Thursday, 27 April 2017

Does the Ratio of Residential vs. Commercial Mortgage Loans Signal Trouble on the Horizon?

Written by Posted On Tuesday, 01 November 2016 07:44

 

There is an old saying that, those who fail to remember the past are destined to repeat it.” This is what many economy forecasters are warning about the Canadian housing market. As red-hot as it can be, the rise seems to have no end. What anyone working in any economic market knows, however, is that what goes up must come down, and the Canadian housing market is no different.

After seeing an out-of-control housing price increase in places like Vancouver, British Columbia, and houses for sale Tuxedo Manitoba, the Canadian government has responded with a 15% tax imposition for foreign investors. The idea is to slow down foreigners who are coming to Canada to buy real estate,which is what has been hiking the prices to such unbelievable heights that the average Canadian cannot afford to live in their own native land.

The other reasons for the tax hikes are to stop the bubble from bursting. Anyone who had their eye on the American housing market would understand the potential for foreclosure fallout, which can tank any economy. What Canadian banks and mortgage lenders can learn from their next door neighbors who are still not recovering seems to be falling on deaf ears.

Banks are leaving themselves totally unsecured in their attempt to cash in on huge profits, and the shift from commercial lending to residential has been exuberant. Some estimate that the shift has been as much as an additional $1 trillion to residential home buyers who may or may not have the financial means to take out the loans or pay them back.

In the past, traditional Canadian banking institutions were split leaning for commercial real estate loans. Currently, lending is as much as 75% commercial with the remaining 25% tied up in residential loans;this is a total overhaul of the way loans used to be structured. Due to the recent increase in loans across the board, the fear is that, in the event of a real estate bubble burst, the residential, or more risky, loans are leaving lenders exposed.

Shockingly, statistics show that the four biggest banks that hold mortgage loans in Canada, CIBC, TD, RBC, and BMO, have taken on an additional $17 billion in residential mortgage loans in just the past three months. This is the biggest lending frenzy in history, and when the top six banks are taken into account, the figure increases to $1 trillion at the end of April, alone.

The biggest problem with the lending practices is that the banks are basing their loans on the soaring prices of homes in relation to equity and what a residential home buyer can afford. If there is a market crash, not only is the homeowner likely to lose all they have regarding their long-term investment, but it will also leave a mark on the economy, which will have them earning less, bringing less home, and with increased monthly budgets, due to potential inflation. These conditions are ripe for leading to the same massive foreclosure atmosphere that occurred in the US less than a decade ago.

Analysts are worried that the banks simply aren’t making stable loans.They are using poor lending practices to cover their losses and to give home buyers the chance to afford their homes in the turbulent atmosphere, which many are forecasting on the horizon.

The response of the banks is that, even if the bubble were to burst and the housing prices fell, the effect on the consumer would be well into the future, giving the economy time to adjust to the market changes. Just like the oil crisis effect was lessened by the real estate boom, a shift in the economy could even things out before the average investor is harmed in any way.

The other difference that the banks in Canada have for the security of their residential loans is the ability to foreclose on any of their properties and sell them to recoup their money. Not stopping there, the banks require the buyer to still be responsible for the additional payments they owe, and the banking institutions are allowed to go to great lengths of wage garnishment. This is very different from the American system,in which the banks have no recourse and are left holding the bag.

 

The hope is that the Canadian public and banking institutions are putting thought into their purchasing and lending habits and covering themselves, should the bubble burst. It is easy to get caught up in a boost, but it’s much harder to recover without a cushion. Because it’s a very different system from that of the US, hopefully Canada won’t experience the same disastrous foreclosure fallout from lending instability. 

 

 

 

 

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Rahul Sharma

Rahul is renowned real estate agent

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