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Jim Rankin – Toronto Star
The trees of Wychwood Park stand naked, the leaves bagged and gone. On Taddle Creek Pond, a sign warns of deep water and quicksand in warmer months, but come winter – a real one, mind you – out will come the sturdy steel and twine hockey nets that rest on the bank.
Kids, as they do any time of the year, roam freely, and in whatever house they wind up in at noon on a Saturday, it is understood lunch will be served.
No pro hockey to watch? No problem. Reruns of the ’72 Canada-Russia series are playing in one home. Please do drop over.
Bucolic postcards from a unique private enclave tucked in the heart of urban Toronto. Indeed, all would seem fine in Wychwood Park, at least to an outsider.
But as usual, in a place where you do know all of your neighbours – and there are 60 households – who kick in private money to care for a private road and common land – there are the usual and occasional crises that, over the 121-year history of the park, tend to come to a full boil before something has to give.
Today, the trust deed that binds the place, drawn up long ago, is showing its age. It comes with no teeth to make folks pay up. It may not, in fact, even be tenable, depending who you ask. Trustees have had to go to court to force one resident who steadfastly, out of principle, refuses to pay for something he says brings him no benefit. A heritage document that sets out what one can and cannot do is also weak. There are suspicions over how a private levy is calculated and over who pays what.
In a place where everyone knows their neighbours’ business, yet these days communicates less eye to eye and more by cold email, how do you enforce neighbourliness? As the line from Jack Nicholson’s character in Mars Attacks! goes, why can’t we all just get along?
That’s what this story is about, set in a stunningly beautiful pocket of forest and homes near Bathurst St. and Davenport Rd., which began as an artists’ enclave and is now home to CEOs, lawyers and architects – newer families with more money, more cars, more wants and less time to deal with the inherent weirdness of Wychwood Park life.
“It’s pretty big, eh, this house?” chuckles Marc Giacomelli, as he and Tikaani, his friendly Alaskan Malamute, pause at the nearly completed home that straddles a double lot at 106 Wychwood Park.
“I guess it will eventually fit in, when it’s green and there’s trees and stuff,” says Giacomelli, 62, one of three park trustees.
For now, 106 – a grey-brick design inspired by Frank Lloyd Wright – looks entirely out of place. Monster home comes to mind, although, at 4,500 square feet, it is not the largest in the park. However, in proportion to the lot frontage, and how it sits on the land, it is undeniably an oddball.
While it may not be a symbol of a sea change here – there are other examples of odd homes here – the story of 106 certainly illustrates the pattern of recurring flashpoint issues that dot the colourful history of the park.
In a place where a private trust deed, a provincial Heritage Conservation District designation and a city heritage bylaw set out rules, how did a home that screams suburbia come to be built here in the first place?
The answer, as usual, was a shotgun compromise, of sorts. More on this later.
Just inside modest open gates, at the point where Wychwood and Tyrell Aves. meet and Wychwood Park begins, there is a plaque that delivers a brief history of the place.
In 1874, painter Marmaduke Matthews built the first house here with the intention of starting an artist colony, and named it after a forest in England. In 1891, he and another early resident created a plan for the area in the form of a four-page trust deed that set out the private enclave’s rules.
Included in the document is a method of calculating an annual private levy, based on lot size and exclusive of buildings, to be spent on maintaining the road and common land. New homes were to be built in the spirit of the English Arts and Crafts movement and blend in with the landscape of the park.
The city takes care of garbage and other services, but residents are responsible to this day for maintaining a meandering circular road, two gates, one of which fronts on Davenport and is only opened for heavy trucks doing work, a ravine area, tennis court and Taddle Creek Pond.
The pond, it should be noted, was artificially created by damming Taddle Creek, which bubbles up from a spring within the park. Surely, not for the sole reason of giving resident artists – and there were a few – something to paint, but that is how one story goes.
In 1907, the trust deed was replaced by a corporation. In 1915, an early controversy over who would pay what and how the levy was calculated led to a new rule that proved unenforceable. That led to the reinstatement of the trust deed that binds to this day, legal or not.
In 1958 came a ratepayers association to act as a buffer between park trustees and the community. There were legal opinions sought over the trust deed and the power of the trustees. There were periodic disputes over land and new development, including one in the ’80s over a developer’s plan to wedge six houses on a large lot. As usual a compromise resulted, and three new homes were built instead.
