Toronto bankers put the squeeze on Vancouver real-estate developers

Eastern financiers have upped the ante, which may have an impact on city council's plan to boost the supply of homes.

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      With great fanfare, the Vision Vancouver–controlled city council recently approved recommendations in the Mayor’s Task Force on Affordable Housing. City staff were directed to conduct a feasibility study on creating a city-owned housing authority. Council also instructed bureaucrats to develop an interim rezoning policy—which would be sent out for public feedback—to promote “affordable-housing choices” for those with family incomes between $21,500 and $86,500.

      “Anybody who comes forward with a suggestion that would deliver housing in that income range is going to get quick attention and support within the existing planning rules to get that housing built,” Coun. Geoff Meggs told the Georgia Straight by phone. “Probably a majority of the population will be affected in some way, shape, or form by these initiatives if they’re successful.”

      Neighbourhood character would be retained, according to Meggs, by capping the number of applications at 20. Only two rezonings would be permitted within 10 blocks along any arterial street. Anyone who watched the debate might well conclude that Vancouver is on the verge of an affordable-housing building boom.

      But what if on the way to try to address the housing crisis, Mayor Gregor Robertson and council overlooked a key consideration? Housing isn’t built in a vacuum. It invariably requires financing. And according to several people contacted by the Straight this month, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.

      So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed to the Straight by phone.

      As an example, the veteran condo marketer said that prior to the global financial meltdown in 2008, banks in Toronto would demand that Vancouver builders presell 25 to 40 percent of the units in a project before they could get financing. In those days, these same bankers might require that each buyer put down as little as 10 percent of the purchase price.

      Nowadays, McNeill said, it’s more likely that bankers in Toronto will demand that each depositor fork over 15 to 20 percent up front, and that 50 percent of the units are presold.

      “Half of them have to be sold to legitimate consumers who reside in Canada and who have ID,” he insisted. “They will actually scrutinize every contract and look at the IDs. And every single contract must stipulate that the consumer must put down 15 to 20 percent cash. That money has to be sitting in a third-party trust account—and the banks will actually check all of those details before they’ll lend a penny to that developer.”

      These tougher lending requirements can influence the type of housing that’s built, according to McNeill. “As a result, a lot of high-density projects in particular have a propensity to be targeted toward an investor consumer: smaller units that might have a higher yield to dollar spent compared to something that we would call more of an end-user product.”

      End users, for instance, prefer better amenities, whereas they’re not such a concern for investors. He mentioned a building at Southeast False Creek called James as an example of a project targeted at end users. With a wide-open, well-lit, and well-stocked gym and a top-floor common area, it appeals to people who are looking for more than just four walls and a hallway. “We didn’t blow it out in a day to a bunch of investors,” McNeill said. “We sold it over the course of three years, and now we only have two or three homes left.”

      The new lending landscape makes these types of projects more difficult to finance.

      Meggs said that city staff recognize that a condo sold to an investor can boost the stock of rental housing, but this doesn’t provide a long-term solution for tenants. “Because people are owning it for fundamentally speculative reasons, they tend to rent it out for a while, and then cash out,” he noted. “And it ceases to be part of the rental market, so it’s not sustained.”

      The banks have tightened their requirements as overall sales volumes have fallen sharply in the months after Finance Minister Jim Flaherty reduced the maximum home mortgage to 25 years from 30 years. The Real Estate Board of Greater Vancouver blamed this decision for low September sales, which were 41.6 percent below the 10-year average for that month.

      “There’s been a clear reduction in buyer demand in the three months since the federal government eliminated the availability of a 30-year amortization on government-insured mortgages,” REBGV president Eugen Klein said in a news release. “This makes homes less affordable for the people of the region.”

      McNeill didn’t express nearly as much concern about the 25-year maximum, but it is a major worry to Peter Simpson, president and CEO of the Greater Vancouver Home Builders’ Association. He told the Straight by phone that his national association will be making “inquiries” to Flaherty to review this policy. Simpson declared that first-time buyers face significantly higher monthly payments because of this limit, which forces them to borrow from “the Bank of Mom and Dad”.

      “It definitely is impacting first-time home buyers,” he stated. “That’s where this whole thing starts—with that first-time buyer.”

      McNeill, on the other hand, said a more challenging issue for builders is the B.C. Real Estate Development Marketing Act, which imposes strict timelines. After a disclosure statement is filed, a developer has nine months to market the building and another three months to secure construction financing. If they don’t succeed in generating sufficient revenue to satisfy the financier, they must return deposits to prospective buyers.

      “The development community in British Columbia is under immense pressure to satisfy the construction financing in a specific period of time,” McNeill stated. “It’s there to protect the consumers so the developer doesn’t take your deposit and stick it in the bank for five years while you’re waiting for the developer to get their financing in place. Eventually, he’s got to give you your money back.”

      He also pointed out that Vancouver's housing situation is not an exact replica of Toronto's, but sometimes the financiers back east don't always make any distinction between different market fundamentals.

      "Toronto is a little softer than Vancouver is right now," McNeill stated. "It's creating a bit of a compounding situation for us."

