Banks' ignorance opens opportunity for monolines

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A leading Realtor and developer is frustrated by big banks’ ignorance about -- and unwillingness to provide lending for – an increasingly popular housing option; but perhaps monoline lenders can pick up the slack.
 
“There are certain Canadian banks that won’t fund condominiums below a certain size but there are a lot of B-lenders that will and so the biggest mistake that the A-lenders are making is not funding those,” Brad Lamb of Brad J. Lamb Realty told our sister publication, Canadian Real Estate Wealth. “They don’t actually know what they are doing.”
 
The condos Lamb is referring to are “Micro condos”, sub-400 square foot units that are gaining popularity in Canada after enjoying success in other over-populated markets such as Tokyo and New York City. And the problem, according to Lamb, is a complete lack of understanding on the lenders’ part.
 
“The problem is that the big five -- they don’t actually know what they are doing when it comes to the condo market,” Lamb said. “They are greatly mistaken and poorly informed of where they should be putting their money.”
 
Perhaps more frustrating, though, is that Lamb foresees a real need and desire for this sort of housing option.
 
“The funny thing is that they are prepared to lend money on the products that take the longest to sell and hardest to sell yet the properties that rent instantaneously and sell instantaneously are the ones that the most people can afford,” he said. “And what can most people afford? The smaller apartments and that is what everyone wants to (own).
 
“The banks should be lending on that stuff,” he added. “They are short-sighted and poorly informed about the market.”
 
Brad Lamb will be speaking at the 2014 Candian Real Estate Wealth Investor Forum, which will be held at the International Centre from March 22-23. Click here for more information.
 
 
  • Lior on 2014-01-27 8:35:46 AM

    It is not just the banks who are not doing them. Meridian won't touch condos either unless it's 700 sqft minimum. National Bank does not have a minimum square footage requirement but they are stiff. Developers have to understand that just because they want to reap in high profit margins by selling increasingly smaller units to homeowners just so that they can keep charging an arm and a leg per square footage, they can expect lenders, not just the banks but the alternative channel as well, to underwrite with a magnifying lens. After all, should a market correction take place, it is difficult to imagine how much headroom there is to protect the lender's interests before the property is considered underwater. The same risk applies to private mortgage investors where the first lender is only willing to lend up to 60% or 65%.

    And FYI Brad a lot of alternative lenders are being quite picky with the Toronto condo market. This tightening of underwriting criteria does not just apply to the banks. They are limiting their exposure to that market by placing a cap on the numbers of doors they have in a particular building, minimum square footage requirements, no glass walled buildings, no rentals, and even when they do agree to lend, the rate of 5% with a 1% commitment fee for an investment property is proving to be the new benchmark, especially for applicants who are self-employed.

  • Paolo Di Petta | dipettamortgage.com on 2014-01-27 9:26:14 AM

    That's because the marketability of micro-condos is almost nil. Totally agree with Lior, Brad Lamb and the like are all getting too greedy, squeezing every penny they can out of the market by trimming unit sizes.

    Something's going to give, and when it does, it's going to get ugly.

  • John Hamilton on 2014-01-27 10:18:31 AM

    80% LTV 2nds below Bloor Street, & 85% LTV 2nds above Bloor Street, equity driven. Paramount Equity Solutions loves rental condos. Just saying :)

  • Anthony C on 2014-01-27 10:24:00 AM

    The micro unit market is presently small, however, over the next several years the micoro market will represent a healthy percentage of new-builds and then of course the majors and mono lines will be on-board with financing...currently exaggerated per foot pricing is the main driving force to building smaller units and contrary to the above comments, the marketability for these units wont be a challenge when singles/first timer buyers are priced out of traditionally sized units and have no other choice but to buy a micro or rent...and since vacancies in Toronto and other major urban cities in Canada are at all time lows, these units will should be able to debt service without too much concern...and presently, there are some A lenders who have already made plans to support this new market at LTV's at or just below 80%...I for one will be happy to originate and support this new market.

  • Paolo Di Petta | dipettamortgage.com on 2014-01-27 10:36:42 AM

    @Anthony - Allow me to deconstruct your argument.

    So basically, what your saying is "people will buy crappy units because they can't afford any better" - I think you're looking at this situation from the wrong perspective.

    There's a broader problem here - home prices are out of whack vs. incomes. Debt to income and consumer (non-mortgage) debt is at an all time high.