In 1985, the area became a Heritage Conservation District, which ushered in new rules about what could and could not be built. But to this day, the plan remains weak, to wit, the freshly built monstrosity that sits at No. 106.
Through the ’90s, the sorry state of the pond was a recurring crisis du jour. It was so shallow it ran the risk of becoming a swamp. Residents eventually ponied up $90,000 to have it dredged.
In the early 2000s, the Wychwood TTC Barns and what to do with them became another divisive issue.
But nothing compares to the mysterious rash of tire slashings that culminated in the 2008 suicide of Albert Fulton, one of two unofficial park archivists, and nasty rumours and a defamation suit over who might be responsible.
It made the news. The private affairs of the private enclave became very public.
Neighbours were talking. About neighbours. To reporters.
Good neighbours who are neighbourly simply shall not do this, but if they must, please be civil.
Quick aside: Following a lovely 1994 Globe and Mail piece on the park by John Bentley Mays, in which one named resident remarked upon the total unsuitability for the area of another unnamed resident’s house – “terrible … too Bayview” – the deeply offended unnamed resident dropped a bomb of a letter on the named resident.
“Immediately I came to realize that to individuals with your views, (and I can only assume there are more of you out there), the reality of living in Wychwood Park for my wife and I differs drastically from the images portrayed by Mr. Mays, with your help,” reads part of a letter circulated widely in the park at the time.
“For we will never be able to live there in peace and contentment,” it continues, “without being aware that beneath the surface of an idyllic park-like setting lurk the negative, senseless and hurtful attitudes of narrow minded and miserable people like yourself.”
Both residents later moved away.
Albert Fulton, as it turned out, was also apparently under the illusion that all should be idyllic in the park. He was upset with cars being parked on the road and generally fond of the old ways. With wealthier people moving in, along came domestic helpers, more cars and regular home upgrading and renos. There was simply no place to park but on the road.
Fulton took it out on the tires.
After being charged criminally and outed in the media, Fulton, also the park’s Neigbourhood Watch captain, went missing. His body was recovered from Toronto Harbour.
That sad chapter speaks to what is inevitable in the park, and not necessarily a bad thing.
Over the years, homes did stay within families, but the park has gradually lost its old-name stock. It attracts eccentrics, professionals and academics. Marshall McLuhan lived here, and only recently did his family sell off the home at No. 3.
Today, the houses of Wychwood Park are home to some recognizable names. Bonnie Brooks, president of Hudson’s Bay Company. Joe Oliver, federal minister of natural resources. Journalist Libby Znaimer. Gary Clewley and Crown attorney Jennifer Lofft, a former trustee.
Lofft, 51, only the second female trustee in park history, resigned last year, along with a fellow trustee.
In a letter to the park, Lofft and Marvin Green lamented that the annual levy was under attack and there was no way to enforce payment, let alone coax out dough for special levies for major projects.
Things were degrading and in need of fixing. And a small minority was standing in the way of getting things done.
One improvement project would be the road. Such is the state of the asphalt road, Lofft and Green noted in their resignation letter, that a cab driver remarked that it reminded him of his home country.
“When asked where he was from, he said Afghanistan,” reads the letter.
“With over $110m of real estate in Wychwood Park we can only imagine what effect the degradation is having on the resale value of each and every home.”
The community, the outgoing trustees wrote, is being “held hostage to a super-minority who may for one reason or another be dissatisfied with what most thought was a sound community decision. This minority is now carrying the day, which is unjust.
“Furthermore there is a very long history of acrimony and dysfunction in Wychwood Park that inevitably results from the problems noted above. The history of bickering and resultant degradation of our environment is a predictable outcome of this no longer workable governance model …
“Until there is a new governance model, we are doomed to re-live the failures of old.”
What’s going on? There are differing wants and needs and priorities, and a power imbalance rooted in who pays what.
Marc Giacomelli, perhaps best known by SCTV Network aficionados as a creative director and associate producer in the Bob and Doug days, was named as a replacement trustee.
Residents now have busier lives. There are younger families. More money. And it is becoming more and more difficult to be neighbourly, says Giacomelli, who along with wife Sarah (she’s in real estate and grew up in Wychwood) live in a lovely home built by artist George Reid.
