The Coming Canadian Housing Crash

Hello,

My fellow ATS'ers I have been thinking of this subject for a while now and today I finally have the time to write about it.

(All I am willing to reveal is that I work in Canadian Real estate industry. I am not a lawyer, not a mortgage agent, not a real estate broker/agent and not a bank underwriter. But i am someone who has to work with them on an everyday basins. I am a sort of private contractor who works on the files for their clients and as I do not work for a single person but offer my service to a lot of them what I say is not an industry blip but a trend and that is all I will say about my work and identity)

We are all aware that in this great recession while the mighty US housing market collapsed the Canadian housing market was able weather the crises and came out in an ok shape (if not good).

While I do agree that prior to 2006 the Canadian lending standards were quite strict we cannot ignore the fact that in the fall of 2008 and early 2009 the Canadian government effectively guaranteed $200 billion dollars of the existing housing debt across the board.

However, this did not stop the crises but rather started it in Canada. The low interest rate regime initiated to kick start the industrial and overall economic growth has created the false sense of security for people by leading them to believe that now is the time to go out and buy and take on more debt as this is a once in a generation chance, they do foresee the interest rates to go up in future however the future is being defined as 10-12 years not 2-5 years.

This false sense of security that interest rates will stay low for a long period has even effected the developers who are building condos like there is no tomorrow. In GTA (Greater Toronto Area) alone thousands of new developments are being approved and are being built up.

But my friends the truth has a much darker side so lend me your eyes and ears:

WHO IS BUYING:

As per the present trend across Canada, there are 3 main groups of people who are buying :

1. The Next Generation: I classify this group of people who are in the midst of starting their family life. Clients in this group are people who has recently got married or are staring a family, has savings that can see them through at least 7-8 months and most importantly have no problem paying 20%-25% down payment to finance their housing purchase. The clients in this group are financially literate and are only and I repeat only opting for conventional mortgages. The people in this group were affected by the financial groups and some of them did lose their jobs however they took time to go back to college and upgrade their skills or even to learn something totally new and go for a major career change. This only financial stressor that the clients in this group has is their student loans which when compared to the student loan crises in USA is nothing but it is still out there.

2. The Foreign Investors: This is the group of people that scare me the most. The clients in this group hare wealthy investors from Asia, Eastern Europe, Japan and Russia. they are only buying the real estate to hold and then quickly sell it for a profit. Their time horizon is very short it is only 2-3 years and most importantly there is no way to confirm where the money if coming from. Let me explain his further.

The clients in this group do not want to report how they earned the money to buy the properties. they insist upon utmost secrecy. For example I work with 3 lawyers who's clients come from Russia, China and India. when we ask these clients about the source of the money for the down payment they simply tells us that they have made their fortune in stock market and "other " (definition varies) sources. Some clients even insists that their part of the money or down payment will be wired directly to the lawyer's trust fund from foreign banks and the rest of the purchase will be financed by mortgages. However such request is declined and so far the lawyers I work with insist that their part of the finance or the down payment be from a Canadian bank. One day I asked a lawyer why take such a big risk the source of the money is not clear for all we know it may be that the clients are just posing as wealthy individuals but may be a money laundering front, and I got the most stupidest answer "Hey I am getting money from a Canadian Bank from their Canadian back account. how that money came to Canada is not my (lawyers) concern the only thing is I charge them more and the LSUC is not bothered about such stuff as long as I am not directly harming anyone" Needless to say that after I heard this I have cut down my own business with him and his partner.

But if you think this is not worth something to worry about then get this that the mortgages are up to 95% of the value of the house as these clients are only willing to pay minimum down payments for their real estate transactions and most of them are financed by Class B lenders like, Street Capital, Equitable Trust, Effort Trust. Home Trust etc.

And now I give you the best part although these investors are renting out the properties the renters are not your everyday renters. For example in the City of Mississauga near the city center ( if i say more my identity will be compromised) the condos have been snapped by "wealth investors" from China but the renters are drug pushers and prostitutes. Those in drug business are sane enough not to do their business with in the same building instead they just drive 5 minutes to down town Mississauga or 45 minute drive to downtown Toronto and make personal deliveries to their wealthy clients. As for prostitution in 2010 to middle of 2011 most kept a low profile but then grew bolder since then. and now the other residents are either fighting back by suing the condo boards or by simply selling their homes/apartments at any and I repeat any price.

