Subprime goes to the market in Toronto condo.
By Stephen Punwasi, Better home :
A few weeks ago a real estate agent told me about his client. Relatively well-off older guy, closed on not one but two mansions that he plans to flip. After some questions about who financed such a deal, he explained that it was a private lender. Just before adding, "do not worry, it's not like in the US This guy has a good credit, he simply could not get enough money from his bank."
I realized that people do not lie when they say that Canadian real estate in the US is nothing like the US. Canadians just do not understand what happened during the American subprime crisis. They also do not really understand that subprime loans in Canada exist well, we just use different names.
Subprime Borrowers Vs. Subprime loans
First a short lesson about subprime. The S-word is a dirty word in Canada, so there is little debate about what it means. Most people think "broke donkey borrower" when they hear the term, but that is not always the case. There are subprime borrowers and subprime loans.
Subprime loans are loans that are below the prime because the standard criteria for loans are not met. The part that is poorly understood is a borrower, a loan or a combination of these can be subprime. A borrower with an excellent credit rating may want a subprime loan. This happens more often than you think, and is usually because a bank does not borrow as much money as needed. Nobody thinks of a family in a nice neighborhood with a private loan to buy their fourth or fifth apartment as a subprime, but they are.
Do not worry, it's not just average people who do not understand this. There is still a lot of confusion about the problem in the financial community surrounding the American subprime crisis. Most people knew that subprime lenders blew, and of course poor people and immigrants accused low credit scores, as is the way. However, new research shows that the sudden increase in bankruptcies during this period was almost exclusively due to investors with a good credit. Good credit, but with the help of subprime lenders.
Subprime borrowers have remained the same as always. Investors using subprime money providers jumped with a "factor of 10". When prime borrowers could not get the loans they wanted, they went to the lenders who would. So yes, it was a problem with subprime loans – but not because of poor people. These were mainly middle-class investors. There are whole textbooks written on the subject, but what you have to remember today is not that all subprime loans are for people with a bad reputation. However, they all have insufficient credit for the size of the loan they want to borrow.
Subprime loans, private lenders and interest rates
Canadian subprime loans are often made through private lenders, you get access through a mortgage broker. Good brokers always start with the best lender, which usually has lower rates than your bank. If you do not qualify for this, they will take up the chain. If your credit profile does not even work with lenders such as HomeTrust, they propose a private lender. Bad credit, no credit, no problem. There is usually a private lender who is willing to make a deal.
Sounds good, so why does not everyone make use of private money lenders? They do not take bank refusals as a good cause, they do this because they can ask for a risk premium. Despite the fact that they are of record low interest rates, these lenders ask 8% more and we have seen mortgages until well into the 1920s. The broker also gets 1% -3% of the loan, so there is little reservation that they suggests. If you can do math, you are probably wondering how people make money from these deals? They can only do this if they hold it for a short period of time. If you are bad in math, you may be one of those borrowers who do not realize that you only pay interest on your loan and do not reduce your debt. Anyway, this is where Canada's sub-prime borrowers are lurking.
Subprime Market in Canada
You know that commercial from the Big Six bank, where the borrower enters a bank and tells them they are richer than they think? Well, according to the credit rating TransUnion, more than 1 in 10 Canadians would probably not get that response. Transunion estimates that 11.9% of the 28.4 million Canadian consumers with credit profiles are subprime. That is about 3.4 million Canadians, but we can not be sure that these are the borrowers. What we do know is that private money lenders have recently become very popular in Ontario.
Bank of Canada (BoC) figures show that private lending in Ontario is increasing despite a decline in sales . Mortgage production at private lenders increased to $ 2.09 billion in Ontario in Q1 2018, an increase of 2.95% over last year. That should raise a few flags, because the volume of real estate sales in the dollar fell by 37.64% in the same period.
The market share of private lending went from 5.71% of the originations in Q1 2017 to 7.87% in Q1 2018. Although originations on other channels fall away, private originals of lenders grow. The province also has many people with a bad credit jump, or a lot of over-leveraged speculators. The confidence of the market should also not be encouraged.
Subprime goes to the condos market in Toronto
Due to apathy (or incompetence), the government does not supervise subprime loans. Shocker, right? However, if you want to see how it contributes to the market, you do not have to look any further than the "healthy" condo market in Toronto. We do not have the number of subprime borrowers on that market, but we do have the interest rates that are paid. Because we know that unusually high interest rates are charged by private lenders, we have at least a proxy with which we can understand condo buyers.
The interest rates are just above the low point, but many people do not pay low rates. CIBC Economics figures show that more than 1 in 10 Toronto-registered condos in 2017 were linked to astronomically high mortgage rates. More than 17.4% of the owner-occupied apartments registered in 2017 had a mortgage interest of more than 9%. More than 16.2% of condo investors with units registered last year also paid more than 9%.
These are many units with unusually high interest-bearing owner-occupied apartments – not a big sign of buyer quality. These buyers are probably waiting for the first sign of buying weakness, or do not realize how difficult it will be to make a profit at that pace.
The government does not follow subprime loans, but the signs are there. More speculators in the middle class or broke-ass buyers go to private lenders. Many of these buyers probably think that they are the only people who do this. The market seems "healthy" because not many of these people understand that many other people do this. As the prices rise, the price development decreases and the turnover decreases. This is what stock traders call a busy trade. If you do not know what heavy trade is, then there was something like the American subprime credit crisis. It is similar to what is happening now. By Stephen Punwasi, Better Dwelling
The average price of single-family dwelling rose 13% or C $ 160,000 from the top. Sales of homes with a price of more than C $ 1.5 million have collapsed by 63%. Condos are still hanging on. Read … Toronto House Price Bubble Not Fun Anymore
Would you like to receive an e-mail when WOLF STREET publishes a new article? Register here .