Steve Randall
REP

Despite a decline in home sales in British Columbia this year, total sales are still forecast to exceed 100,000 for the third consecutive year.

The BC Real Estate Association is expecting 101,000 sales for 2017, down 10 per cent from the record high of 112,209 in 2016. This remains well above the 10-year average of 84,700 units.

“The province is in its fourth year of above-trend economic growth,” said Cameron Muir, BCREA Chief Economist. “Strong employment growth, consumer confidence and an influx of inter-provincial migrants are important drivers of the housing market this year. In addition, with the millennial generation now entering their household forming years, the condominium market in major urban centres is experiencing pressure on supply.”

Spring activity has been strong as government measures to cool the market have started to dissipate.

Prices are expected to end 2017 down 1.1 per cent to an average $683,500 before gaining 5.2 per cent in 2018 to reach $719,100.

Copyright © 2017 Key Media Pty Ltd

Sales and prices for recreational properties are up across BC, with overseas demand remaining steady

Joannah Connolly
REW

The hot housing market in Greater Vancouver is spilling over into the BC-wide recreational property market, according to the 2017 Royal LePage Canadian Recreational Housing Report published June 20.

The aggregate price of a recreational home in BC has risen to $595,077, as slower sales at the start of the year turned into a flurry of sales activity, said the nationwide brokerage.

The report said, “In many areas, months of pent up demand have been unleashed onto the market, propelling sales activity higher. This trend will likely continue for the remainder of the year.”

The Royal LePage report authors added, “Demand stemming from Greater Vancouver’s residential housing market has increasingly influenced pricing and sales in many of the province’s recreational markets, as prospective buyers elect to capitalize on their home’s equity in search of a leisurely lifestyle.”

Gulf Islands and Okanagan Heat Up

This ripple effect is extending further than it has in previous years, with areas such as the Fraser Valley having already seen significant price rises. In turn this is leading buyers of recreational property to look to traditionally lower-priced areas such as the Gulf Islands.

“As price appreciation across Greater Vancouver resumes its previous pace from a year ago, and homeowners accumulate more wealth, many prospective buyers have decided to forgo upsizing within the highly competitive Vancouver marketplace, electing to instead push outwards in search of a recreational property,” said Jim Morris, manager, Western Canada, Royal LePage.

“Now, with the Fraser Valley feeling the heat, prospective purchasers are turning to the islands for relatively more affordable recreational properties, accelerating market demand within these regions.”

Agents in the islands seemed to agree with this assessment. “Recreational sales activity has increased significantly on the Gulf Islands,” confirmed Janet M. Moore, real estate sales agent, Royal LePage Nanaimo Realty. “We have finally seen the return of buyers to smaller regions within the Gulf Islands, driven by both interest in recreational activities and retirement.”

The Okanagan, however, remains arguably the most desirable region in which to buy a recreational home.

“The Okanagan Valley is still one of the most sought-after places to buy property in Canada, and we have seen two years of steady upward price movement,” said Mark J. Walker, sales representative, Royal LePage Kelowna. “We sit between an improving Alberta economy and what many consider an overheated market in Vancouver. Consumer confidence in our region continues to grow, but the supply of recreational properties has decreased significantly this year, as sellers are willing to wait in a rising-price environment.”

No Fall in Foreign Buyers

Royal LePage reported that its agents and advisors said foreign buyers accounted for less than 10% of all recreational property sales.

This percentage is similar to one year ago, despite the foreign buyer tax being introduced in late summer 2016. The brokerage added that 60% of agents surveyed for the report believed that the number of US buyers in their recreational markets had risen over the past year.

“British Columbia will never go out of style as a recreational destination, with our mountains, our coastline and our West Coast lifestyle,” added Morris. “Together, the softening of the foreign-buyer tax rules, the persistently low Canadian dollar and the introduction of a similar tax in Ontario are encouraging the return of buyers from outside of the country.”

© 2017 REW.ca

Diane Slawych
REM

A new documentary says Vancouver is experiencing a housing crisis so severe that many of its residents have been forced out into the streets. Some live in tents, others in vehicles. It’s not entirely surprising in a city where the average house price is $1.7 million and the minimum wage is $11 an hour.

The many causes of the crisis and how people are dealing with it are explored in the documentary, Vancouver: No Fixed Address, which had its world premiere at the Hot Docs film festival in Toronto in May. We caught up with Vancouver-based director and producer Charles Wilkinson to discuss his latest work. The following has been edited for length.

Why did you make this film?

