Well, this has been an interesting week. Was it only six days ago an unbuilt Van condo development in a smelly part of town sold out in four hours? At a numbing $670-a-foot?
You bet. Here’s the evidence.
Of course we now know fewer than 130 buyers managed to consumer 418 units, which leads to one conclusion: Most (if not all) of the horny people who camped out all night were amateur speculators, thinking they could buy units with weensy deposits, then flip them for giant profits when occupancy occurs in three years.
Pray for them, for they shalt be squished.
Hardly had the owners powerwashed the pee off the bushes around the presentation centre before the entire Canadian real estate environment started to crumble. Will F man up in his budget next Thursday and murder 30-year amortizations? Actually, it doesn’t matter anymore, because there are so many other leaks in the Titanic.
Like condo asphyxiation, which this weekend has developers across Toronto gasping. The national banking regulator finally managed to scare the big banks into slamming the brakes on runaway condo development in a city where supply will soon overwhelm demand. That will lead to failed projects, plunging condo values and an abrupt end to an extreme case of overbuilding.
Kicked around by OSFI (the bank cop), the Big Six are now refusing to hand over construction money unless developers can show more advance sales and deposits. Some banks are also telling developers they have to pony up more of their own equity, which has sent them scrambling to reign in suckers for syndicate mortgages.
Why would the feds pick on condos in such an obvious way? Because it’s widely believed in Toronto at least 80% of all sales are (like with that Vancouver project last weekend) made to speckers and flippers. This suggests when the market turns – and it will – significant numbers of buyers will vaporize, happier to leave their 20% on the table than close on a unit they know will never be cash-flow positive, and guarantee a capital loss upon selling.
But big-city condo developers soon won’t be the only ones pining for financing. Worse (far worse), CHMC has announced it’s dramatically scaling back on the number of new mortgages it’ll be insuring. Do not underestimate the impact of this. Nine of ten new mortgage originations in the past year have been ‘high-ratio,’ which means the borrowers have a down payment of less than 20% and therefore require insurance. No insurance, no loan.
As discussed here yesterday, CHMC has a limit of $600 billion for insurable mortgages. But our bubbly market, complete with frolicking virgins, bucolic bankers and scanty deposits, has meant it’s all but used up. So while most people had been expecting F just to snap his cute pixie-like digits and create more cash, apparently he won’t. This means two things. First, CMHC insurance will become increasingly rare and, second, if the banks want to continue giving fat mortgages to young people with no finances or savings, then they’ll have to shoulder more of the risk.
Will they do it? Sure, if the virgins are willing to pay an interest rate reflective of that risk, or go away and find a 20% down payment. So it’s not too hard to see what this will do to a housing market which has been fueled by the young & the horny.
But there’s more.
Three days ago I explained how new banking regulations, now in draft form, could alter the landscape, making people who bought houses in the last few years with tiny downs regret they ever did so. OSFI’s rules will not only force banks to more closely qualify borrowers and appraise houses (especially those ‘won’ in a bidding war), but they’ll dramatically affect mortgage renewals.
Banks would be forced to apply their LTV (loan-to-value) ratios to houses whenever a mortgage term expired. So if house prices fall, owners could face the cancellation of their loans unless they cough up money. Example: A $450,000 townhouse in Surrey bought with 5% down has a 95% LTV. If it’s worth $380,000 in five years, the maximum loan amount would fall from $427,500 to $361,000. To gain renewal, the owner would have to pay the difference, less the principal retired.
OSFI says it will collect comments on the proposals and enact them, as is or amended, by year’s end.
Finally, there’s already evidence Titanic is listing. Sales are off about 40% in Vancouver. New-build condo deals are down 59% in Toronto. GTA sales are 24% lower so far this year. And on Friday CREA suggested housing prices may have topped.
They rose in February at the slowest rate since last summer, making it the fourth month running of diminishing increases. Said the realtors, it’s “more evidence that the trend for Canadian home prices is slowing.”
So, if you were F would you mess with mortgages next week and turn yourself into a whipping boy for a housing market now sinking on its own?
Now, lest anyone doubt what happens next, here’s another vid for you. It’s dawning on even Global TV that ever-rising real estate values don’t make cities more valuable, they choke them. By pushing average houses beyond the grasp of average families, bubble markets polarize wealth, rift generations and turn people racist. There is no good that flows from this.
And mercifully, it is ending.