When longtime park caretaker Peter Caddick, who resigned a year ago, died in late November, only 11 houses of the 60 in the park were represented at the funeral, according to one person present.
The service was less than a 10-minute walk from the park.
“There are more, newer people moving in, with more money, especially young couples who I guess are kind of in between ‘charming, idyllic, historical Wychwood Park’ and ‘can’t the road be fixed and what about my property values’ kind of attitude,” says Giacomelli, who has served as treasurer and is in his second stint as a trustee.
“I guess because it’s unique and it’s lovely and it’s got trees and a pond, it’s different … but I don’t think it’s different in the neighbour dynamic, other than it’s more personal.
“It’s like a village, a weird little village, so the agreements and disagreements get emphasized. The benefits and the negatives are emphasized because everybody knows everybody.”
Perhaps the only Wychwood owner that still has family ties to an original owner is Gerald Owen, a Globe and Mail editorial writer who, along with his wife, inherited his father’s home on Alcina Ave. It backs onto Wychwood Park and is part of the area subject to provincial and municipal heritage rules.
Owen, 59, also happens to be at war with the Wychwood Park trustees over the trust deed.
While he believes in the heritage aspects of the neighbourhood and the philosophy behind it, he believes the trust deed has no merit. Five years ago he stopped paying annual levies, for which he argues he receives no benefit, since his home fronts onto a city-owned street. (A number of Alcina homes are part of the park.)
The trustees took him to small-claims court, where Owen lost. On appeal to divisional court, the ruling was upheld.
Unchallenged in either court, however, was whether the trust deed is binding on future homeowners. Or even legal. The trust deed is not registered on the title of his home and Owen believes it is a feudalistic arrangement – one he didn’t agree to.
Owen remains steadfast and refuses to pay the regular levy. In a subsequent small-claims case brought forward by the trustees, Owen will have a chance to make new arguments on what turns out to be an old issue.
Owen contends that his family, in paying the levy over the years, has been subsidizing benefits received by others.
In 1952, a legal opinion cast doubt on whether the trust had any legal hold on a strip of common frontage on Alcina Ave. and warned trustees not to make any claims of ownership on that land. In other words, do not rock the boat.
The trustees, argues Owen, have been winging it for more than a century.
“We have every reason to believe that a succession of trustees have been afraid of what some of the beneficiaries would say to the court in that event – some would simply want out,” Owen said in an email to the Star.
At the heart of it all are the fees, suspicions over who pays what, who wants what, and who benefits.
Over the years, others have not paid or withheld payment until the last moment because of various disagreements with the trust over spending and projects. Records indicate past lawsuits where the trust went after residents.
In rare cases of financial problems, payments were delayed or staggered and, if left unpaid, were recouped by placing liens on properties, the amounts owed realized when the property was sold.
Owen’s regular annual levy now stands at more than $3,000, which is high for the park. Only eight other properties pay more than $3,000.
While the trust will not disclose who pays how much in levies, for privacy reasons – which is odd, given that one can look up city tax information – the average levy for the coming fiscal year is $2,027. The highest levy is $8,423; the lowest, $729.
With growing park costs, levies jumped by 25% from the previous year.
This is on top of city property taxes.
At the end of each year, the homeowners of Wychwood Park vote with their chequebooks. By the end of this past fiscal year, three residents, including Owen, had not paid.
Owen, it should be noted, is not part of the “super-minority” that led to the resignation of the trustees. But he does have supporters who wonder about the trust deed. A neighbour on Alcina offered a letter of support for the court battle, saying that the private tax is “unfairly and inappropriately levied.”
Owen says that when he first started asking questions at a general meeting in 2007, he was treated “rather disdainfully.”
“The whole thing needs to have a complete overhaul,” Owen said in an interview. “But we essentially just want out. The deed is illegal and trusts aren’t really allowed to go on indefinitely, unless they’re actual charitable trusts. It just doesn’t make sense for us to be part of this.”
Others agree that the trust deed needs improvement. Options include scrapping it in lieu of a condominium–like arrangement, or, just turning over everything to the city, with heritage rules in place to protect the area. And there are residents who are leaning that way.