The evidence is not in open right now by if anyone of the ATS members live near the City of Mississauga city centre then they can themselves find evidence by investigating "NEW" housing developments near Prince of Wales Road , Prince Charles Road, Hurantario/Highway 10 , Burnhamthrope road. There are a number of real estate listings in these areas that are selling for the same price as in 2005 or even 5% lower than the initial asking price.

When the interest rates start to rise this group of home purchasers will quickly abandon the market leading to a vicious downward price spiral.

PLEASE SEE BELOW NEXT POST

The New Immigrants - This group of clients not only scare me but even make the hair on my skin stand up..It is not the Immigrants who are the problem but how they are being used by lawyers, real estate agents, mortgage agents to increase their earnings.

Here is how this scam being played out.

In this group there are people who are new immigrants to Canada and who have been in Canada for no longer than 1-2 years. They have practically no idea how the real estate market works or who quickly the interest rates can rise. since they are relatively new to Canada they also have net to nothing in their own savings. this group is geographically spread out across Canada (due to recent changes in the immigrant policies) and thereby the risk is spread out which is good but also worse in the sense that when the crash happens it will be felt across Canada and not just in major cities.

The people in this group are being told by the real estate agents that the interest rates are low and will remain low until US starts raising them and then Canada will follow I have had clients tell me that their real estate agent and brokerages are telling them that there is treaty between US and Canada in 2008 that the rates cannot be increased independently. I was stunned and when I told the couple that is a lie they did not believe me, after all I only work for the people ( real estate agents, Lawyers, underwriters and mortgage brokers)

Moreover the individuals in this group are taking variable rate mortgages and are only paying down 5% of the down payment but even this a deception, since this group does not have any saving to finance their down payments they are taking loans against their personal line of credits or even worse the lawyers and the mortgage brokers are arranging for private mortgages. Let me be very clear the bank or the main lender who has the first charge say on paper that there should not be a second mortgage or a private mortgage but the mortgage brokers are moon lighting for private lenders and since the lawyer who did the clients home purchase and registered a charge on title cannot do the private mortgage charge the file is being sent to their friends for a small cut in the fees. This is done after 2-3 months of the initial purchase so that the bank or the main lender does not question them in many cases the private lenders lend the money on the spot with a signed agreement that the charge will be registered after 2-3 months and to compensate for the risk the charge will be greater than the amount lent and have at least 12% interest rate.

The result being that there is now a second charge/mortgage on the property that the bank or the main lender does not know about, the client is now 100 % leveraged, even a healthy 5% price correction in the housing market will put them underwater. Another fact is that since February 2012 nearly 80% of the clients whose file i am handling in the course of my work are going in for Collateral Mortgages given by the top 5 banks.

And the most fearful part of all this is that there is no way to verify income. Since clients in this group are new to the country they always have a tax consultant to take care of their yearly tax needs but the same tax consultant works with the mortgage agent to identify potential clients whose income can be inflated by giving out false income slips all for a small charge.

As far as the banks/main lenders underwriters are concerned there is an emerging practice to either give then false evidence of income, home appraisal and savings and if this does not work then the trend is that the mortgage agent will firstly ensure that the mortgage commitment and the instruction to the lawyer is sent late. Secondly the mortgage agent will deliberately hold back a crucial piece of fact which is mostly income verification or the evidence of savings then on the last day or the funding day all the paperwork from the lawyers office and the mortgage agents office will be sent to the underwriters and the regular staff for the lawyer and the mortgage agents will then start calling the banks/main lenders every 1/2 hour and put pressure on them to approve the paperwork and give consent to fund and release the funds.

Those mortgage agents who have been in the business for long enough have gone further down the road to know the underwriters personally and offer financial incentives.

I have no power, I have no means and I have no strength to fight and change the system but I do have the courage to speak up.

anyone of influence out there reading this, i have never begged in my life but I beg you to pay attention, pay attention to the warning signs.

Thank you

When the mortgage rates go up, in areas like Toronto, and Vancouver the monthly payments are going to cost hundreds more. Some people aren't going to be ready for that.
Those are the cities that the banks will be insisting on more money down just to refinance, it'll be noticeable when those mortgages are more than the house is worth. Houses just cost too much there.

