Goldy

Jason’s been a realtor for almost a decade. Got his broker’s license a few years back, and operates a one-man shop out of his home. The clients are local. His turf is local. He knows every house, property, barn and shed in the horsey suburban area he lives in. Lately life’s been hell.

“No sales since June,” he says. “Not just for me. I mean, no sales. Period. For anybody.”

With one exception, that is. After endless months of marketing and showings, J was able to find a buyer for a $2.5 million estate on 15 acres of prime, rolling countryside. “It finally sold for two-point-one,” he told me, “which was a huge bargain. But then the appraiser came.”

The lender was one of the big banks, and the woman sent to establish a valuation was brutal. Actually she turned out to be sweet and cute, but her report was crushing. “She told me, ‘I hope your client has lots of capital,’” says Jim, “and then she said they were appraising it at only one-point five.”

Whether the deal closes or not is an open question. There’s a good chance the seller will have to take back hundreds of thousands in financing to make it work – or the buyer might simply walk, it now being ‘proven’ to him that he overpaid, by a bank with little  stomach for risk.

This is no isolated event. Deals are falling apart with regularity as buyers and sellers discover how lenders are feeling these days. Ask any real estate lawyer in southern Ontario about missed closings and defaults. They’ll probably report more of them in the last months than in the preceding decades.

This is how banks deal with exposure. It’s quiet, effective, definitive. And it’s helping to cripple the market.

Meanwhile the bank’s regulator, OSFI, is planning to show up and shoot the wounded. The new universal stress test would force Jason’s buyer to not only cough up a lot more equity, but then qualify for lending at the current rate + 2%. This requirement would be regardless of whether he found a down payment of $450,000, or a million. Just like with weightlifting or bobsledding, everyone has to pee in a jar (so to speak). No exceptions.

Days ago the right-wing Fraser Institute came out swinging against OSFI, calling the test needless and harmful. It will hurt the mortgage market, it said (something small lenders and independent brokers are terrified of), drive borrowers away from the banks and into the arms of cheesier lenders like credit unions, and (of course) suck equity out of everybody’s house as overall prices decline along with credit.

“The main point of the paper is that the stress test is not necessary,” adds the author. “Cities like Vancouver and Toronto are very different from other parts of the country and there is potential for housing prices to be depressed because buyers simply don’t have enough buying power. But that also depends on a number of factors, including policies being taken recently from the provincial, municipal and federal governments.”

Indeed. Universal rent controls in Ontario have not even started to have their dampening effect on condo prices. Toronto is still actively designing its knucklehead Empty Houses Tax so it can be as vacuous, provincial and myopic as Vancouver. And in BC the socialists now running the place have not yet brought in the across-the-board speculation tax which is widely expected, while fostering the myth that government can actually create affordable housing. It can’t. Only the market does that.

Well, a new report this week from Citi forecasts that the Canadian housing market will soon enter a “disorderly stage” as sales tank, lenders recoil and sellers freak. Capital Economics housing perma-bull David Madani is forecasting the mother of corrections for this coming winter. “With interest rates on the rise and mortgage financing rules likely to be tightened significantly later this year, the worst is still to come,” he says. Housing starts are down. The seriously-lagging Teranet index has just recorded the first monthly price decline. And interest rates continue to stiffen – a US hike coming in December and our bank moving a few times in 2018. Plus the stress test. Oh boy.

But wait. Here’s Royal LePage. Apparently everyone else is wrong. It’s all good.

“Uneven regional economic growth has plagued Canada for much of the past decade, a challenge most evident in the nation’s housing markets,” claims corporate boss and cheerleader Phil Soper.  “For the first time since 2011, we are seeing real estate in all five of our largest cities appreciate at a manageable, healthy clip. Canadian housing is enjoying a Goldilocks moment — not too hot, and not too cold.”

Or, Goldy just croaked.