Risk off

When Sharon approached her long-time bank (the purple one) for a mortgage on a secondary property (because she’s a 1%er) the reply surprised. “I had no idea,” she said afterwards, “that where you want to buy makes such a profound difference in what they’ll lend.”

It’s true. One deal for buying in the Big Smoke. Another entirely for Bunnypatch.

In her case it was an offer on a cool house down in Ontario’s banana belt of Niagara. “Our lending policy allows us to finance 80% up to $750,000 and then 50% of the remaining balance,” her mortgage-specialist NL@TB wrote. And in contrast this is the deal when buying an urban house for exactly the same price at the same rate by the same person with the same income: “For a property located in Toronto, our lending policy allows us to finance 80% up to $2,250,000 and then 50% of the balance for a townhome/ house. Our lending policy for a condo would be 80% up to $1,000,000 and then 50% of the balance.”

Why the huge difference? For example, on a $2 million property (no big deal anymore) in T.O. Sharon could get a loan for 80% of the entire price, while out of town the max would be $1.2 million. In the city it would take a down payment of $400,000, and in Bunnypatch she’d need twice as much cash.

Well, the bankers have always coughed up extra credit for property purchases in markets they deem more stable, sustainable and in-demand. In contrast, cottages, farms and recreational properties have been harder to finance and usually more costly to buy. Not always, but normally. And especially now.

Price appreciation in the burbs, hinterland, sticks and hick cities since Covid came to town has been unprecedented. It’s a pure phenom. Bankers aren’t dumb. They can see the risk. The pendulum will swing in the other direction in the months or years ahead, and they don’t want owners walking away from real estate that’s in negative equity.

Those risks include a gradual, inevitable end to WFH for most people. It won’t be immediate. But it is assured. Hybrid first, then – when that no longer works – back to the workplace. Also factored in are higher interest rates. No, not now, but when 2020 and 2021 mortgage renew in 2025 and 2026. There will be no more 1.4% VRMs, HELOCs at prime or fivers at 2%. Bankers are preparing now.

More risk – property taxes. In places (like Ontario) with assessments based on market value and rapidly rising prices there’s a tax bomb coming. Properties have not been reassessed for more than two years, during which time values have jumped 40% and municipalities been whacked with extra costs. For example, the small-city property Sharon wants to buy for just over two million is assessed at $929,000. The tax lady at Town Hall told her to expect to pay 1% of her purchase price in property tax after re-assessment. The current tax bill of ten grand will double. Has everyone who moved in the last year budgeted for this?

Finally, the market. Are prices in the 200-km swath of land outside major cities in Canada sustainable? Is it reasonable a detached house in the car-centric boonies should cost the same as one where people can catch a 15-minute subway ride to work downtown? Or to a (ugh) Drake concert? Or a Jays game? If the work-from-home experiment fades along with the effects of the pandemic – and with prices so high most first-time buyers (who make up 50% of the market) are shunned, what will keep prices aloft?

Yep, risk. It’s what bankers do – try to contain it, especially for loans where they are not covered with tax-payer funded insurance. These days that includes every deal with more than a million. And you know what seven figures buys in the GTA or the LM. A nice garage?

Speaking of debt, we now owe $2.15 trillion. That staggering sum is increasing by an annual rate of 12%, or three times inflation and six times wage gains. In the second quarter of the year, reports Equifax, new mortgage loans increased more than 60%. That was the biggest increase ever. And we’re addicted to HELOCs, too. The number of demand loans secured by real estate has just increased 56% year/year. Of course, these loans are tied to the prime rate, which rises immediately when the Bank of Canada decides the time has come to end emergency lending. That looks like the second half of 2022. Says Equifax…

“With many consumers now heavily leveraged and the potential for increases on variable rate mortgages and HELOCs, consumers may find themselves not in a position to pay back their debt obligations if interest rates rise. This can lead to higher insolvencies”

Of course, nobody believes this. Interest rates cannot rise. People will forever be paid their full wages to stay at home in their jammies and peck away at their keyboards while deshedding the cat. Nobody will commute in the future. Mortgage costs and property tax payments will be stable. And there’ll always be a lineup of people to buy your house for more than you paid. Way more. No matter what soulless place you moved to.

Bankers, meh. What do they know about making money?

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