The only way to deal with changes to the trust deed is to open it up in court, which is costly. The results could be unpredictable.
Tsur Moses pads through the nearly finished interior of 106 Wychwood Park in rubber boots. His iPhone chirps constantly. A couple of workers do brickwork on the main entrance.
The soft-spoken, 39-year-old Israeli-born engineer and developer and a business partner bought the land in 2007 for $1.5 million, and in doing so sent a collective shudder through the park.
That the old ’50s bungalow that sat on one side of the lot would come down was almost a given. For starters, no one much liked the bungalow, although the garden, including a lovely rose garden, on the empty lot beside it, was pleasing to the eye.
“It was a given, as soon as Tsur Moses bought that property, that something big was going to happen because our very own heritage document identified the lot as one for potential development,” says former trustee Lofft.
Initially, Moses wanted to put two large houses on the double lot. The city and the Wychwood Park Heritage Advisory Committee stopped him cold. A revised plan for two smaller homes looked promising but not to the residents of Wychwood Park, who galvanized over this issue.
“It was an amazing thing in some ways because a lot of the residents really came together and pitched in and there’s actually an extraordinary amount of expertise here,” says Lofft. “There are lawyers and planners and architects and artists.”
Architect Paul Oberst, who drew up one of the homes, remembers showing off the drawings at a community open house at the Wychwood Barns.
“The councillor (Joe Mihevc) liked it, the staff liked it, people came to the open house and just said, ‘It’ll never happen.’ And it didn’t.
“We got completely slaughtered. The neighbourhood is very tight. They sort of go to the wall.”
For what it’s worth, Oberst says he fell in love with Wychwood Park at first sight. “This would be years and years ago, it was just like, ‘Holy crap, I can’t believe there is this right in the middle of the city,’ and, ‘Oh, what a lovely place to live.’ And (now) it’s like, ‘You couldn’t make me go there. It’s just too weird.’ “
Their two-house plan thwarted, Moses and his business partner went to the Ontario Municipal Board, where, after years of back and forth on the property, hammered out a settlement with the Wychwood Park heritage committee. There would be one house and a plan that would not result in the total demolition of the existing house.
The park was adamant that a demolition precedent not be set.
So, although you’d never know it to look at it, encased in double-thick foundation walls are remnants of the original bungalow.
This particular compromise will hence be known as the “house at 106.”
The fight, while always civil, took its toll on everyone involved.
As for the house, people “hate it,” in the words of one resident.
“As much hard work that was done, it looks like a monster house,” says Giacomelli. “When you stand and look at it, it looks like one of those fake French chateaus that you can see in Forest Hill or the Bridle Path.”
Even the developer thinks it doesn’t fit the lot. It’s “too huge” and the two smaller houses, Moses thinks, would have blended in better.
Five years after he embarked on the project, Moses will soon walk away without making any money, he says. He sold his share of the property to his partner, who may or may not live in the house before selling. It could potentially be ready for listing in a month.
Greeting a reporter for a tour of the house, Moses begins with a sales pitch: “What can I tell you about lovely Wychwood Park? Wychwood Park, it’s the oasis in downtown or middle downtown Toronto. It’s a place, if you are a young CEO, you want to raise your children in a countryside feeling and be ten minutes from your office.
“And the secret of this place is that a lot of people don’t know it exists.”
And then this piece of advice for fellow developers:
“I recommend to everybody not to do it. It’s not worth the time. It’s too hard. The neighbours are very picky, and I understand them, because they really love the neighbourhood and they really care. They want to protect it like a mother protects a child. But they overprotect it.
“For a builder, it’s very hard to get it approved. And they want to be involved in all the details.”
Moses calls this house – boasting a home theatre room, library, walnut floors and soaring ceilings – his baby and predicts it might go for $5.5 million, which would be a record for Wychwood Park.
It appears to be well built, with fabulous views of the park and tennis court.
“Whoever buys it is lucky,” he says. “He’ll have a finished house and he won’t have to deal with the neighbours. Because somebody already did it for you.”
To recap: In this beautiful weird neighbourhood, there’s been a legal bun fight over a dusty 121-year-old document, a developer managed to build a house no one wanted built, divisive issues continue to crop up, there are suspicions over money, and occasional unneighbourly conduct.
And people who continue to love living here for a host of reasons.
