In its latest report, Moody’s Analytics stated that Canada’s total outstanding credit to the non-financial sector—which includes households, non-profit institutions serving households, and financial corporations apart from banks—is at 217 per cent of GDP in Q1 2017, far above the average credit outstanding in this category for 42 developed countries (154 per cent) in the same time frame.
This out-sized figure is but part of a more complicated story, according to the agency. Moody’s emphasized the crucial role that low interest rates have played in driving a widespread appetite for mortgages and properties—in turn leading to seemingly inexorable home price hikes that might ultimately prove fatal to the nation’s financial system.
“This cycle is inducing fears of a bubble. If a recession were to hit the economy, many households would find themselves with negative equity and reduced incomes, raising the spectre of a swell in non-performing loans as homeowners default,” the report cautioned, as quoted by the Financial Post.
Moody’s added that while banks hold the loans, over half of mortgages across the country are insured by the 100-per-cent federally-backed Canada Mortgage and Housing Corporation.
“Mortgage insurance is required for loans obtained with less than a 20 per cent down payment, which implies that the loans CMHC is insuring have a smaller-than-average equity cushion,” Moody’s economist Brendan LaCerda said.
LaCerda hastened to note that the possibility of a major slowdown remains low, but “supposing such a severely adverse scenario comes to pass, the ability of the government to absorb CMHC’s losses is worth considering.”
Fortunately, Canada’s debt-to-GDP ratio of around 79 per cent of GDP in the first quarter of 2017 has placed it on stable footing relative to other industrialized nations.
“Even if CMHC realized a total loss on its more than $500 billion of insurance guarantees, which is nonsensical given the collateral value of the underlying homes, and the government completely bailed them out, its debt-to-GDP ratio would rise to about 105 per cent,” LaCerda explained. “Such an increase would raise Canada above the U.S. at 99 per cent but still keep it below many of Europe’s largest economies.”
Article by Ephraim Vecina and published in REP Magazine. Check out http://repmag.ca for lots of interesting articles every day.
Born in a boomtown, Phil Soper has seen his share of runaway housing markets. Soper, raised in Calgary, was exposed early to the nauseating ups and downs of the city’s home prices, appropriately Rocky Mountain-esque in how their exhilarating peaks suddenly became horrifying precipices.
“One of the popular bumper stickers of my youth was, ‘Please God, let there be another oil boom. I promise not to piss it away this time,’” Soper says. “I thought that was an appropriate motto for the real estate industry.”
Soper’s ability to view the industry from a distance – as a whole within the greater whole of the Canadian economy – has been key to his success as the CEO of Brookfield Real Estate Services, Royal LePage’s parent company. While many were skeptical about how a former IT executive – Soper had been with IBM for 17 years – with no real estate experience would handle the reins of a real estate company, Brookfield saw Soper as an outsider with fresh ideas and a propensity for seeing what’s coming over the horizon.
“Real estate, at its core, is one of the purest supply and demand economics-driven industries there is,” Soper says. “If you understand the levers that drive the economy overall you can apply those to the real estate industry. You can understand why things are happening and have a pretty good eye to what’s going to happen next.”
Fright and flight
“The real housing problem that has me worried in 2017 is Toronto,” says Soper. “People mistakenly think if house prices are going up rapidly it must be a good housing market and nothing could be farther from the truth.”
While Soper is often asked to comment on the Canadian housing market, the overall health of which he says extends to almost every market besides Vancouver’s and Toronto’s, he is rarely asked how its fluctuations will affect Royal LePage’s 18,000 agents. With inventory drying up across vast swaths of Ontario and BC, and sales showing massive year-over-year declines, what do Royal LePage’s agents have to look forward to if Canada’s largest markets suffer a full-on correction?
“There’s what you call in the industry a ‘flight to quality’ when markets tighten,” says Soper. “Essentially the part-time agents and the narrow service/low fee models suffer because the price to the consumer isn’t that variable. It doesn’t matter how cheap your real estate company is if no one’s buying your house.”
Soper doesn’t see a correction affecting the Toronto market until 2018; but that assumes a lack of election-inspired government intervention.
“I hope it is a naturally driven correction,” he says, “because those result in the softest of landings.” Soper points to the BC government’s attempt to cool housing prices with a Vancouver-only foreign owner’s tax as an aggressive attempt to spark a decline in prices that was largely inevitable.
“I don’t think it had to be because affordability was eroding demand and the market would have corrected by its own right,” Soper says, adding that Royal LePage had predicted a correction in the Vancouver market in April of 2016. “It takes time for a really unbalanced market to adjust.”
