Three Theories for Cooling the Housing Markets in Canada’s Hottest Cities

Toronto and Vancouver have markets perceived to be totally out of control, to the point of policy-makers calling “emergency” meetings to discuss the causes and strategies. How can the rules be adapted to cool things off? At Vancouver’s meeting, three ideas were proposed.

  1. Refine mortgage qualification – the mortgage payment:income ratio can be scaled up or down. Right now, maximum 40% of a buyer’s income can go to a mortgage payment. Decreasing this would result in fewer qualified mortgages.
  2. Increase the banks’ capital requirements – if banks are required to keep higher reserves, naturally, they will increase interest rates and/or tense up their underwriting guidelines to protect themselves against buyers defaulting on their loans. If it is more expensive to loan, banks will have less incentive to do so.
  3. Tax foreign buyers specifically – other countries including Hong Kong, Australia, Switzerland, the United Kingdom, and Mexico apply specialized tax for non-permanent residents who buy local real estate. Economists think foreign investors trying to avoid taxation or parking cash in residential real estate drive up the prices in the hotter markets while homes remain vacant. Applying the tax could help alleviate the issue; how much this would actually help is hotly debated.

Source: Buzz Buzz Home

Analysts are Holding Their Breath For the Collapse

The real estate market has been in constant growth in Canadian markets like Vancouver and Toronto for YEARS. Market analysts foresee a reversal, but it never comes. The factors that they predict jeopardize the market’s momentum are:

  1. The deceleration of the global economy means less minting of millionaires. The accessible pool of international investors seeking Canadian real estate has peaked.
  2. The decline of the oil and gas industry has two effects: Decreased demand – businesses fail, and the enterprises that depend on them also fail. This means less jobs, and weakens the demand for housing. Increased supply – as homeowners become unemployed and unable to maintain mortgage payments, they could be forced to sell which means an influx of housing supply.
  3. Also tied to the energy sector, more businesses and supporting businesses default on loans. This means the banks are increasingly vulnerable, and will likely tighten up loan policies, which in turn means it will be harder to finance homes through the banks.
  4. There is an enormous excess of supply nationwide. While the demand appears to nearly match the large supply in major markets, some of this originates from smaller Canadian cities where houses are put on the market in favour of migrating to the city. This intra-border exodus is not automatically accounted for.

Read the whole story at The Financial Post.

Seeking Construction Financing in the US? These 4 Trends Could Have an Effect

In 2015 in the USA, it was still easier to obtain a construction loan than back in 2011. Here are four trends that outline how lenders are beginning to be more cautious this year.

  1. Bank underwriting is tightening. Debt lenders run debt-coverage-ratio tests or  debt-yield tests to restrict proceeds for apartments. The for-sale market hasn’t seen quite the same stringency for condos, subdivisions, and townhomes; lenders are simply being more cautious in these markets.
  2. Banks have exhausted their construction allocations. Some lenders have a certain allocation for construction and have recently exhausted or nearly exhausted it. They need time to recover the funds from previous construction loans in order to move forward with new ones. Of course, no lender wants to advertise that they don’t have the money, because borrowers will simply go to the competition.
  3. There are new regulations. One such regulation is the High Volatility Commercial Real Estate (HVCRE) requiring lenders to prove that a borrower has 15% equity in a project at stabilization. Even when a project is a success, it is a difficult proposition because the as-stabilized value may exceed 15% cash equity in the deal. This means the bank will be out of compliance, which in turn means they will need to reserve more against the loan. The inability to put that money out costs the bank, a cost which they will eventually find a way to pass on to the borrower.
  4. Banks are increasingly concerned about submarkets. Open secret: some banks won’t lend in certain submarkets until the products are in the process of stabilizing at their pro-forma rents. The same lenders have no issue funding deals in the overall markets.

Knowing these issues and understanding the deal going in is critical for approval success. Read the case at