Andrew Mayeda and Greg Quinn – Bloomberg News

Canada’s biggest banks are tight­en­ing lend­ing stan­dards for con­do­minium builders at the urg­ing of reg­u­la­tors, request­ing higher pre-sales and deposits as pol­icy mak­ers warn the Toronto and Van­cou­ver mar­kets are overheating.

Com­ment: Except the num­bers I am hear­ing are the same as I have always heard… there is no change as far as I can tell.

Some banks have been ask­ing con­struc­tion firms to put more equity into new projects in recent weeks, accord­ing to devel­op­ers. Lenders have also been rais­ing the per­cent­age of condo units that must be pre-sold and are demand­ing higher deposits as con­di­tions for financ­ing, they said.

“Sev­eral of the banks have tight­ened up” after the Office of the Super­in­ten­dent of Finan­cial Insti­tu­tions “told the banks to be a lit­tle bit more care­ful on who they are lend­ing to and how they are lend­ing,” said Barry Fen­ton, chief exec­u­tive offi­cer of Toronto-based Lanterra Devel­op­ments, whose con­dos include Water­ParkC­ity and Ice Con­do­mini­ums at York Centre.

Com­ment: This is a good idea though, just to be sure that only the best projects move forward.

Pol­icy mak­ers includ­ing Finance Min­is­ter Jim Fla­herty have warned about the risks of record con­sumer debt and soar­ing hous­ing prices that some investors say may be inflat­ing a condo bub­ble in Toronto and Van­cou­ver. Hous­ing prices may drop 15% as inter­est rates rise, crimp­ing eco­nomic growth and send­ing Cana­dian stocks down 10%, said Sadiq Ada­tia, who man­ages about $9 bil­lion at Sun Life Global Invest­ments Inc.

Com­ment: For the 100^th time, there is no bub­ble in Toronto. An aver­age annual price growth in the 6% range is hardly any­thing to worry about. In 1989–1990, we had 127% price growth in about a year. That is a bub­ble. And hous­ing prices are not going to drop 1%, never mind 15%, in Toronto. They have already gone down 14% or so in Van­cou­ver. But Toronto is see­ing price growth in the 9% range – that is not going to sud­denly reverse 24% to a big drop.

While OSFI, Canada’s bank­ing reg­u­la­tor, hasn’t imposed new for­mal require­ments on real-estate lend­ing spe­cific to geog­ra­phy or prop­erty type, it increased super­vi­sion of res­i­den­tial lend­ing prac­tices more than a year ago, spokes­woman Leonie Roux said.

Risk Dri­vers

“This includes meet­ing with mar­ket par­tic­i­pants to under­stand the dri­vers of risks and the deci­sions that are being made to man­age those risks,” she said in an e-mail.

OSFI released new draft guide­lines on March 19 for mort­gage under­writ­ing by Cana­dian finan­cial insti­tu­tions. Banks should take “rea­son­able steps” to ver­ify a borrower’s income before grant­ing mort­gages, the agency said. Finan­cial insti­tu­tions should also estab­lish inter­nal stan­dards on the abil­ity of bor­row­ers to ser­vice their debt.

“What we have seen is a lit­tle tight­en­ing of the require­ments” on loans offered by major Cana­dian banks to con­do­minium devel­op­ers, said Dov Meyer, CEO of Terra Firma Cap­i­tal Corp., a Toronto-based com­pany that finances res­i­den­tial projects.

The condo build­ing surge is being led by devel­op­ers rang­ing from Toronto-based Tridel Group and Vancouver-based Con­cord Pacific to El-Ad Canada Inc. Toronto has more sky­scrap­ers and high-rises under con­struc­tion than any North Amer­i­can city — almost three times as many as New York.

Record Debt

Ris­ing home sales and prices fos­tered by the low­est inter­est rates in decades have pushed house­hold debt to record lev­els, leav­ing some fam­i­lies vul­ner­a­ble to an expected rise in bor­row­ing costs. Fla­herty and Bank of Canada Gov­er­nor Mark Car­ney have warned Cana­di­ans to make sure they can afford their debts at higher inter­est rates.