      For a couple of years, Vancouver chartered accountant Bert Paul has been raising concerns about how the Conservative government and financial regulators are dealing with the real-estate market, which he says is a major engine of the Lower Mainland economy. Paul told the Straight by phone that he readily acknowledges that U.S. lenders precipitated a housing crash with their shoddy lending practices. But he worries that Canadian authorities have over-reacted by imposing tougher rules on the securitization of mortgages, repeatedly slashing the mortgage-amortization maximum, and ensuring that the Office of the Superintendent of Financial Institutions Canada is “micromanaging” how the banks finance real estate.

      “If they’re not careful, they could precipitate a very serious problem,” Paul said. “They’re trying to be so prescriptive that the OSFI and the Conservative government are starting to write lending guidelines. Effectively, this is what’s happened.”

      A call to the OSFI went unreturned by deadline.

      Paul suggested that chartered banks often make fatter profits through investment banking as opposed to through retail banking, where mortgages are arranged for consumers. He added that it wouldn’t surprise him if the Conservative government is crafting public policies to move the country’s wealth away from real estate and into paper assets to please CEOs of the chartered banks, no matter how disruptive this might be to the Vancouver economy and to first-time home buyers. “The reality is it’s in the interests of the governing party to have a cordial relationship with the banks,” Paul noted.

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      Richard Pearson

      Oct 11, 2012 at 12:22am

      Hey Charlie, still peddling the "Eastern Bankers are trying to kill Vancouver Real Estate to Help Eastern Investment Bankers" thesis... You sure won't let this die. Maybe it's part of the wider Bilderberg conspiracy... On one hand everyone interviewed lauds our "conservative" lending practices, yet criticizes the fact conservative lending practices are being implemented. You can't suck and blow at the same time. I say privatize the CMHC and get the federal government out of mortgage insurance and securitization. Then the banks will take on the real risk of mortgage origination and underwriting.

      Bo Xilai

      Oct 11, 2012 at 12:25am

      He also pointed out that Vancouver's housing situation is not an exact replica of Toronto's, but sometimes the financiers back east don't always make any distinction between different market fundamentals.
      What Vancouver fundamentals? No head office jobs, Lower average family income, higher price/rent ratio, higher price/income... Any way you slice it, Vancouver's "fundamentals" stink. BTW, mountains and oceans are not "fundamentals".


      Oct 11, 2012 at 5:50am

      To quote “For a couple of years, Vancouver chartered accountant Bert Paul has been raising concerns about how the Conservative government and financial regulators are dealing with the real-estate market, which he says is a major engine of the Lower Mainland economy.”

      I agree with the last comment. The Vancouver economy has long ago been reduced to flipping real estate (let’s face it MacMillan Bloedel moved out a long time ago). I say this in contrast to cities like Toronto where people earn money in such long forgotten ways as working for banks, insurance companies or General Motors.

      As the housing market continues to disintegrate in Vancouver it will likely collapse much more spectacularly here than Toronto. Each drop in the housing market in the Vancouver economy automatically translates to a reduction in the number of potential buyers.

      As housing falls, Toronto residents may well retain their banking or head office jobs. However as the income of Vancouverites is so frequently tied to real estate (whether a lawyer, advertiser, realtor, architect, notary, contractor) I anticipate that it will come down like a house of cards.


      Oct 11, 2012 at 7:12am

      "Paul suggested that chartered banks often make fatter profits through investment banking as opposed to through retail banking, where mortgages are arranged for consumers"

      This Paul guy doesn't really know what he's talking about. Someone should tell him how much the banks make through mortgages, which is a colossal amount on their balance sheets.

      Let's take TD, for example.

      See that? TD Securities Inc. (their investment banking arm) brought in about six and a half times *less* money than TD Mortgage Corporation in 2011.

      Charlie, you're probably a nice guy, but whenever you start talking about bizarre conspiracies involving Canadian banking -- which, for the record, is one of the most transparent industries in this country -- you make me want to face palm for hours.

      Of course the banks are nervous about loose lending in the housing sector, if housing goes down, so do they! And yeah, it's going to be tougher for people to both build and buy housing in Vancouver, you know why? Because Vancouver is in any insane real estate bubble, and if authorities don't slowly deflate it now, it's going to crash and burn the moment interest rates go up, and everyone knows it. And when I say "everyone", I'm talking about guys like Robert Schiller.

      Emily Cat

      Oct 11, 2012 at 8:26am

      Hey Bo, how does HootSuite jive with you?

      Emily Cat

      Oct 11, 2012 at 8:27am

      Or Lululemon?

      Patrick Smyth

      Oct 11, 2012 at 9:01am

      Banks are not evil entities. They are owned by shareholders including union pension funds that have the right to change policies. Blaming CEO's is always the easy route to go.


      Oct 11, 2012 at 10:31am

      Why do some posters consider this article an accusation of some kind of conspiracy theory? Last time I checked banks had indeed tightened lending practices, and last time I checked those changes are indeed influencing the housing market. This city is so wrapped up in development that any honest acknowledgement that things are headed down seems to get everyone upset.

      Bo Xilai

      Oct 11, 2012 at 10:39am

      Emily Cat, surely you must be joking... an obscure "social media dash board" service and a designer of stretchy pants... That's Vancouver's "head office" presence? You forgot all the junior mining companies located here.

      Look three hours south to Seattle for a list of their head offices:


      Oct 11, 2012 at 11:25am

      No mention of CMHC in this discussion? No mention of the Federal government bailing out banks? Every government from municipal to federal encouraged and supported this real estate bubble. Lenders, developers, and regular folk jumped in. Banks know it is coming down. Prices are too high. That is all.