“It is without a doubt the best place in the city to live,” says Lofft, who loves being “surrounded by beauty and interesting discourse.
“The eclectic mix of people who live here don’t fit perfectly into any one category. It’s not the place for those seeking instant social status or recognition; it is the quiet secret of midtown, and it’s more of a village.”
She and her husband Gary Clewley, who bought into the park in 2000, have had the pleasure of watching their five children – aged12 to 20, including 14-year-old triplet daughters – grow up there.
“It still is an amazing place to bring up kids,” says Giacomelli, who raised three kids here. “The positives are your neighbours know your business. The neighbours know your kids. The kids can run around, go in the pond, skate on the pond, look for rabbits.
“So, the negatives of a village turn into a positive.”
In the wake of last year’s trustee resignations and obvious neighbourhood issues, there’s now a new approach to getting along, and it turns out to be a very old approach.
Go slow. Walk around and talk to people, just like the trustees of olden days, who were typically older and had a lot of time on their hands.
“They would walk around on a weekend or on an evening and talk to people and ask what’s going on,” says Giacomelli. “Tree fallen down? Is your street light out? Do you really want to put that colour of roof on your house?
“It was face-to-face and it was like elders in a village.
“It sounds like some kind of weird idyllic thing.”
In other words, you do want to be a good neighbour, don’t you?
Weird anywhere else, perhaps, but not in Wychwood Park.
“It’s a great positive experiment in urban living,” says Giacomelli. “You wonder why there aren’t more neighbourhoods actually like this.”
For pleasure and sport, the residents of Wychwood Park will now hope for a frozen Taddle Creek Pond and watch the new trees at 106 Wychwood grow – and, now that the monstrosity is built, speculate on just how much she might go for.
Not that good neighbours ever talk about such things.
Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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Erica Alini – Macleans
Last Friday, rating agency Moody’s announced that almost all of Canada’s biggest banks might be in for a credit downgrade, citing “concerns about high consumer debt levels and elevated housing prices.” It was just the latest warning that, after soaring for 14 years, Canada’s housing market might be finally headed back to Earth.
Now, virtually everyone – from the Bank of Canada and the Finance Department through Canada’s banks to the International Monetary Fund and independent analysts – agrees that housing is losing steam and Canadian wallets are overstretched.
Comment: Except a lot of us do not agree with that. David Rosenberg does not agree. CIBC does not agree. TREB and CREA do not agree. CMHC does not agree. Those are some serious people who are not calling for a correction, collapse or crash.
But is Canada’s housing market headed for a gracious landing or a face-forward crash? When it comes to predicting how rough a ride it will be, opinions vary widely.
Comment: It is heading for a gentle slowdown, nothing more.
To help Maclean’s readers make up their minds, we’ve compiled a review of prominent arguments supporting bullish and bearish positions on four key questions about the future of Canada’s real estate and what it all means:
1. Will housing prices cool or collapse?
Here are the latest numbers from the Canadian Real Estate Association and the Canada Mortgage and Housing Corporation:
* sales of existing homes were down 15% in September 2012 compared to the same month last year. Compared to August, however, they were still up 2.5%.
* during the same period, the seasonally adjusted average price of a Canadian home edged up one% compared to year ago levels. Compared to August, home prices were virtually unchanged, dipping 0.2%.
* housing starts fell to a seasonally adjusted annualized rate of 220,215, down slightly from the August figure of 225,328 but still above the 2012 average of 218,400 units.
Comment: So things are basically the same as they were. Wow, what news…
At least in part, many argue, this slowdown was government-engineered. What we’re seeing is the effect the new rules Ottawa introduced in July, which shortened the maximum length of a government-insured mortgage from 30 to 25 years and capped home equity loans to 80 rather than 85% of the property’s value.
Comment: What? You just said that sales were up in September over August, how is that a slowdown? And you said that prices rose 1% over last year – how is that a slowdown? Housing starts are above the yearly average – how is that a slowdown? How can you say that when you just gave data that contradicts it completely?
And, according to CIBC’s Avery Shenfeld, that was enough encouragement. Discussing the possibility of an interest rate hike – which would make loans more costly and further discourage Canadians from buying homes or borrowing against their own – he writes: “In the face of recent changes in mortgage insurance rules, lofty prices that make taking the plunge a bit less attractive (particularly for speculators), and the end of a catch-up period in which construction has outpaced the trend in household formation, there are good reasons to expect mortgage volumes to settle down in 2013, even without a tightening.”