    People were able to "afford" to pay more (even for less house) because of extended amortizations, lax terms and low interest rates. That pushed prices up past reasonable values.

    Now, if you must be working with the expectation that values will stay there forever (or continue increasing), then you're also working with the expectation that either a) people can just continue to infinitely pile on debt, and that mortgage terms will never change or that b) units will keep shrinking to 200sqft eventually, and we'll all be living in something akin to a prison cell.

    Personally, I don't think that makes much sense. All this debt is going to catch up to us. It always does.

  • Ron Butler on 2014-01-27 1:00:22 PM

    @ Paolo - I am not disagreeing with the thrust of your argument.

    I will say that the micro condos may represent a density concept in a down town core which is separate from the other factors.

    Tiny places do sell in New York and London on a brisk basis. I don't want to get into the argument about Toronto NOT being those cities, that becomes a subjective discussion. If and when the drop in property values occurs I am not certain the micro-condo will be any better or worse off than the penthouse two story condo.

  • dml on 2014-01-28 7:09:56 AM

    To Paolo;

    I am interested in the mortgage industry and have been reading articles from this website for months.

    I have noticed how negative you are about the state of affairs in the economy and particularly the housing industry and as a result can only assume that your advice to each and every person who is thinking about getting into the market, would be to run away, rent and not even think about buying a property! I cant imagine that this would be very good for business.

    If that is not your advice, then I find your opinion extremely hypocritical.

    I am sure, just like all the other nay sayers out there, that when there is a correction in the market in the next 5 or six years, that you will jump up and down on your desk and yell I told you so.

  • Victor on 2014-01-28 8:00:32 AM

    The problem is not whether people should buy real estate, including condos, micro-condos etc. The challenge is that many young people are putting all their eggs in one basket when it comes to their financial planning. If a young couple has saved within their RRSPs and TFSAs and then wishes to allocate a small percentage of their net worth to purchase real estate, that is fine. The problem is that this isn't the case. Most have very little savings, lots of consumer debt and they are then proceeding to take on the responsibility of a mortgage in the hopes that property values will continue to move upwards, in spite of economic indicators that suggest that a slow down is imminent.

  • Paolo Di Petta | dipettamortgage.com on 2014-01-28 8:29:24 AM

    @Ron - I agree that "Toronto is not New York" is a subjective argument, but at what points to unit sizes become unlivable?

    @dml - My goal isn't to be negative, it's to be realistic. As a mortgage broker, it's my duty to give my clients the best advice, even if that advice means that I won't make the sale today. If all I was looking out for was myself, then I could easily join the rest of pack and continue to prop up this illusion. I don't do that, because it's not what I believe in.

    The fact is, I'm not telling people not to buy, I'm just telling them to avoid buying things that don't make sense. I'm telling people not to take on more debt than they need. I'm telling people to spend within their means. Since when was giving good advice looked at so negatively?

    @Victor - excellent points.

  • Anthony C on 2014-01-28 8:50:57 AM

    @paolo

    With all due respect (a phrase used to express polite disagreement in a formal situation and one which, out of courtesy, you may want to consider applying to any future messages) your "deconstruction" of my opinion was not requested nor does it reference the intention of my message...I will give you credit however...your definitely the most persistent debater on this forum...I don't believe i've read more than a few replies of yours where you actually see the merits or can relate to another's point of view that may run contrary to yours...

    And out of courtesy to your opinion, I do agree that debt is a major problem and the introduction of lax mortgage lending guidelines are a major contributor to the overpriced market, in addition to limited inventory/availability of development land near large urban areas/employment proximity.

    All the knows triggers exposes the real problem, which lies in the fact that our purchasing power is decreasing as inflation erodes the dollar's value and subsequently, the cost of manufactured goods increases and triggers all other related fixed costs to increase...and the consumer eventually pays for it in exxagerated resale prices.

    Assuming that we in our industry should know these basic market fundamentals, it only logically follows that all consumer goods (including cars, homes, packaged goods etc...) will decrease in size in order to ensure profitability for the manufacturer/shareholders as well as accommodate an ever increasing population...

    A market correction may be inevitable, as you have mentioned, and as history has indicated with three corrections in the last 25 years , but we will persist through the next one, and homes will still be bought and sold...perhaps by a more concentrated segment of the population, unless of course things get really bad, the banks are forced into liquidation, the government collapses, aliens invade... and we are all out on our arses...and then you can say "I told you so...!"

