Money Ontario’s measures to cool housing could be ‘positive’ for Canada’s banks

04:20  21 april  2017
04:20  21 april  2017 Source:   Financial Post

Ontario sets April 27 budget date, Morneau meeting next week

  Ontario sets April 27 budget date, Morneau meeting next week Ontario's finance minister Charles Sousa on Thursday confirmed he will meet with his federal counterpart Bill Morneau on April 18 to discuss measures to cool Toronto's housing market and set a date of April 27 for the province's annual budget.The acceleration in home prices in Toronto has prompted some economists to worry the real estate market in Canada's largest city is in a bubble and has raised concerns about the ability of first-time buyers to afford a home.

Ontario ’ s suite of new measures aimed at curbing runaway growth in Toronto housing prices could similarly slow growth in mortgage lending, but Canada ’ s largest banks are expected to absorb any impact comfortably.

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Measures introduced Thursday by the Ontario government to cool the hot housing market – including a 15 per cent foreign buyers’ tax – are not expected to hurt the mortgage books of the country’s big banks.

“We believe it will reduce some of the speculative activity that’s causing higher house prices in Toronto, which should be positive for the banks,” said Jason Mercer, an assistant vice president and analyst at Moody’s Investors Service who has written in-depth reports on Canada’s housing market.

If prices continue to skyrocket in the absence of higher household incomes, the chance of a housing crash rises, Mercer told the Financial Post. A crash would lead to lower house prices, which would put recoveries for the bank at risk if buyers start to default.

No short-term measures for homebuyers: Morneau

  No short-term measures for homebuyers: Morneau TORONTO - Federal and Ontario finance ministers say that while they are concerned about diminishing housing affordability in Toronto, they will not introduce measures for homebuyers that could impact house prices in the city by boosting demand. Federal Minister Bill Morneau says Ottawa will help the province in a number of ways, including housing data collection and analysis, enforcement of tax compliance through Canada Revenue Agency, and anti-money laundering rules.His Ontario counterpart, Charles Sousa, says the provincial budget that he will table next week will include a package of measures aimed at improving house affordability in the Greater Toronto Area.

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Even in that scenario, “housing prices need to fall pretty significantly for a loss to the bank to occur,” Mercer said.

In a report in last June, he calculated that a U.S.-style housing meltdown would cause Canada’s largest banks to lose close to $12 billion. Mortgage insurers would also face losses in the billions, he said in the report, calculating that total loss would be around $17 billion.

“It’s the amount of price buildup in the system, without supporting income increases, that makes the market susceptible to a housing crash,” Mercer explained Thursday. “If prices decrease, that reduces the value of the collateral (attached) to a mortgage loan.”

Gabriel Dechaine, an analyst at National Bank Financial, said the new measures — which include the potential for Toronto to put a tax on vacant homes – could curb mortgage growth at Canada’s big banks.

Housing plan tackles speculation, supply

  Housing plan tackles speculation, supply TORONTO - Ontario's upcoming package of housing measures is set to be announced Thursday and will take aim at speculators, expedite more supply, tackle rental affordability and look at realtor practices. The provincial Liberal government has been facing increasing pressure to cool the market in the Greater Toronto Area, where the price of detached houses rose to $1.21 million last month, up from 33.4 per cent a year ago. The intention of the package The provincial Liberal government has been facing increasing pressure to cool the market in the Greater Toronto Area, where the price of detached houses rose to $1.21 million last month, up from 33.4 per cent a year ago.

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Homebuyers who are finding affordability a challenge amid bidding wars can expect efforts to curb fast-rising home prices and rents in Ontario budget, finance minister said.

“While the market typically appreciates growth, in this case we believe an exception will be made, as investors have become more concerned about the risks associated with ‘excessive’ mortgage growth,” he said in a note to clients, indicating one such risk is “fallout if the housing bubble bursts.”

Dechaine said mortgages are a “low-margin product,” which would dull the earnings impact from any pullback in volume.

Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada have been experiencing the fastest mortgage growth in Ontario over the past year, Dechaine said, while Toronto-Dominion Bank, Bank of Nova Scotia, and CIBC have the most proportional exposure to mortgages in the province, accounting for about 50 per cent of their total domestic mortgages and home equity lines of credit.

Prem Watsa, chief executive of Fairfax Financial Holdings, who profited handsomely by betting against the U.S. housing market before it crashed 10 years ago, told shareholders at his company’ annual meeting in Toronto on Thursday that he expects a Canadian crash and that it would be painful.

Wynne to slap 15 per cent tax on foreign real estate speculators

  Wynne to slap 15 per cent tax on foreign real estate speculators Premier Kathleen Wynne is slapping a 15 per cent “non-resident speculation” tax on foreign investors to help cool down southern Ontario’s scorching real estate market , the Star has learned.Wynne will join Finance Minister Charles Sousa and Housing Minister Chris Ballard on Thursday against a backdrop of condo towers in booming Liberty Village to launch a massive plan to improve housing affordability.A key plank in that would be the 15 per cent surcharge on offshore speculators, who are estimated to make up just 5 per cent of the current market.

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“Most banks can’t survive a 50 per cent drop in real estate values,” Watsa said, according to a report from Bloomberg News. “It’s going to come down, and a lot of people are going to get hurt.”

Executives at some of Canada’s largest banks have expressed concern about double-digit prices increases in Toronto’s residential real estate market.

In February, Royal Bank of Canada chief executive Dave McKay told the Financial Post the increases in Canada’s largest city were “unsustainable,” and said he thought it was time to consider bringing measures that cooled Vancouver’s sizzling housing market to Toronto.

The number of houses sold in Vancouver  has tapered off since a 15 per cent additional land transfer tax was introduced for foreign buyers in the British Columbia city last August. And there have been recent indications of modest price pullbacks for single family homes.

Vancouver also introduced a vacant home tax that went into effect on Jan. 1. Ontario has opened the door to a similar tax for Toronto, though it will be up to the city to determine whether one is adopted.

Will Ontario’s plan to cool housing work or do more harm? Both say economists

  Will Ontario’s plan to cool housing work or do more harm? Both say economists Concerns about rent control, but thumbs up to the foreign buyer tax. Economists weigh in on efforts to cool Toronto’s housing market

“In the coming week, the Ontario government will announce a suite of measures designed to increase supply and address demand,” he said. The governor of the Bank of Canada has also said that the rate of increase in house prices in the GTA Sousa declined to clarify what that could look like.

As the Ontario government prepares to unveil measures to cool housing prices in Greater Toronto, another factor is making the market more attractive Royal Bank of Canada , which raised its five-year rate to 2.94 per cent in mid-November, now features a rate of 2.74 per cent on that same mortgage.

John Jason, a lawyer specializing in financial services at law firm Cassels Brock & Blackwell LLP in Toronto, said Ontario’s new housing measures could lead to some decreases in house prices if speculation is tamped down. While that is potentially “psychologically painful,” it would not necessarily raise the level of defaults, he said.

“Efforts have been made to ensure that banks only make loans that are supported by income — in other words that the borrower can support the loan and the loan is not solely dependent on realizing on the value of the property,” said Jason. He added that mortgages underwritten by the big banks tend to either be insured or have loan-to-value ratios that provide a significant cushion if home prices fall.

But he noted that the impact of policy changes is hard to predict, and there is a risk of fallout beyond the housing market in other pockets of the banks’ consumer credit business that includes credit cards and auto loans.

“You would hope that a small reduction in demand would not have a major impact. Of course you cannot be certain in advance exactly what the impact will be,” said Jason, whose areas of focus include regulatory risk management.

“If house prices drop substantially, does that lead to a negative psychology that leads to an across-the-board reduction in consumer spending? That could lead to defaults generally and not just in relation to mortgages.”

Ontario budget 2017: What to expect .
Ontario budget 2017: What to expectPremier Kathleen Wynne and Finance Minister Charles Sousa are sending strong signals there will be plenty of goodies in the budget, after nine years of relative restraint.

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