Bank­ing reg­u­la­tors have been mon­i­tor­ing the risk to finan­cial insti­tu­tions of the surg­ing condo mar­kets, espe­cially in Toronto and Van­cou­ver, OSFI doc­u­ments released to Bloomberg News in Jan­u­ary through freedom-of-information law show.

“The Toronto mar­ket is dom­i­nated by a small num­ber of very pow­er­ful devel­op­ers,” OSFI stated in a June 2011 mar­ket update. “Their role in sup­port­ing or dis­cour­ag­ing pre-sale spec­u­la­tive activ­i­ties would appear to be very incon­sis­tent, with lit­tle transparency.”

‘Shut Door’

Some of the country’s biggest banks have “shut the door” on lend­ing to less estab­lished real-estate devel­op­ers, said Brad Lamb, pres­i­dent of Brad J. Lamb Realty Inc., which spe­cial­izes in devel­op­ing con­dos and loft apart­ments in Toronto, includ­ing the King East project on Par­lia­ment and King Streets.

“What I’ve been told, and I’ve had meet­ings with sev­eral banks in the last few weeks, is that OSFI has been in there, they’ve been clear about their con­cern about poten­tial risks in the high-rise indus­try in Toronto and Van­cou­ver, and that there needs to be a tight­en­ing,” Lamb said in a phone interview.

Less well-established com­pa­nies may have dif­fi­culty get­ting loans from the top Cana­dian banks, even if they have pre-sold 70% of the units, col­lected 20% of the total pur­chase price in deposits, and can offer 15% of the project’s value in equity, Lamb said.

Com­ment: Inter­est­ing… If they have their finan­cial house in order, they should be able to get the funding.

Efforts by fed­eral reg­u­la­tors to slow the condo mar­ket will prove fruit­less, since smaller devel­op­ers should still be able to tap “tier-two” lenders and for­eign insti­tu­tions for cap­i­tal, he said.

Raise Rates

“It’s not like we’re not going to have fund­ing for our projects,” said Lamb. “If you want to cool the mar­ket, raise inter­est rates.”

Fla­herty said Thurs­day banks can tighten rules for mort­gage lend­ing on their own and shouldn’t rely on the gov­ern­ment to act for them.

“I’d like the mar­ket to cor­rect itself,” Fla­herty told reporters. “We’re see­ing some evi­dence of that in the condo mar­ket, par­tic­u­larly in Toronto, where there is some soft­en­ing of the mar­ket. And that’s a good thing.”

Com­ment: Again, we are tak­ing one month and turn­ing it into a trend. A trend that goes against the 59 months that came before. Let’s wait a few more months before we start mak­ing predictions.

Canada’s banks have been ranked the sound­est in the globe by the World Eco­nomic Forum in part because they avoided the sub­prime loans that crip­pled many U.S. lenders dur­ing the finan­cial cri­sis. Canada’s 10-member S&P/TSX Banks Index returned 155% over the past three years, com­pared with a 97% gain for the 24-member U.S. KBW Bank Index.

Aligned With Developers

Bank of Mon­treal Chief Exec­u­tive Offi­cer William Downe said he can’t com­ment on con­ver­sa­tions with OSFI. Still, devel­op­ers are becom­ing more “con­ser­v­a­tive with respect to their projects, rec­og­niz­ing what’s going on in the mar­ket,” he said.

“I met with one of the largest devel­op­ers in the last cou­ple of weeks, and I was really impressed with how aligned we are,” Downe said in a March 20 inter­view in Hal­i­fax, Nova Sco­tia. “It’s not in their best inter­est to have a mar­ket that over­heats and then falls rapidly.”

Toronto-Dominion Bank hasn’t made any recent changes to its lend­ing prac­tices to condo devel­op­ers, said spokesman Stephen Knight. Royal Bank of Canada spokes­woman Ka Yan Ng declined to com­ment and Cana­dian Impe­r­ial Bank of Com­merce spokesman Sean Hamil­ton didn’t return requests for com­ment. Bank of Nova Sco­tia spokes­woman Ann DeR­ab­bie reit­er­ated com­ments the com­pany made on a March 6 earn­ings call that its condo loans are per­form­ing well.