In my city, Vancouver, and in many of the cities around the world, inequality is growing at an astounding pace. We now often see homeless people sprawled on the sidewalk as cars drive by that cost as much as a house. In Vancouver, the engine that’s driving the growing disparity between the haves and have-nots is housing. Landowners’ wealth increases daily. The lot of renters diminishes daily. As well, there are a number of significant societal changes taking place – for example millennials who choose not to take on 30-year mortgages and are searching for alternatives. Amidst all of this we hear a debate raging that is often characterized by misinformation, anger, racism and misdirection. This is a story that involves all of us.

It’s one worth telling.

Some of the contributing causes of the current housing crisis – lack of housing supply, government inaction, greed, foreign ownership, the fact that some of the biggest donors to political parties are real estate developers, loopholes in rent control, the arrival of Airbnb – have previously been documented in the media. What new information do you feel you uncovered?

There are multiple facts in the film that are pretty mind blowing. Like that 90 per cent of the condos built in the city are purchased by speculators. Like the fact that this housing issue is merely a symptom of a far greater problem – namely that successive business-first governments have encouraged the looting of our natural world such that our economy’s former staples – timber, fish and minerals – are largely gone and with them all those jobs and taxes. So our governments have created a flurry of economic activity around real estate speculation. It’s one of the last things of value that we have to sell in order to facilitate the continued lavish, unsustainable lifestyle to which we’ve all grown accustomed.

One of the residents featured in the film is a pensioner who lives in his van. Are there others like him?

Yes, hundreds. There are side streets in downtown Vancouver where every second parked vehicle is someone’s abode.

During a Q&A after the film’s screening at Hot Docs, you mentioned that even wealthy people are being negatively affected. How so?

What we have found really surprising is that almost no one we talked to is happy with the situation. People who are doing really well, whose houses are assessed for a lot more money, are concerned that our communities are disintegrating because they’re filled with vacant houses. Even the kids of wealthy people can’t afford to have children, that means we don’t get grandchildren. So it’s cutting across all economic lines.

Aside from real estate marketer and “Condo King” Bob Rennie, you didn’t feature any real estate agents in the film.

No, no agents per se, although we did consult with a number of them. For obvious reasons, few Realtors are in a position to speak freely. Many who spoke off the record expressed fear and frustration that the runaway market is destroying their communities. We did include Bob Rennie, whose point of view can be condensed as “we need to build more”. It’s an argument that many disagree with.

You say Vancouver house prices are the highest in the country. How high are they?

The price of detached houses sold in Greater Vancouver in April averaged $1.76-million, down 3.2 per cent compared with $1.82-million in February 2016. By contrast, average condo prices in the area over the past year have jumped 13.7 per cent to $603,737, while average townhome prices have risen 10.8 per cent to $827,893. This in a city where minimum wage is $11 an hour.

Any final thoughts?

A previous film of mine was Oil Sands Karaoke. It was made at the height of the oil boom with prices well over $100/barrel. In the oil patch, in Ft. Mac you couldn’t find a single person who thought it would ever end. Sustained high oil prices were invincible. Just like today sustained high housing prices are invincible. We know what happened to the oil patch.

Vancouver is not unique in this. International money, much of it anonymous and of questionable origin is sloshing around the globe looking for a return. We could, as do some other jurisdictions, make speculation less attractive. But we don’t. The amount of cash at play is just too tempting.

Unfortunately, as always happens, at the end of the day the profits will be taken away, the Porsches will rust, the motorboats will sink, the expensive wine will be drunk and the hangover will commence. It’s going to be a doozy.

© 2017 REM Real Estate Magazine

The future of mortgage rates

REP

Interest rates are expected to increase sooner than originally expected.

“With economic growth coming in strong this year, inflation should turn the corner,” TD Bank said in its Quarterly Economic Forecast. “The Bank of Canada will look for confirmation, but is now expected to begin increasing its policy interest rate in October of this year, two quarters earlier than previously anticipated.”

Variable mortgage rates are largely dependent on the Bank of Canada’s benchmark rate; when it increases, expect variable rates to as well.

Canada saw strong first-quarter momentum with economic growth of 2.8%. That signifies a 0.5% upgrade from the previous forecast.

A more moderate 1.9% growth is expected in 2018.

Most recently, the Bank of Canada held its benchmark rate at 0.5%.

“The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment. Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions,” the BoC said at the time. “Macroprudential and other policy measures, while contributing to more sustainable debt profiles, have yet to have a substantial cooling effect on housing markets.

“Meanwhile, export growth remains subdued, as anticipated in the April MPR, in the face of ongoing competitiveness challenges,” it continued. “The Bank’s monitoring of the economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.”

Copyright © 2017 Key Media Pty Ltd

Steve Randall
REP

Three British Columbia residents and two mortgage investment corporations have been accused of committing fraud by the BC Securities Commission.

