His nephew is a trainee at one of the Big Five banks.
“Customer in Surrey comes in for a $500k loan (last week),” says Robert, repeating what the boy banker told him. “The guy squeaks by on the qualification for the mortgage payment, but is $10,000 short on the 5% down. Helpful personal banking loans officer suggests that he take out a 10k line of credit, give it to his father, so his father can give it back to him with a gift letter. Voila, 5% down. After all, you’re richer than you think.
“My nephew, needless to say,” adds Robert, “is rather disenchanted at the prospect of a future of cubicle dwelling at this upstanding institution.”
As I mentioned some days ago, house buyers needing 95% financing are not allowed to borrow the last 5%, or their loans won’t be eligible for CMHC mortgage insurance. So what the boy witnessed was illegal. And if the loans officer’s willing to do this in front of a moist little trainee, it makes you wonder if the practice is routine.
More importantly, is real estate in such a descent in poor Surrey (and elsewhere) that even bankers are going badass? “The people I work with are largely in shock,” says an IT guy toiling in the mortgage originations centre of another massive bank with a $145 billion home loans portfolio. “Business is now down by two-thirds and I bet half the people won’t be there by June.”
Safe bet. Big downsizings in store, and this will be one lonely year to be flogging mortgages.
Consider some of the news of the past twenty-four hours, if you doubt me.
Teranet tried as hard as it could to hide the bugs on its December numbers (“December home prices up 3/1% in 12 months,” its release headlined), but it didn’t work. Every market in Canada has fallen from historic highs with the exception of Hamilton and Quebec City. Vancouver prices are down 4.3%, which doesn’t sound like a lot until you realize it’s the third biggest monthly drop since the 2008-9 meltdown, the two others being August and September. Ouch.
Victoria is down 5%, Edmonton negative 11% and Calgary lower by 7.4%. Toronto has three declines in a row and this is the second-biggest tumble for the six largest markets since the depths of March, 2009.
But all this is piffle compared with new construction in the godless GTA. The latest RealNet numbers speak for themselves: Total monthly sales the second-lowest on record. Total sales in 2012 down by 18%. December sales an arresting 52.1% lower than the same month a year earlier. Inventory of unsold condos up 29% over late 2012.
Yes, prices are higher even as sales slag, due mainly to a 44% jump in the cost of new detached homes over the last four years as the number of available units shrivels. So, condos are flooding the GTA and new SFHs are relatively rare. Condo prices are starting to deteriorate along with sales while detached houses get more unaffordable and rare. This is not a happy market.
Now what do cheating bank loans officers, mass mortgage layoffs and lousy sales have in common? Falling demand – made all the more poignant since it’s taking place amid the lowest loan rates since Kevin O’Leary had hair.
It’s exactly this housing funk which has the Bank of Canada backstroking as it now surveys the real estate landscape. Its growth forecast has been cut and this is the big news: “While some modest withdrawal of monetary policy stimulus will likely be required over time consistent with achieving the 2% inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such
withdrawal is less imminent than previously anticipated.”
Does this mean mortgage rates won’t increase for at least a year? Of course not. Most Canadians have locked in (once again) to fixed-rate loans, all of which are financed in the bond market, not tied to the central bank rate. Bond prices have only one direction in which to head as the US economy gains breath. So if the Bank of Canada never upped its rate again, seven in ten homeowners will face increases as their mortgages mature. In the US they called this ‘teaser rates’.
However, as riveting as this may be, it doesn’t matter. The evidence of a real estate reset is too compelling.
Expect a year of drama and contrasts. Sales drought in vast suburban 905 tracts while bidders fight in 416 urban micro-markets. Plunging prices in the Lower Mainland while a top forms in Cowtown. Depression in Edmonton and shock in the Peg. Summer bargains in Muskoka and condo illiquidity in Toronto. Greater Fools lulled by cheap money and cheaper bankers. Sellers who will never look back.
And one jaded kid.
Say, where did all the rebels and heroes go, anyway?