The Hongcouver

For bankers, the smell of real estate profit in Vancouver is being overwhelmed by whiff of something worse

Why are mortgage lenders who made merry in Vancouver and Toronto now queuing up to call for government intervention to hose down ‘wildfire’ markets?

PUBLISHED : Wednesday, 22 June, 2016, 6:53am
UPDATED : Wednesday, 22 June, 2016, 12:47pm

In recent weeks, a conga line of bankers has warned Canada’s government that Something Needs to Be Done about Vancouver’s real estate market.

Incongruously, that’s in spite of lenders profiting handsomely from the over-leveraged city, where average house prices now sit around C$1.75million for the metro region, and the Real Estate Board of Greater Vancouver’s “benchmark” price for all residential properties is C$889,100, a 30 per cent increase over the past year.

That doesn’t come without risk, of course.

BMO, CIBC, Scotiabank and the Bank of Canada itself are all ringing alarm bells.

Most attention went to BOC Governor Steve Poloz’s stark warning to buyers.

“The rapid pace of price increases seen over the past year … raises the possibility that prices may be supported by self-reinforcing expectations, making them more sensitive to an adverse shock to housing demand”, he said on June 9, and it “is unlikely that the current pace of price increases [in Toronto and Vancouver] can be sustained”.

He didn’t quite say “irrational exuberance” - but “self-reinforcing expectations” comes pretty close.

A week later, BMO’s chief economist Douglas Porter and colleague Robert Kavcic chimed in with calls for government intervention to calm the housing market.

Government policy action [should] be aimed at … foreign investment, speculation and land restrictions, in that order
BMO economists Douglas Porter and Robert Kavcic

“There is no doubt that heavy-duty buying from abroad is a major factor behind the price surge in Vancouver and Toronto,” they warned in last week’s Capital Markets Report, describing the factor as a “crucial player” in the cities’ real estate “wildfires”.

“While many downplay this factor (‘it’s only X% of the buyers!’), Economics 101 will tell you that the marginal buyer sets the price.”

In Vancouver, house owners made more sitting on their assets than entire population did by actually working last year

(Porter and Kavcic also sneer at the real estate industry’s insistence that supply restrictions are the primary pricing villain: “Suddenly, now many are citing the lack of new building as the bogeyman. The reality is that overall home building has been relatively healthy in the two big cities , and broadly in line with demographic demand”.)

In order to put out the “wildfires” in Vancouver and Toronto, they “recommend that government policy action be aimed at … foreign investment, speculation and land restrictions, in that order.”

Last month, CIBC chief economist Benjamin Tal called for a “flipping tax” on foreign investors to tamp down the markets in Vancouver and Toronto, saying of speculative foreign investment: “We don’t know how big it is, but we know it’s not constructive”. In an article titled “Should we tax foreign real estate buyers”, Tal said: “Applying a flipping tax on foreign investors might be a step in the right direction. It won’t solve the problem, but it might be an effective way to remove the most problematic element of foreign investment in Canadian real estate.”

Stampede: the inside story of Vancouver’s wildest property deal, gone in 7,200 seconds

Scotiabank CEO Brian Porter meanwhile did a raft of interviews in which he urged governmental de-frothing in Vancouver and Toronto, calling for increases in down-payment requirements and imposing a temporary tax on foreign buyers of luxury homes.

So what gives?

Why, all of a sudden, are bankers coming out with all this prissy talk about reining in demand in a market that has helped make them rich? Why not just build, baby, build, as the supply-siders would have it?

FOMO versus Fear of Something Worse

Moody’s points out the peril of a sudden-shock price drop.

According to the rating agency, in an announcement on Monday, Canada’s banks stand to lose C$18billion in the event of a 25 per cent price drop in Canada, coupled with a further 10 per cent drop in the hot provinces of British Columbia and Ontario.

That’s a big hit, although the Moody’s stress test concludes that Canada’s banks would ultimately be able to weather those losses (some better than others). Moody’s says the 25+10 scenario would hit Royal Bank of Canada hardest in terms of absolute loss, with CIBC having the most capital at risk.

Now, 35 per cent sounds like a lot, but put it in perspective – detached house prices in Vancouver rose about 40 per cent in 2015 alone. Remember the good old days when average house prices weren’t C$1.75million, but a paltry C$1.3million? That was January 2015. Six months earlier, it was less than C$1.2million.

It’s fear of missing out, versus fear of something they see as much worse – a disorderly collapse of the home-price Jenga tower that they helped build in Vancouver

UBC economist Tom Davidoff, who has become one of the most prominent voices in the Vancouver real estate scene, opines that were the foreign money prop to vanish from Vancouver there’s “no way prices don’t fall” by 25 to 50 per cent.

For his part, Prime Minister Justin Trudeau, who was in Vancouver last week, has described the city as being in an affordability “crisis”, and that “obviously overseas money coming in is playing a role”. He told the CBC he wants to pull levers that “rein things back”, but don’t “completely devalue” owners’ equity. What is an acceptable devaluation? Twenty per cent? Fifty? That’s unclear.

It would be a simple matter for Canada’s banks to unilaterally manage their risks by introducing their own market calmers via stricter lending practices (some have) and disavowing the dubious-yet-legal practices that allow clients to illicitly funnel cash out of China and into Vancouver property.

How CIBC supports clients who break China’s cash export laws

Against this they must balance their hardwired aversion to surrendering profits to rivals. Rather than throw their cards on the table and watch other players scoop up the pot, the banks would much prefer the government to change the rules for all.

So the banking sector is balancing the same fears as the home buyer, writ large. It’s fear of missing out, versus fear of something they see as much worse – a disorderly, unmanaged, unpredictable collapse of the home-price Jenga tower that they helped build in Vancouver.

But make no mistake – in spite of those extra zeroes, it’s the average Vancouverite who has a lot more at stake.


The Hongcouver blog is devoted to the hybrid culture of its namesake cities: Hong Kong and Vancouver. All story ideas and comments are welcome. Connect with me by email [email protected] or on Twitter, @ianjamesyoung70.