DominionGrand II Mortgage Investment Corporation (DG Mortgage) and DominionGrand Investment Fund Inc. (DG Fund) are B.C.-based companies that held themselves out as mortgage investment corporations; controlled by Donald Bruce Edward Wilson, David Scott Wright and Patrick K. Prinster.

The BCSC alleges that the respondents raised approximately $1.1 million from 40 investors who were told their money would be invested in mortgages secured by real estate.

However, the respondents did not invest the money in mortgages and instead distributed the majority of the investors’ money to other companies related to the respondents, business expenses, and commissions to finders.

The three men named in the notice of hearing are allegedly liable to the companies’ alleged fraud.

These allegations have not been proven. Counsel for the Executive Director will apply to set dates for a hearing into the allegations before a panel of commissioners on July 11, 2017 at 9am.

Copyright © 2017 Key Media Pty Ltd

Mortgage fraud complaints in B.C. soar along with house prices

Sam Cooper
The Vancouver Sun

A review of B.C. regulatory filings points to a growing number of mortgage fraud cases involving fake incomes, phoney offshore collateral, and false tax information in schemes allegedly connected to real estate professionals operating in B.C.’s growing shadow banking sector.

Postmedia reported Saturday that shadow lenders — non-banks that are not federally regulated — have rapidly increased their share of Canada’s mortgage market in recent years, as Ottawa has tightened lending standards for Canadian banks. Many of the big loans issued in Vancouver prior to 2017 won’t be insured again, a Bank of Canada risk report says. As a result, according to a number of experts, an increasing number of borrowers are turning to shadow banks for loans in Vancouver’s hot market, and the private lenders in this growing sector are more prone to fraud and careless lending. 

Chris Carter, B.C. registrar of mortgage brokers at B.C.’s Financial Institutions Commission, or Ficom, said the agency is experiencing an increase in mortgage fraud complaints, and “recently recruited dedicated staff to implement a more ambitious program of risk-based examinations.”

Ficom’s stats show complaints roughly doubled from 109 in 2013 to about 200 in 2016, and about a third of complaints allege loan application fraud.

Canadian housing analysts Hilliard MacBeth, Ben Rabidoux and Vancouver short-seller David LePoidevin say mortgage fraud cases they are seeing in B.C. are similar to the dodgy loans that were exposed after the U.S. subprime meltdown of 2008. All three analysts said they expect B.C.’s fraud problems will be exposed when prices correct and the real estate collateral that backs loans is reduced in value, which could trigger a domino-like drop in the market.

“I’m selling my home in West Vancouver,” LePoidevin said. “I think we could see a disaster in B.C.”

A number of cases reviewed in Postmedia’s investigation illustrate the creative documentation and methods that some borrowers and brokers appear to be using to get home loans in Metro Vancouver.

In a March 2017 notice of hearing, Ficom alleges that a sub-mortgage broker from Surrey named Dennis Rego, of the company Shank Capital Systems, provided fabricated home purchase and sale contracts, and faked income and offshore collateral information, for numerous mortgage applications made for several closely related borrowers. The borrowers included two families who were seeking financing for three multi-million-dollar homes in Vancouver’s South Granville area.

Since about 2010, this area of Vancouver has become synonymous with speculation and offshore investment, veteran realtors say.

For one of the borrowers, Ficom alleges, Rego submitted at least seven misleading mortgage applications. At first, the unidentified borrower was reported to be a “cook” with a $50,000 annual income and Canadian savings of $85,000. Next, the borrower was said to be a mechanical engineer, then an “assistant chef.” In yet another application, the borrower was reported to be a “real estate investor” who had Canadian savings of $800,000, foreign savings of $500,000, and offshore real estate investments worth $5 million. Finally, the borrower was reported to be the part-owner of a related borrower’s company, and reportedly possessed “foreign liquid assets” worth $400,000, and offshore real estate worth $1.5 million.

Rego’s company is now closed, a number he was listed at is out of service, and he could not be reached. None of the allegations has been proven and no defence has been called yet.

In another Ficom notice of hearing, posted in March, staff accused sub-mortgage broker Anil Kumar Singh of submitting false financial information for at least six different borrowers, including a self-employed nail salon worker, a personal maid, a self-employed construction worker, a fish filleter, and a self-employed landscaper. Singh failed to confirm the accuracy of documents for another 22 mortgage applications, and submitted altered Canada Revenue Agency documents, according to the Ficom allegations. 

In an interview with Postmedia, Singh said he strongly denies the allegations, and that he believes fraud is widespread in B.C.’s mortgage lending industry because brokers are poorly trained to verify loan application information, and speculative buyers are gaming the system.

“The market in the Lower Mainland is like a wildfire, because people are borrowing in a huge way,” said Singh. “And foreign buyers have impacted the market, because of the loopholes in the lending system. How can people buy a $2.5-million home when they have hardly any income?”