Although, as Shenfeld hinted, Canadians have been building houses faster than they’ve been forming new households, CIBC notes in another report that they’ve done so to a much lesser extent than Americans did in the run-up to the U.S. housing bust. That’s another reason to believe that an “American-style real estate meltdown” is not in cards.
Comment: US housing starts to household formation was at a ratio of 1.8 when they crashed. Canada is at 1.1 currently – 63% less than the US was. And we have investors lining up to buy condos for renters. I have seen 45 people come to a single loft rental showing. Bidding wars are common for rental condos and houses. Certainly that is not a sign of too much product!
According to economists at TD Bank, home prices are 10% overvalued. If interest rates stay low, TD’s Francis Fong recently wrote in a note to clients, there’s plenty of space for the market to adjust gradually to its “long-term trend levels” in terms of both sales of existing homes and the pace of new construction projects.
Comment: Overvalue by 10% based on what? No one ever has an answer for that. They just throw numbers around without any supporting data.
Besides, real estate agents’ favourite adage – “location, location, location! – still applies. Not every regional market is headed south. As BMO’s Robert Kavcic noted last month, “Alberta and Saskatchewan posted solid gains, with the latter jumping to the highest level since 1983.” Even Moody’s acknowledges this: “A correction in real estate prices looms as a downside risk for Vancouver and Toronto, but average national home prices are unlikely to decline outright.”
Comment: Vancouver, yes, but not Toronto. Trust me, I work in this market every day. Mr. Kavcic does not.
Others aren’t so sure the landing will be all that soft. The 15% drop in resale numbers registered in September, analyst Ben Rabidoux pointed out, was the market’s weakest September performance since 2001.
Comment: And they are directly tied to the new mortgage rules. And a 15% drop in sales only brings us to minor record numbers, not the massive records we had been seeing.
Sales of existing home are falling sharply, and prices will soon follow. That construction of new homes is still robust is bad news, as it means the market is creating excess supply that will only further depress home values.
Comment: Prices follow volume? Says who? Not in Toronto, not while half of houses have bidding wars and rentals have multiple offers.
Capital Economics predicts home prices could drop as much as 25%. The dive will leave Canadian consumers hurting and could wipe out as many as 115,000 construction jobs, the firm predicts.
Comment: And they have been saying that for almost a year now. All that time, prices in Toronto have risen 6–10% NOT dropped. Even nationally we have seen minor increases or flat price growth – NOT any sort of drop. Vancouver, sure, but they have been in the toilet for years now.
Another telling estimate foreshadowing a sharp correction is the Economist’s price-to-rent ratio, which calculates that Canadian homes are overvalued by as much as 76%.
Comment: And price to rent is moot moot moot. Carrying costs to rent makes much more sense. And the mortgage on a $500,000 house is about equal to the rent on a 2-bedroom condo in Toronto. That is why people buy and don’t rent.
2. Will Canadians start defaulting on their mortgages like Americans did?
According to the latest estimate by Statistics Canada, which just revised its methodology for calculating the ratio of debt to disposable income to adjust to standards set by the IMF and the UN, Canadians are even deeper in the red than previously thought, owing $1.63 in debt for ever dollar they make.
The BOC called household debt “the biggest domestic risk” to the economy and recently suggested the state of Canadian families’ balance sheets will play a role in its interest-rate setting decisions.
Canadian households got the message about debt, and have already started reining in the borrowing. As of March of this year, household credit was growing at the slowest pace since 2002.
Comment: And some months it even decreased. It is a problem yes, too many big screen TVs being bought on credit. But we have to differentiate between bad credit and good credit. Credit used to buy a TV is wasted, the TV is essentially worthless. Credit used to buy a house turns into equity.
And CIBC’s Benjamin Tal notes that the debt-to-income ratio in Canada has been rising much more slowly than it did in the U.S. prior to the crisis.
Besides, when it comes to mortgage debt, a larger share of Canadians own their homes outright than Americans did at the onset of the U.S. housing crisis: 39% vs. less than 32% south of the border as of 2007.