    Peace...

  • Paolo Di Petta | dipettamortgage.com on 2014-01-28 10:32:43 AM

    @Anthony Please forgive my prior lack of politeness - the comment section is a forum, and I never have intentions of being disresectful. Being a forum, I expect there to be differing opinions, and my thought is that would be implied.

    In any case, I still wonder how you can recognize debt, overvaluation, and inflation are looming over our economy, that a correction is in your own words "inevitable", but expect things will continue to be business as usual.

    I understand space is as a premium, but that argument has been used many times in the past. Many parts of Toronto used to be considered the fringes - either a vacation property or otherwise undesirable. Over time, transportation has improved and the city has expanded. This happened, largely, because at the time it was the only affordable option.

    While I don't disagree we will be looking at high density in the near term, after a certain point, the desirability (and thus marketability) of micro-condo units is going to hit a cliff. It's only common sense - there's a point where something is too small to be reasonably habitable.

    We can debate where that line is, but my point is, that line is somewhere - the fact is that you can't just expect people will keep buying smaller and smaller units because they can't afford anything else in the heart of the city. At some point, the cost-benefit equation won't make sense and they'll look elsewhere.

    Add to that, that you can only realistically have 1 person in these micro-condos, the market is pretty limited. Marketability is key and micro-condos already have a few strikes against them.

  • Quan Le on 2014-01-30 10:31:56 AM

    ''The smaller apartments and that is what everyone wants to (own)'' -- Wrong! The lenders don't lend to those micro units for a reason, and that is because there is little demand for this, thus not very marketable.

  • Quan Le on 2014-01-30 10:32:00 AM

    ''The smaller apartments and that is what everyone wants to (own)'' -- Wrong! The lenders don't lend to those micro units for a reason, and that is because there is little demand for this, thus not very marketable.

  • Omer Quenneville on 2014-02-02 1:14:19 PM

    Small units hold value and sell well when their is limited land to build. Toronto doesn't have this problem. While the market is hot and they will sell now, they won't hold their value when things level off or go down.They are high risk and should require minimum 20% down. It is my opinion Brad and develeopers only speak out when it is in their best interest not the customers. Let a correction in the market happen and these units will be pooring blood into the streets.

  • Glenn May-Anderson on 2014-02-03 6:36:45 AM

    Interesting debate, but I find it difficult to understand why people are saying that there "is no demand" for these types of dwellings. If there was no demand, then someone like Brad Lamb (who is a pretty smart developer and Realtor, proven by his prior successes) would not be proposing to build such units.

    I highly recommend this PBS primer from September of last year on the issue: http://www.pbs.org/newshour/bb/environment-july-dec13-microapartment_09-22/

    The "Manhattan-ization" (or, really, "Tokyo-ization") of urban centres like Toronto and Vancouver has much to do with increasing demand, density, and a dramatic increase of people living alone (young professionals, high divorce rates, etc.) So, why should the market simply reward those with enough money to buy investment rental units, and deny younger professionals the ability to begin creating equity?

    I find the arguments disingenuous that it's a "cash-grab" on the part of developers, or that the problem is people not saving enough money outside of their real estate holdings. Developers take risks when building, which the successful ones mitigate, and they have every right to profit from their efforts. Regarding outside savings or investments, if someone has to rent in a major market, chances are they don't have the extra funds to save in the first place. Allowing these individuals to develop equity in a property actually gives them a leg-up, and starts them towards a lifetime of home/condo ownership.

    As for the doomsayers and naysayers about the market collapsing: While I agree that market corrections occur in every free market, all one needs to do is look at the long-term trends regarding real estate valuations (or stock markets, for that matter) to understand that regardless of fluctuations, long-term value always trends upward. Note I didn't say it always goes up - long-term, however, that is the direction of the trend line. This is especially true when it comes to land - which they aren't making any more of (unless you live in Dubai or the UAE, I guess).

    Short-term ups and downs are to be expected. Eventually, everyone who says "housing prices will go up" or "housing prices will go down" is correct.