Singh said that Ficom is unfairly cracking down on him because of a half-dozen erroneous notice of tax assessment documents that he believes borrowers submitted to him, knowing they were false, when he was an inexperienced broker.

“I don’t want to hide anything because I’m not guilty. The training for mortgage brokers is almost zero,” Singh said. “It is the clients that are doing wrong, because they don’t have any fear. I think it is a big gang operating in the market.”

Singh believes lenders are often complicit in accepting fraudulent loan applications. 

“They have well-trained staff. How can they miss all these cases?”

In another case, involving tax documents, an agreed statement of facts in a 2016 Ficom consent order states that while working for Dominion Lending Centres Gold Financial Services, Jorawar Gosal “altered” borrowers’ Canada Revenue Agency documents in order to inflate incomes for mortgage applications. Gosal was reached at the phone number listed in an online ad that says he is a real estate agent in Surrey. In a brief call, Gosal said that he is not a real estate agent, and that he has no comment on Ficom’s consent order. 

Details of a Ficom cease and desist order, which Ficom filings say was issued without a hearing due to the seriousness of the allegations, indicate Ficom staff investigated Rani Kaur Gill, an unregistered broker. Calls by Postmedia to Gill’s listed number have not been returned.

Gill placed an ad with an unidentified realtor, the investigation showed, which said: “When everyone says ‘No’ call Rani and get your mortgage done.”

Gill’s clients did not speak English, and included new immigrants, first-time home buyers, and those with low income and bad credit, according to the investigation. Ficom employed undercover investigators to do a sting, the order says, and an investigator posed as a property buyer. Ficom alleges that Gill told the undercover investigator that she would falsely tell lenders that he lived in a property that he planned to rent out, and this would get him a better deal with the bank, and save him money on taxes when he sold the property. And if he needed to borrow money to meet a loan’s downpayment requirements, Gill said, “then we make a gift letter. Then we tell them my parents, or whatever, they’re going to give us a gift.”

None of the allegations has been proven and no defence has been called yet.

Other Ficom investigations involve mortgage investment corporations, which are a growing portion of B.C.’s shadow banking market, but are not always visible to Ficom.

“We don’t have statistics on mortgage investment corporations (as) most are not publicly traded,” Carter said. “But we monitor that sector very closely.”

On Friday, the executive director of the B.C. Securities Commission issued a notice of hearing alleging three men and two mortgage investment corporations “committed fraud.”

From 2011 into 2013, respondents Donald Bruce Wilson, David Scott Wright, and Patrick Prinster, “raised approximately $1.1 million from 40 investors,” and told investors their money would be invested “in mortgages secured by real estate,” the notice of hearing alleged. Instead of investing in mortgages, the mortgage investment corporations put “the majority of the investors’ money to other companies related to the respondents, business expenses, and commissions to finders,” the notice alleged.

None of the allegations has been proven and no defence has been called yet.

In an April 2017 notice of hearing, Ficom alleged that Dominion Lending Centres submortgage broker Gordon Lemon altered a bank draft, misappropriated investor funds, and was guilty of misconduct in relation to three registered mortgage investment corporations, and one unregistered mortgage investment corporation. Postmedia’s efforts to reach Lemon were not successful. None of the allegations has been proven and no defence has been called yet.

In another Ficom case, an April 2017 notice of hearing alleges that Kevin Bownick of Port Moody failed to answer a summons and either “withheld, destroyed, concealed or refused to produce records” requested by Ficom investigators. Ficom investigators are trying to determine whether Bownick’s company, Como Lake Ventures Ltd., “is carrying on a business of lending money secured in whole or in part by mortgages,” with the proper registrations, or not.

An online ad for Kevin Bownick’s services says that “Kevin specializes in helping to match clients needing private second mortgages with investors willing to fund them … (he) understands how difficult it is sometimes for people to find bank financing.”

The ad says that services of brokers in the company include: “High-ratio Mortgages up to 100% financing on either a purchase or refinance; offshore investor mortgages; rental/investment Mortgages; 2nd mortgages.”

Calls to Bownick at Como Lake Ventures were not returned. None of the allegations has been proven and no defence has been called yet.

In an interview, NDP MLA David Eby said he was concerned by the findings in Postmedia’s investigation. He said he believes Ficom hasn’t kept up with risks from the growth of shadow banking and loan fraud because the B.C. Liberal government understaffed Ficom. He said millions in fees from regulated industries, money that was intended to fund Ficom auditors, was instead put into general provincial revenues by the Ministry of Finance. A new NDP-Green government would make sure these fees go to staffing, Eby said, to “make sure we have sufficient auditors in place at Ficom, to make sure B.C. citizens are protected from a shock related to shoddy lending or fuzzy collateral.” 