Finally, according to Moody’s: “Home equity loans and second mortgages have complicated the U.S. foreclosure crisis immensely because of the conflicting incentives of first and second lien mortgage holders. Second liens have limited the ability of some borrowers to refinance their mortgages to take advantage of record low rates. Loan servicers have also run into barriers when trying to modify first mortgages, as the co-operation of second lien holders is needed to preserve the legal rights of the first mortgage-holder during a loan modification. Even if the Canadian housing market should falter and foreclosures should rise, the limited volume of second mortgages among Canadian homeowners suggests that the legal and procedural issues that have plagued the U.S. market would be largely avoided. This would mitigate the spillover effects brought on by the U.S. housing bust. A Canadian housing crisis would likely be shorter and shallower than the U.S. experience.“
Canadians are now more indebted than Americans were pre-crisis.
Comment: Except that it does not take into account health care costs (theirs out of pocket and ours through taxes), nor housing asset values, or many other things. It is not that simple to compare their income and debt to our income and debt.
Though proportionally fewer Canadians are carrying a mortgage, according to the BOC, the most vulnerable borrowers, those who are channeling 40% or more of their income toward interest charges, are carrying a disproportionate share of debt. While these borrowers amount to just over six% of Canadian households, they account for over 11% of household debt.
Comment: And yet our mortgage arrears rate hovers around 0.4% – while the US saw default rates as high as 30% in some states at one point. That is a full 75 times higher than here. And we worry about 6% of buyers…
And Canadians look more vulnerable than Americans in one important respect. While a standard mortgage term south of the border is 30 years, in Canada it is typically five years, meaning that homeowners here are much more exposed to the risk of rising interest rates.
Comment: Only IF they rise.
Finally, Moody’s notes that, although Canadians’ credit ratings look good for now, so did Americans’ before the onset of the crisis.
“Rapidly expanded lending,” writes the agency, “can lead to low delinquency rates in the short run, as new loans contribute to outstanding balances while contributing little in the way of new delinquencies for the first few months or quarters after origination. A relatively stable and expanding economy can also mask underlying deterioration in credit quality, as even distressed borrowers have greater flexibility in paying back their loans.“
Comment: But we have had low delinquencies in Canada forever.
3. Are the banks safe?
BOC Governor Mark Carney called household debt the greatest domestic danger to Canada’s financial institutions. A 3% rise in the unemployment rate, the Bank reckons, would double the rate of mortgage arrears.
Comment: Who in their right mind thinks that Canadian unemployment is going to skyrocket from 7.4% to 10.4%? That is the stupidest thing I have ever heard. We have not seen a number like that since June 1994.
Canadian regulators have also becoming concerned with loosening standards among Canadian lenders. Subprime-like mortgages, typically offered to the self-employment and recent immigrants, have become “an emerging risk” to the banking system, according to the Office of the Superintendent of Financial Institutions.
Comment: What? Seriously? We just had our mortgage rules TIGHTENED for the 4th time. And our standards are loosening? Do the people talking know anything about what they are talking about?
According to the BOC, before the financial crisis, “In the United States, the subprime market had grown to account for about 14% of outstanding mortgages… compared with about 3% in Canada.” Non-prime mortgages in general, which include subprime and other rather lax types of mortgages, accounted for 46 percent of all U.S. subprime mortgages in 2006, according to Credit Suisse. While mortgages that require little income documentation may be on the rise today in Canada, they still account for a very small share of the market – probably under five%, CIBC’s Tal told Bloomberg News.
Comment: So we are talking about our sub-prime mortgages, which barely exist, admitting they are 1/10th of what they were in the US by percentage, meaning 1/100th in total volume.
Moreover, Canadian banks are largely sheltered against potential losses from residential mortgages, as 75% of them are insured by either the CMHC or private-sector insurer Genworth. And all federally regulated financial institutions are required to insure residential mortgages with a downpayment of less than 20% of the property’s value.
Also, residential mortgages make up 23% of total bank assets, which is relatively low among developed economies.
Comment: So banks have tiny exposure, that is what you are saying. They have only 23% of their assets in mortgages, only 5% of those being sub-prime. And 75% of the total mortgages are insured, 100% of the low-quality ones. All of which is considered low among G20 type countries. And somehow we are trying to make this something to be worried about? Right…
No one is predicting that a housing downturn would nearly bring down the financial system as the last one did in the States. But many are warning that Canadian banks may not be as sheltered as one might think.