We just bought our second house, will be mortgaged to the hilt on both, but I've thought out 4 years ahead. We might sell one of them then, depending on how much the rates go up. We also have a loan that will be paid off then, that'll go towards the higher rates.
I'm sure we'll be OK, we're in the prairies, where you still get good value

We just bought the second at 2.9 % - lowest rate I've ever heard of, and the one we're currently living in, has a rate of 3.9%. Both these rates will hold fixed for 4 years. Both houses combined have a value of $250,000, but they're rural, so the taxes are less than $1000 a year on each property.
I still haven't figured out what people get for their taxes in cities, other than garbage pickup and light pollution

I expect rates to be at least 7% in four years. These last few years the rates have been ridiculously low. I remember when 10% or 12% felt normal.

The people in this group are being told by the real estate agents that the interest rates are low and will remain low until US starts raising them and then Canada will follow I have had clients tell me that their real estate agent and brokerages are telling them that there is treaty between US and Canada in 2008 that the rates cannot be increased independently. I was stunned and when I told the couple that is a lie they did not believe me, after all I only work for the people ( real estate agents, Lawyers, underwriters and mortgage brokers)

Wow, that is a total lie. Our banking systems are totally different and separate. Our rates are already going up, slowly, but it's happening. The 2.9% rate we got, is over now. We got locked in before we started looking for a second house.

And the most fearful part of all this is that there is no way to verify income.

That's how the states got into their housing mess.
Scary stuff ahead for some.

Another thing I've noticed, is people are getting steered towards high end housing.

My husband works in Northern Alberta, and he sees some of his work mates looking for houses in the $300,000 to $500,000 range. Not only are you paying interest on the work that someone else has done to the house, if the work is all done - granite counters, etc - you cannot build your own equity.

The house we just bought in Alberta is nice enough, 1300 sq ft, 16 acres. We can do our own hardwood floors, and granite counters, and additions, etc, and then equity gets built up. When it comes time to refinance, the house can be worth much more than what we paid for it.

I always go for a fixer upper. If you don't end up fixing it up, you usually break even when you sell. If you fix it up and housing goes up....it's a win.

Be very wary of the Lenders like Street Capital, Bridgewater Bank, Effort Trust, Equitable Trust, Home Trust & Mcap.

These lender will be worse hit.

In the big 5 banks be very careful about

Royal Bank of Canada

TD Canada Trust

If anyone owns stock of these two banks then its time you start pouring over their financial statements very carefully at the very least these two banks (RBC, TD) should have at least 3 times the reserves or the ability to get such financing in a very short time when the housing prices start to correct more than 5%.

If the housing prices start to correct between 5% to 7% then all the B grade lenders above are in trouble at more than 7% RBC and TD Canada Trust will be in trouble and so will be ING, at 8%- 10% the list will expand and CIBC and BMO will be in trouble beyond 10% Bank of Nova Scotia will be trouble as well.

So read their annual statements very carefully and check for their filling at www.sedar.com

I hope the horrendous high priced market crashes. Its outrageous.

So I take it you do not have fixed mortgage rates in Canada then? Or is this just on some loans ?

Listen to this man and learn from the US's mistakes. Get out of your mortgage now and just rent for the next several years till it all collapses. I am stuck upside down in a couple of mortgages that have lost over 50% . Many will be caught flat footed. I should have known better in fact I did and was planning on cashing out but I waited to long and got caught flat footed.

Here in Australia our housing market is in the exact same position hugely overvalued and whats most scary is that our bubble is even bigger than Americas was and our government continues with policies to keep giving as much free money to anyone that is willingly to use it towards a down payment on a house.

I fear alot of my friends have taken on way too much mortgage debt by the lure of government money right at the top of a bubble. I tried to warn them most just look at me as if Im some doomer and that it could never happen here. Hoping for the best for them but any big downturn in China and I think it could be the catalyst for the bubble to finally pop here.

This was a great post whether or not I entirely agree with the OP. Canada had it's share of subprime mortgages too, and if you look at the market compared to 5 years ago, even though it is doing well for itself, in comparison it has already taken a hit.

The reason I see the market so high, is because of the developments that have and are taking place, which is increasing the value of areas under redevelopment.

In the GTA it was just a few years ago when permits opened up for builders, and until the new developments are done, I don't think you will see a downward trend in the housing market.

OP can you PM me...I wish to speak with you outside of this forum. Thanks!