Eby pointed to the July 2016 report by B.C. auditor general Carol Bellringer, which noted Ficom’s lack of investigators for B.C. credit unions and pointed to understaffing concerns for other regulated entities. Bellringer said Ficom received adequate funding to hire staff via fees from regulated industries but the government did not “green-light” the needed hires.

“It’s like having a smoke detector in your house, but not buying the batteries,” Bellringer said in her report. “No batteries, no early warning system.”

Eby also points to a statement that he received from Ficom head Carolyn Rogers in 2016.

Rogers said the Bellringer report “reflects problems that I have been warning government about for the past three years. A regulator that draws funding from fees paid by the entities it regulates requires the freedom to spend those fees appropriately and for the sole purpose of regulation.”

In response to Eby’s criticism, a spokesperson for Finance Minister Mike de Jong told Postmedia that understaffing at Ficom was limited to staff overseeing credit unions.

“Regulatory staffing at Ficom on the mortgage broker and real estate side has not experienced the retention issues that the financial institutions division has,” a Ministry response says. “And enforcement regarding mortgage broker misconduct continues to be proactive.” 

© 2017 Postmedia Network Inc.

Intracorp?s Belpark attracting plenty of interest from its immediate Vancouver area

Simon Briault
The Vancouver Sun

Belpark

Project location: 375 West 59th Ave

Project size: 120 apartments. The project is already at least 80 per cent sold. The two-to-four-bedroom homes still available start at $1,877,900 and are between 1,426 and 2,312 square feet

Developer: Intracorp

Interior designer: Scott Trepp

Architect: Ramsay Worden Architects

Hours: noon — 5 p.m., Sat — Thur

Telephone: 604-891-1281

Website: http://www.belparkliving.com

Finding a tranquil, natural setting that still provides easy access to rapid transit is a hard thing to pull off in Vancouver’s increasingly tightly developed neighbourhoods. But the people at Intracorp reckon they’ve nailed it with Belpark, a 120-home development of three buildings planned for a block east of Cambie Street on West 59^th Avenue.

“We have an extensive history building on the west side of Vancouver, including at UBC,” said Barrett Sprowson, vice-president of sales at Intracorp. “The appeal of those buildings was their tranquil settings and lots of interaction with water. We wanted to pull in some of that history at Belpark with the idea of a courtyard with water features and reflecting pools in a very peaceful setting.”

Belpark will be built between the Langara Golf Course to the north and Winona Park to the south, making it a rare location in Vancouver’s city limits in that there’s green space all round. At the same time, the development will also be just a couple blocks from rapid transit after a new Canada Line station is completed at Cambie and West 57th Avenue.

The natural setting was an important factor for Deborah Jennings, who has bought a two-bedroom home at Belpark with a media room and a large rooftop terrace.

“I had a house in Dunbar on Olympic Street for 21 years,” she said. “It’s a combination of downsizing and moving in with a new partner. He’s always felt like it was my home that he moved into, so this will be our first home moving in together.”

“We were actually looking for a duplex, but we kept getting outbid on them,” Jennings added. “We looked at this because there’s a nature trail right outside and there’s the golf course right there so we know it won’t be like downtown where there’s the possibility of a building coming up in front of you and taking your view away. Then there’s Winona Park as well and we have two dogs. It was really important for us to have green space around us.”

Sprowson said that many of the buyers so far are very familiar with the area and understand the benefits of the location with the park and the golf course being right next to all the amenities available on Cambie Street.

 “We’ve seen a lot of people who I would describe as hyper local – from the absolute immediate area – and they’re primarily downsizers,” he said. “They get what a great spot this is so we don’t have to sell them on the neighbourhood because they already know it so well.”

“There are also some younger folks who are getting help from their parents and then, when we still had one-bedroom homes available, we had a few investors as well,” Sprowson added. “Again, these were really local people who knew the area and had to have a piece of this because they understood that in the future a location like this is not replaceable.”

Given the benefits of the location, it’s perhaps not surprising that the project is already 80 per cent sold. But there are still some larger homes available, which Sprowson said would appeal to the local downsizer market that Intracorp is targeting.

“We often hear people saying they want to be in more than 1,500 square feet,” he said. “We go up to 2,300 square feet, which is a ton of usable space given how well we lay things out these days. We make sure we make use of every single square inch and offer a lot of functionality. You can take somebody from their 3,500 square-foot single family home and they come in here and it doesn’t feel small to them at all. That’s rare in the Cambie corridor.”

Homes at Belpark feature a choice of two colour schemes, hardwood flooring, private patios and oversized windows. The development also includes a games room, a fitness studio and a climate-controlled wine room.

