Distress Sale: Borrowers Sinking
Jen St. Denis
other
With its slightly kitschy but homey pine-panelled interior, stunning view of the ocean and backyard swimming pool, it’s easy to imagine a family living in the four-bedroom home on Russet Way in West Vancouver.
But today the house is empty, a court notice affixed to the door, the pool holding just a few inches of slimy green water.
Like many houses in West Vancouver, this house’s value has dropped dramatically since a series of government interventions, in response to a price spike in 2016, let air out of the market.
Real estate market watchers say this home is also an example of how borrowers and private lenders are scrambling to recoup their investments in several high-priced neighbourhoods where home prices are rapidly deflating.
A recent analysis shows private lending has been growing in Toronto, but a dearth of data in Vancouver makes this area, and its potential impact on the wider housing market, a mystery.
Two private lenders have registered a total of $4.47 million against two West Vancouver homes owned by Sherrin Lim, including the one on Russet Way. While the two properties together have an assessed value of $5.85 million, one of the homes sold for $2.4 million in a court-ordered sale in July, while the Russet Way home is currently listed at $2.1 million. The owner has seen $1.35 million in value disappear.
“It’s much more vulnerable right now, and we’re already starting to see some very distressed sales in the Vancouver market where the lenders were private lenders,” said Ben Rabidoux, the owner of North Cove Advisors, an investment research firm in Ontario.
For nearly a year, Canadian banks have been required to “stress test” borrowers to make sure they can withstand a mortgage rate increase. The new requirements were brought in by a federal government concerned that homeowners were taking on too much debt. The regulation means that many borrowers can no longer qualify for as big a mortgage as before, and borrowers looking for a second mortgage are more likely to be turned away.
B.C.’s government has put in place a suite of measures targeted at rampant speculation in the province’s real-estate market, including higher taxes and stricter data collection rules. In response for a request for comment for this story, B.C.’s Ministry of Finance sent a statement that said the province has “secured a permanent federal-provincial table on white-collar crime and information sharing, where we will be discussing how to improve data collection on the mortgage market.”
In the Greater Toronto Area, private lending provided funds for 20 per cent of second mortgages in the second quarter of 2018. This is a 67 per cent increase compared to two years ago, according to an analysis published in October by John Pasalis of Realosophy and Paul McGowan of Teranet. The same study found that private lending was most heavily concentrated in areas of the GTA where there had been a lot of real-estate investment activity.
There are no similar studies for Vancouver or British Columbia, and it’s simply not known how many properties have mortgages from private lenders, which are normally higher-interest, short-term loans of up to one year. Private lenders are usually less concerned with borrowers’ incomes than with property equity that can be used to cover the loan.
As governments try to solve Vancouver’s high-home-price crisis and rein in lending that could be fuelling price growth, not knowing the size of private lending is a blind spot, said Tom Davidoff, an economist at the University of British Columbia who studies real estate.
“When we think about solutions to high prices, there’s build more homes, make sure people who don’t live and work here aren’t buying houses cheaply, and then make sure there aren’t crazy loans driving people who normally wouldn’t be able to buy homes pay prices they normally wouldn’t be able to repay,” Davidoff said.
“If you don’t know the extent to which first-time home buyers, especially, are getting financing, or investors are getting financing to buy multiple properties, then you don’t know how important credit is.”
The Bank of Canada has said the “migration of lending” to nonbank sources “warrants monitoring,” and Canada Mortgage and Housing Corporation is currently collecting more data on the sector.
Private mortgage lenders and borrowers who rely on them say they’re meeting a need as banks turn away borrowers who can’t meet the stricter new rules.
When Sean Abadian wanted to tap the equity in the Yaletown condo he’s owned for 14 years to invest in his own real-estate investment fund, he didn’t want to wait months for his bank to evaluate his mortgage application, only to turn him down anyway.
Instead, the former realtor-turned-real-estate-investor went to Neighbourhood Holdings, a private lender, for a one-year loan. Under the terms of the loan, he’ll make payments on the interest only and will pay back the rest of the loan in full at the end of the term.
“I invest it in my own fund; I mainly do land development,” Abadian said. “I’m mainly involved in projects that are five-, six-, maybe seven-year cycle, usually, but of course I look for opportunities in the (building) I live in.”
Taylor Little, president of Neighbourhood Holdings, said he knows of private lenders who will lend to properties worth $10 million and up. But he said there are few buyers for those kinds of properties and the risk is greater.
“We’re looking for liquid properties in urban markets, properties like condos, townhouses, renovated houses with rental suites that are easy to sell,” Little said.
Mark Cashin, the Toronto-based co-founder of an online private lending platform called MyBrokerBee.com, said his company is currently assisting with a deal in which the owner of a Vancouver house is looking for a short-term loan of $3 million to help with the carrying costs while the owner tries to sell the property.
“They bought an older property, tore it down, built a massive place and are trying to sell it at $15 million,” Cashin said.
Cashin said that kind of deal is “not one I think I would personally play in.” Safer bets for private lenders are urban properties in the $400,000 to $1 million range that can be sold quickly, said Cashin, who also owns a mortgage brokerage and created his platform in an attempt to make private lending more transparent and legitimate.
Steve Saretsky is a Vancouver realtor who has been approached by companies like Neighbourhood Holdings to invest with them. The companies usually pitch investors a guaranteed investment return of eight or nine per cent, Saretsky said, although Neighbourhood Holdings said they have never claimed a guaranteed return.
But Saretsky is wary of that promise and so far hasn’t invested “because I know the risk and where the market’s going.”
“There are possibilities where if the market goes down, investors can get a little more nervous and they can ask to get their funds back out, but a lot of these (mortgage investment corporations) have clauses that say they can put a hold on the funds if they wish, if they run into liquidity issues,” Saretsky said.
“There’s definitely risk from an investor standpoint. There’s no such thing as a nine per cent guarantee.”
Little and Cashin both described the Greater Toronto market as a strong bet, with a large and growing population, high demand for housing and relatively high incomes to support real-estate purchases. But Vancouver is more of an open question right now, with the once red-hot market appearing to react to the government’s new taxes and data disclosure rules.
“It’s hard to come to a firm conclusion,” Little said. “Sales volumes are dropping, liquidity is dropping. There’s a lot less activity.”
Abadian said private lenders are needed especially now, as banks tighten their lending practices, to keep capital flowing in the real-estate market.
“I think there’s a need, but it’s concerning how much they’re growing,” Saretsky said. “We saw this in the U.S. in 2006 and 2007. A lot of the lending growth started to turn more into the shadow lending sector, and that’s kind of what’s happening here.”
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