Mort­gages on con­dos rep­re­sent less than 8% of Royal Bank’s res­i­den­tial mort­gage port­fo­lio, Chief Risk Offi­cer Morten Friis said on a March 1 earn­ings call. Royal’s expo­sure on loans to high-rise con­do­minium builders is $800 mil­lion, less than 3% of Royal Bank’s commercial-loan book, Friis said.

Vul­ner­a­ble

“There may, for instance, be some vul­ner­a­bil­ity in the condo mar­kets of Van­cou­ver and Toronto, but as I have said before, we have very lim­ited expo­sure to these mar­kets,” Royal Bank CEO Gor­don Nixon said on the call.

Toronto-Dominion Bank takes a “con­ser­v­a­tive” approach to loans to condo devel­op­ers, which rep­re­sent one of the “higher risks” in com­mer­cial lend­ing, TD Chief Risk Offi­cer Mark Chau­vin said on a March 1 earn­ings call.

“Cana­dian banks are def­i­nitely” tight­en­ing stan­dards on con­dos, said Ada­tia, chief invest­ment offi­cer at Sun Life Global in Toronto. “Cana­di­ans are look­ing at it and say­ing ‘we saw what the U.S. went through.’ The finan­cial sys­tem in Canada is smarter than in the U.S.”

Fla­herty said as recently as March 5 he is con­cerned some con­do­minium mar­kets are over­heated and some fam­i­lies are tak­ing on debts that will become unaf­ford­able as inter­est rates rise. The cen­tral bank said March 8 house­hold debt “remains the biggest domes­tic risk” and Car­ney said in a June speech in Van­cou­ver there may be an “over­shoot in the condo mar­ket in some major cities.”

House­hold Debt

The ratio of house­hold debt to dis­pos­able income declined to 152.9% in the October-to-December period from a revised record 154.2% in the pre­vi­ous three months as income rose faster than bor­row­ing, Sta­tis­tics Canada said March 15.

Com­ment: And yet no one talks about the good news here, of debt ratios dropping.

Multiple-unit starts in Toronto more than dou­bled in Jan­u­ary to 2,999 units com­pared with a year before, while starts rose 4 % in Van­cou­ver to 1,261 units, accord­ing to Canada Mort­gage & Hous­ing Corp.

“The large num­ber of con­struc­tion cranes crowd­ing Toronto’s sky­line is rais­ing con­cern of an emerg­ing over­sup­ply of high-rise hous­ing,” Bank of Nova Sco­tia econ­o­mist Adri­enne War­ren said in a March 16 research note. Slow­ing price appre­ci­a­tion should “dampen investor demand and new prod­uct launches,” she said.

For­eign Banks

Sev­eral promi­nent condo projects in the city have recently relied on financ­ing from lenders other than the nation’s five largest banks. The Trump Inter­na­tional Hotel & Tower Toronto opened in Jan­u­ary with condo prices as high as C$6.3 mil­lion. The owner and devel­oper, Talon Inter­na­tional Devel­op­ment Inc., arranged $310 mil­lion in con­struc­tion financ­ing from Raif­feisen Zen­tral­bank Oester­re­ich AG, an Aus­trian bank.

Tri­con Cap­i­tal Group Inc., a Toronto-based com­pany that finances real-estate devel­op­ments, is help­ing to finance a condo high-rise called Massey Tower in the city’s down­town the­ater district.

Paris-based BNP Paribas SA says it has become one of the biggest providers in Ontario for con­do­minium con­struc­tion financ­ing insured by CMHC. The bank says it has financed con­do­minium con­struc­tion loans for some of the country’s biggest devel­op­ers, includ­ing Tridel and Lanterra. BNP helped finance the L Tower, a 57-story con­do­minium designed by Daniel Libe­skind under con­struc­tion near Yonge and Front streets in Toronto.

“The smaller, medium-sized guys, those are the ones being asked for either higher pre­sale tar­gets to be hit and/or for their pur­chasers to come up with higher deposits,” said Tasso Era­cles, CEO of Simerra Prop­erty Man­age­ment in Toronto, which man­ages about 280 con­do­mini­ums and is a unit of First­Ser­vice Corp.

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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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