Bathrooms have wall-hung toilets, storage niches, recessed medicine cabinets, marble accent feature walls and heated floors in ensuites. Kitchens come with custom-made Italian cabinetry, LED strip lighting and stone countertops with elevated island extensions. The high-end appliance packages are by Gaggenau.

“Downsize buyers have all done renovations over they years and they’ve done exactly what they want in the space that they have,” said Sprowson. “We’re building condos that are not custom homes, but we’re looking to achieve some of that same desirability. That’s why we looked after all the luxury details that you won’t see generally in the market.”

As for Jennings, the move to Belpark represents a big change from her current living arrangement in Dunbar.

“It’s the start of something new and different for me and that’s very exciting,” she said. “I also want to do a little more travelling so it’s great that it’s turn-key.”

The Belpark sales centre at 660 West 41st Ave (Oakridge Mall) is open from noon to 5 p.m. every day except Fridays. Completion is scheduled for summer 2019.

© 2017 Postmedia Network Inc.

Vancouver?s hot real estate market is plagued with another concern that shows similar characteristics to the fraudulent loans exposed in the U.S. in 2008, writes Sam Cooper

Sam Cooper
The Vancouver Sun

Massive and risky home loans are increasing in number across Metro Vancouver, while mortgage fraud cases are also on the rise, connected to the growth of so-called “shadow banking,” a Postmedia investigation shows.

The trend of increasingly risky loans underlying Metro Vancouver’s high home prices is illustrated by Bank of Canada figures that show the rapid growth since 2014 of large mortgages made to people with relatively low incomes.

This is a growing danger for Vancouver’s real estate market, because under new tighter lending standards introduced for banks in fall 2016, the Bank of Canada says that many of these big mortgages can no longer be insured, and won’t be issued again by federally regulated lenders. 

As a result of the tighter federal lending rules, borrowers trying to buy million-dollar-plus properties in Vancouver’s market are increasingly taking out dangerous loans from shadow bankers in a fast-growing and poorly regulated financial market.

There is also evidence of growing links between shadow banks and traditional banks, according to the Bank of Canada’s June 2017 report, as people borrow large amounts from shadow lenders to use as down payments in order to qualify for lower-interest loans from federally regulated banks.

“Price increases in Vancouver and Toronto have an element of speculation to them,” Bank of Canada Governor Stephen Poloz said last week, while issuing the bank’s biannual financial system review. The review showed “riskier characteristics are increasingly evident” in new mortgages.

A December 2016 Bank of Canada report estimates shadow lenders now account for $1.1 trillion in debt — about half as much as the traditional banking sector — and that over the past decade “these new players have become more important and have changed the face of the Canadian mortgage market … (as) tightening bank regulation can lead to migration of activity from the traditional banking sector to the shadow banking sector.”

Shadow lenders are non-bank lenders that increase the supply of credit in Canada’s financial system, without facing the regulatory oversight of banks. Critics say shadow banking is vulnerable to loose lending standards, mortgage fraud, money laundering, and collateral that is overly leveraged (also called re-hypothecated) — meaning debt backed by property assets is used over and over again by related lenders to issue more home loans, in ever riskier chains of debt.

Shadow lenders identified by Postmedia through a review of B.C. civil court filings, lending documents and regulatory filings, include mortgage investment corporations, hedge funds, and private lenders such as realtors, crowdfunding companies, real estate lawyers and mortgage brokers.

A number of cases involving these lenders contain allegations with characteristics similar to the fraudulent loans exposed in the aftermath of the U.S. subprime lending crisis of 2008. Postmedia’s review of over 30 regulatory or civil court cases shows a trend of allegations that home buyers and real estate professionals are involved in deceptive mortgage applications that include exaggerating the incomes of borrowers, forged documents of home ownership used by multiple borrowers to obtain mortgages, phoney claims of offshore assets used to back home loans, falsely inflated collateral accepted by subprime lenders to fund real estate development loans, and falsified CRA tax return documents.

For Hilliard MacBeth, an Alberta-based author and wealth manager, the Bank of Canada loan risk statistics and the related growth of shadow banking in Vancouver and Toronto herald a crisis. 

“These properties in Vancouver are so expensive that you need people either laundering money or loan fraud or people borrowing such large amounts of money that should never be allowed, in order to keep it going,” MacBeth said. “If everyone is reporting their incomes honestly in Vancouver, there is no way that housing prices can stay where they are.”

In B.C., the provincial regulator B.C. Financial Institutions Commission, known as Ficom, is in charge of monitoring the growing shadow banking sector. Postmedia’s review of Ficom enforcement hearings shows an increase in the number of alleged mortgage fraud cases in B.C., mostly linked to private mortgage lenders and mortgage brokers.