    For what I feel is a proper analysis of the media hype surrounding the "housing bubble" or potential corrections in the Canadian marketplace, I would recommend reading this article: http://fortressrealdevelopments.com/news/forecast-report-card-did-any-housing-analysts-get-in-right-in-2013/

    Full disclosure: Our brokerage distributes the Fortress product and we raise capital for development projects on their behalf. I hear these arguments all the time regarding the real estate market, and find that numbers are always more reliable than newspapers, who sensationalize because a juicy doom-saying headline is always more attractive than "things continue to go well."

    There is a market for these units. There will continue to be a market for these units as long as young professionals wish to move to large urban centres to begin their careers. Eventually, lenders will get with the program, and insurers will follow. The market will ultimately prevail. The question is, which lender(s) will be brave enough to lead the charge? My hope is a broker-market lender; we have an opportunity to grab a piece of the market the Banks won't touch, so the smart play would be to use that to our advantage as an industry.

  • Anthony C. on 2014-02-03 8:42:55 AM

    @ Glen

    My sentiments exactly...we will see this type of development in the near future and it will be supported by a a very select market that favours an affordable alternative to an urban living arrangement that focuses less on available living space and more on location near employment centres and proximity to venues that support lifestyle and recreational pursuits...there is a market for it already and although the market will be small, I believe it will substantiate this type of development.

    As for lenders, my personal inquiries have revealed a few select lenders (who support Broker originated business) are completing their due diligence in this space with indications that conventional financing up to 80% LTV is possible...with prime lending rates...

    It will be interesting to see how it it all plays out over the next year or two when these project launch.

  • Ron Butler on 2014-02-03 9:07:32 AM

    @Glenn, with complete respect there are many very sound studies based on factual principals that suggest there is a basic overvaluation in key Canadian real estate markets. While you are right in saying the overarching trend is upward it is somewhat disingenuous to suggest that the reporting of these studies is just about selling papers. I also think that if members of the public are caught with private mortgages that are underwater they will not be comforted that all they will have to do is wait a decade and they will be back to even.

    While I don't really disagree that there is a market for these condo products I also question the concept that the lenders and the insurers will "wake up" soon. We really don't know that at all and while I credit you for giving full disclosure I don't think that is a carte blanche to suggest the lending problem with micro condos will soon be solved. We simply don't know if and when that will happen.

  • Paolo Di Petta | dipettamortgage.com on 2014-02-03 10:32:39 AM

    @Glenn, as Ron said that whole post is a little disingenuous.

    1) Real estate does go up over the long term, but there's always peaks and valleys - someone buying now would see a lot less growth and would have much higher carrying costs over the life of the property. Additionally, they'd have to have enough to carry it through the valley, which likely isn't the case for most buyers. You can look at household debt numbers to tell that story.

    2) You mention that your brokerage distributes/sells for Fortress, but you neglect to mention that Fortress funds/co-develops with Brad - not exactly an unbiased opinion.

    3) If you're going to bring up documentaries, then I'll bring up CBC's "the condo game" - http://mrt.gs/TheCondoGame - it paints a VERY different picture.

  • Glenn May-Anderson on 2014-02-03 11:33:52 AM

    @Paolo

    Ron didn't say the whole post was disingenuous, he simply disagrees with my contention the media over-hypes the matter to sell papers. I agree there is some sound reporting out there, but for the large part I stick by my opinion.

    I disclosed Fortress purely for that reason. I never claimed to be impartial; I know from experience how successful a developer Brad is.

    As for the documentary you reference: Like any industry, you have people who do things right and care about quality, and those that don't. I agree there are developers currently in business that are focused on the money and short-term gain and not the bigger picture. Condos in and of themselves are not evil. There's also no rule saying that micro-units couldn't be in the form of townhomes, stacked townhomes, etc.

    I appreciate pragmatism and realism, but in the end you're either an optimist or a pessimist about development. Bottom line, even if the market corrects or adjusts, people still need a place to live - and with the migration of people to major urban centres, that demand will continue for some time. Vacancy rates under 2% for rental units means someone will pick up the units - even if it is investors who turn around and make them available for rent.

  • @kiltedbroker on 2014-02-04 3:07:14 AM

    I wanted to make a comment, but I wasn't sure if I should preface it with: All due respect, complete respect, or with the right to remain disingenuous...

  • Salim J Kanji on 2014-02-12 12:41:17 PM

    I have not read all the comment, however, I can understand when a lender is hasitatant in lending to units that are glass-towers. I have not know them declining smaller units.
    Whatever this comment is worth.

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