The value of disruption
Taking the helm of one of Canada’s most established companies – Royal LePage is 104 years old – meant Soper would have to fully immerse himself in the organization’s long-established culture. He was eager to do so.
“Our Royal LePage motto is ‘helping you is what we do,’” he says. “I adopted that when I first came in because I thought it spoke well to the servant/client-first focus that was in the DNA of the company but would also succeed in the modern world.”
That marriage of classic service and cutting edge strategies has been in place since 1995, when Royal LePage unveiled the real estate industry’s first online portal, and has resulted in a number of recent innovations that have Soper visibly excited. In 2016, the company partnered with Google to launch Travel Time, a search function that allows potential buyers to find homes within a desired commuting distance, and has recently introduced Your Perfect Life, which leverages dating site technology to match buyers with their perfect neighbourhood. The company will also be rolling out a new online CRM and marketing center for its agents, which will allow for greater automation and eliminate third party marketing costs.
“We build a better mouse trap because we know if we don’t, someone else will,” he says.
Soper, a believer in the disruptive business model, sees the agent experience on the verge of a revolution that will be sparked by the integration of technologies and a greater use of intelligent software.
“I think, more and more, the menial tasks of serving both Realtors and consumer clients can be done through automation. To do that, we need to integrate data, integrate systems and make it incredibly easy to use,” he says.
But Soper expects some pushback, the inevitable result whenever a new technology threatens appears to make agents seem less necessary.
“When I came in, which was only 15 years ago, there was a big debate as to whether photographs should go on listings,” he says. “And then a debate as to whether or not people should include addresses.
“Whenever it’s better for the consumer – if you provide them information, if you provide them insight – even if it appears at first blush to be worse for you, in the end it’s going to be better for you and better for your business. If you don’t disrupt the industry, someone else will, so you better think long and hard before you say no to something that’s going to be better for consumers.”
Reprinted with the kind permission of REP magazine. REP has lots of interesting articles on Canadian real estate every day.
Is a property survey important? Is it necessary if the buyer gets title insurance?
I’ve often said that a survey is the most important document in a real estate transaction — even more important than a deed. A transaction may be closed without a survey, but the owner accepts the risk if the house is not on the same land covered by the deed, or if part of a neighbour’s house is sitting on the buyer’s land.
A 2015 study by the surveyors at Protect Your Boundaries showed that of 1.2 million freehold residential properties in the Greater Toronto Area, an estimated 49 per cent have significant boundary issues, most of which would not be covered by title insurance since they involve fences, hedges and retaining walls.
One of my hobbies is collecting bizarre court cases involving survey-related issues. Among my favourites are the buyer who built a house on a lot down the street from the one he actually owned, and the buyer who thought his lot was 10 feet wider than the actual measurements. He built his new house five feet onto the neighbour’s land.
Cottages have been built on municipally-owned shore allowances and roadways. Septic beds and swimming pools have been built on neighbouring lands and the courts have ordered removal.
Purchasers have discovered, to their dismay, that they do not own the driveway to their own property.
Lack of a survey can be fatal to a property closing. I’ve written columns about a vendor who owned a house on the wrong side of a street, and about another vendor who owned the wrong half of a semi-detached house. I’ve also written about a transaction where, due to a botched severance, my client owned half of his house, and the neighbour owned 1-1/2 houses.
Disputes over misaligned fences and shifting shorelines have been keeping me very busy lately.
Many lawyers and real-estate professionals believe that title insurance is a substitute for an up-to-date survey. This is a misguided view.
Title insurance provides indemnification for some issues but is not the same as getting an up-to-date survey. Most policies offer protection for a violation, variation or adverse circumstance that would have been disclosed by a current survey.
Earlier this month, I wrote in this space about Boro Radjevic who paid for a property that is 2.21 metres narrower than what he paid for. Title insurance denied coverage and now he is forced to sue his lawyer, the seller and the real estate agents.
Title insurance will cover the owner’s expenses if a court or municipality orders removal of an encroaching improvement, such as a garage or pool or septic bed, but not a boundary wall or fence. But it typically won’t pay for the reduction in value.
Title insurance, as valuable as it is, does not cover defects which the buyer knows about before closing.
Nor will it cover the loss of a buyer’s ability to build improvements such as a pool in the back yard or add onto the rear of the existing house.
Buyers need to have an open and frank discussion with their real estate agents and lawyers about the value and importance of a survey. Only then can the buyer decide whether to get a survey or take the risk and proceed without one.
Databases of existing surveys are available online at protectyourboundaries.com and landsurveyrecords.com.
Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at email@example.com, phone 416-364-9366 or fax 416-364-3818.