“We have experienced an increase in mortgage broker complaints in the last few years,” Chris Carter, acting registrar of mortgage brokers, confirmed. “About a third of our investigations relate to application fraud.”

The Bank of Canada warns of two key risks in Canada’s housing market.

The first is that property prices and household debt have reached such extremes in Vancouver and Toronto, that “just about anything” could trigger a correction, Poloz said last week. Highly indebted borrowers could be forced to sell in a correction, the Bank of Canada says, leading to further selling, tighter lending, and a potential domino effect on banks and shadow banks.

The other elevated risk is the potential for a shock from China’s volatile economy. China has its own shadow banking problems, the Bank of Canada says.

In China, “linkages between the banking and shadow banking systems are also becoming more complex and opaque, increasing the underlying credit risk,” the Bank of Canada’s December 2016 risk report says. “The experience of the 2007-09 global financial crisis showed that financial stability can be threatened by vulnerabilities originating in the shadow banking sector.”

As a result of the flood of money pouring from Mainland China into Vancouver real estate in recent years, some financial experts say they believe Canadian banks are directly exposed to shadow lending in China and the risks of so-called “ghost collateral” — meaning collateral that may not exist or is used continuously to secure loans for multiple borrowers.

Postmedia confirmed that Canadian banks are allowed by the federal regulator, the Office of the Superintendent of Financial Institutions, to accept collateral from China to secure real estate mortgages in B.C.

“OSFI does not dictate what type of collateral (federally regulated banks) can accept,” spokeswoman Annik Faucher said. “Whether the borrower is foreign or domestic, OSFI (allows) financial institutions to compete effectively and take reasonable risks.”

One U.S. hedge fund manager, who did not want to be identified, said: “We all know that the ghost collateral is a huge deal, and we all know that the shadow banking and other Chinese influence in Vancouver is profound. The issue it that the ghost collateral ends up re-hypothecated and laundered. So by the time it shows up in Vancouver, it will likely just look like a rich Chinese cash buyer with a suitcase of money. “

RISKY LOANS SPREAD

The spread of high risk loans in Metro Vancouver can be seen in Bank of Canada maps that show where new ‘high-ratio’ loans — meaning the buyer makes less than a 20 per cent down payment on a home purchase and borrows the rest — have been issued. If the value of the loan is 450 per cent of annual income or more, the borrower is considered particularly vulnerable. The Bank of Canada will not reveal the number of high-ratio loans issued in Metro Vancouver, but says they are concerned with the rapid growth in these loans. In 2014, across Metro Vancouver, 31 per cent of new high-ratio mortgages were at least 450 per cent of the borrower’s income. In the second half of 2015, this figure rose to 37 per cent. By late 2016, it was 39 per cent.

The Bank of Canada says that under the new tighter federal rules, about 43 per cent of the high-ratio loans issued in Vancouver between September 2015 and September 2016 would have been rejected. This means either that an increasing portion of buyers in Metro Vancouver will be unable to get loans in the future or that the shadow lenders will fill the void.

There are four areas across Metro Vancouver in which more than 50 per cent of new high ratio loans are above 450 per cent loan to income. In an indication of rapid price rises or extreme speculation, South Vancouver, a neighbourhood bordering Granville Street and just north of Richmond, had an explosion in high ratio loans in 2016, from very few in 2015. The other three areas at the top of Bank of Canada’s risk scale, at over 450 per cent loan-to-income, are Burnaby’s South Slope neighbourhood, a northern part of Richmond, and a northern part of Delta. 

GROWTH OF SHADOW BANKING AND GHOST COLLATERAL

Shadow lending can be as simple as a mortgage loan provided by one person to another in need of financing, or as Byzantine as the complex processes through which credit is created and exchanged and repackaged between various lenders to fund mortgages.

For example, the director of a Surrey lumber and real estate investment company explained to Postmedia that his group’s business model consists of pooling the real estate assets of an extended group of family and shareholders, and using these homes as collateral to borrow money from financial institutions. The borrowed capital is then issued in mortgages to home buyers that can’t obtain financing from chartered banks.

In another example researched by Postmedia, lending documents show that controversial “crowdfunding” developers are using single-family homes owned by investors in Vancouver to secure loans from subprime lenders that are active in B.C. in order to fund condo developments in Vancouver and Burnaby.

Ben Rabidoux, a Canadian analyst who provides market research to U.S. investors that are betting on a sharp correction in Canadian housing, said that his research with on-the-ground mortgage brokers suggests that loan fraud is a systemic concern in Ontario and B.C.

“The shadow market is absolutely booming,” Rabidoux said. “Of course B.C. has a mortgage fraud problem, but you won’t really see it until there is a problem with collateral in the system.”

