Yet that all began to change a decade or so ago. And one of the major reasons for it is a big shift in our global financial system. It’s a complicated subject. But what you need to know is that the global capital investors use to invest in things is growing much faster than the actual economy. There is so much capital, investors don’t know what to do with it all.”

“Desperate for quick financial returns, many investors are pouring this capital into real estate, turning local markets into global investment opportunities. One of the results, according to trackers such as Bain & Company, is ’skyrocketing home prices.’”

“The real estate industry is aware social mobility is declining. Its leaders know there is huge demand for cheaper homes. But they prefer to profit from income inequality rather than doing anything about it. That’s one takeaway from a major real estate industry trends report produced by PwC and the Urban Land Institute. ‘The middle class has been hollowing out,’ it concluded.”

“With land prices going up in big cities, the industry is increasingly focused on building luxury homes for wealthy people. Not everyone thinks it’s a wise strategy. ‘Time will tell if that’s going to come back to haunt us,’ said one CEO. ‘Not everybody makes $75,000 to $100,000 a year.’”