“The over-leveraged household sector and a potential deflation of the housing bubble would continue to pose significant risks to the banking system stability in the near term,” reads a report by Roubini Global Economics, the research firm headed by NYU’s Nouriel Roubini, who rose to fame as “Dr. Doom” for predicting the U.S. housing bust and the worldwide recession that ensued.
Canadian banks, for one, won’t be able to rely heavily on the CMHC to absorb mortgage risk for much longer. The housing agency is approaching its $600 billion federally-imposed liability cap. Finance Minister Jim Flaherty also recently hinted the government might soon privatize it.
In any case, mortgage insurance doesn’t offer 100% protection. “In the event of a significant housing downturn,” continues the RGE report, “banks could still face legal risk should there be claim disputes between banks and mortgage insurers, as had happened in the case of U.S. banks.”
Comment: But a minor downturn is not even coming, never mind a “significant housing downturn”.
Even if Canadian banks are relatively sheltered in terms of mortgage debt, they could still suffer a major hit if dropping housing prices force Canadians to dramatically rein in borrowing or fall behind on their consumer debt. Rabidoux pointed out that, according to OSFI data, chartered financial institutions in Canada hold proportionally significant more HELOC debt than their U.S. counterparts. Outstanding HELOC debt in Canada is $206 billion, or roughly 12% of GDP. That compares to an estimated $649 billion of equivalent outstanding debt in the U.S. in 2010, according to consumer reporting agency Equifax, or roughly four% of U.S. GDP.
Comment: But house prices are not dropping, so it is a moot point. Even with Vancouver falling, the overall national average is up 1% over last year. Take Vancouver out and the country is up nicely. Toronto is up 6% last month.
4. Could all this trigger a recession?
According to the BOC, the ratio of residential investment to GDP has risen from 4.3% in 2001 to a whopping 7% in 2012. If the housing market falters, will the economy at large follow?
Comment: But that is because prices have risen significantly in that time. And there have been more sales. Of course that value has risen. And why is this a bad thing? The housing market is not going to falter, it just isn’t. Read everything above, it is all outline pretty well.
Despite his moniker, Roubini has been sounding a positive note about Canada’s economy and its sputtering housing market. RGE is still predicting that the real estate downturn will be relatively gentle and the economy will slow, but not shift into the reverse gear. Even in the event of a sharper-than-expected housing bust, the research firm forecasts only a mild recession in 2013, with GDP contracting by a modest one%.
Comment: Our housing is not “sputtering”, stop saying that. And Dr. Doom thinks we are in fine shape, predicting the same as me, a slowing of the current hectic pace. If we have a recession in 2013 I will buy you all lunch!
Sure, a rise in interest rates – which, sooner or later, must go back up – could be just the kind of spark that sets the house on fire. But, as economist Larry MacDonald notes, “interest rates normally trend upward when there is growth in incomes and jobs, factors that add to housing demand and offset the rate rises.”
Comment: Yes, rates will rise, but only once Europe has its house in order. And even then, so what if rates rise 60%? That means our current 3% rates go to 5%. Big whoop. We just aren’t going to see rates shoot into the double digits. And if, in the impossible event that it does happen, it means the economy is going gangbusters. Rates follow the economy. The better the economy, the higher the interest rates. Rates are low now because of 2008, the Euro crisis and the US stalling economically. Rates will not rise until economies rise. And with better economies comes more money – and people can then afford the higher rates.
Housing bubbles gone bust have plunged economies into recession – including right here in Canada, remember? – well before sub-prime mortgages and complex derivatives came around.
Comment: But that bubble saw a 127% price jump in 15 months in Toronto – not quite the same as the 6% annual growth we are seeing now. Which is actually only 4% after inflation. Whoa Nelly, 4% a year!
According to Capital Economics, there is “a good chance” that the housing market will become “a significant drag on overall GDP growth in both 2013 and 2014.”
Comment: But they are insane and say stupid things that no one else agrees with.
Moody’s, for its part, puts the chance of a recession at between 20 and 25%.
Comment: Speaking of… never mind…
Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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