Ghost collateral is explained in a recent investigation from Reuters that concludes that China’s financial system faces a potential collapse similar to the U.S. subprime mortgage crisis of 2008, due to “massive credit expansion,” and “collateral risks” connected to $17.2 trillion in outstanding loans as of April, up from $5.8 trillion in 2009.

The report says that 60 per cent of all loans issued in China’s system are backed by property, and that China’s property values are “wildly misleading” — which is part of the reason that China’s credit rating was recently downgraded. Reuters reported that Chinese lenders are prone to fraud “with loan officers turning a blind eye to the quality of collateral and knowingly accepting dubious and even fraudulent documents.”

© 2017 Postmedia Network Inc.

Justin da Rosa
REP

The Canadian Real Estate Board releases latest round of housing market stats.

National home sales dropped 6.2% month-over-month from April to May, according to CREA. That represents the largest sales decline since August 2012.

The most drastic sales decline occurred in the Greater Toronto Area, where the market experienced a 25.3% month-over-month drop.

Activity was also down “significantly” in surrounding areas, including; Oakville, Hamilton, and Barrie.
“Recent changes to housing policy in Ontario have quickly caused sales and listings to become more balanced in the GTA,” said CREA President Andrew Peck. “Meanwhile, the balance between supply and demand in Vancouver is tightening up, while many places elsewhere in Canada remain amply supplied.”

CREA argues the sales declines in the Greater Golden Horseshoe Area are a sign of dwindling speculative home purchases.

“This is the first full month of results since changes to Ontario housing policy made in late April. They provide clear evidence that the changes have resulted in more balanced housing markets throughout the Greater Golden Horseshoe region,” said Gregory Klump, CREA’s Chief Economist. “For housing markets in the region, May sales activity was down most in the GTA and Oakville. This suggests the changes have squelched speculative home purchases.”

The national average home price increased 4.3% year-over-year last month and newly listed homes increased 0.3% month-over-month.

“With sales down considerably in May, the national sales-to-new listings ratio moved out of sellers’ territory and back into balanced market territory for the first time since late 2015,” CREA said in its release. “The ratio stood at 56.3% in May 2017, down from 60.2% in April and the high-60% range over the first three months of this year.”

Copyright © 2017 Key Media Pty Ltd

The Vancouver Sun

OTTAWA — Home sales across the country dropped sharply last month, driven by a plunge in the Greater Toronto Area (GTA) after the Ontario government imposed a tax on foreign buyers aimed at cooling the red-hot market.

The number of residential properties sold nationwide fell by 6.2 per cent in May compared to April, the largest month-to-month decline in nearly five years, the Canadian Real Estate Association said Thursday. The industry group, which represents real estate agents, brokers and salespeople in Canada, noted sales were down a whopping 25.3 per cent month-over-month in the GTA.

The data showed that while real estate may be local, the impact of changes in a market the size of Toronto can have a sweeping effect nationally.

“This is the first full month of results since changes to Ontario housing policy made in late April. They provide clear evidence that the changes have resulted in more balanced housing markets throughout the Greater Golden Horseshoe region,” CREA chief economist Gregory Klump said in a statement.

“For housing markets in the region, May sales activity was down most in the GTA and Oakville. This suggests the changes have squelched speculative home purchases.”

The Ontario government introduced more than a dozen measures, including a 15 per cent tax on foreign buyers, aimed at stabilizing Toronto’s blistering housing market. Prices have spiralled out of reach for many potential homebuyers both in and on the outskirts of the city.

Sal Guatieri, a senior economist with BMO Capital Markets, said while the rules have had an effect, they merely brought back “some semblance of normalcy after a manic winter” that will likely be short-lived.

“Given the strong economic, demographic and financial backdrop, don’t expect the GTA market to stay down for the count,” Guatieri said in a note to clients.

“Policy tinkering will do little to cool demand on a sustained basis. Time to take out the heavy artillery: higher interest rates. The ball is now firmly in the Bank of Canada’s court.”

The central bank has dropped hints that the era of historically low interest rates may be coming to an end. Just this week, governor Stephen Poloz said cuts to the benchmark rate have “done their job” as the economy builds momentum, a statement that some market watchers have interpreted as a sign that a hike could be six to 12 months away.

In the closely watched Vancouver market, sales were up by 22.8 per cent month-over-month. There are concerns that the city may be returning to bubble territory less than a year after the British Columbia government instituted a tax on foreign buyers of properties in the Vancouver area.

Nationally, the average price for all homes sold last month was $530,304, pulled up by Toronto and Vancouver, where it was $863,910 and $1,110,376, respectively.

© 2017 Postmedia Network Inc.