With both December and January delivering their share of record-smashing real estate activity, it’s clear that Canadians’ raging thirst for housing is more than a few townhouses away from being quenched. It’s looking as if 2021 is going to be another big year for the mortgage industry, albeit one with its own unique set of challenges.
Even though he expects “a very exciting and busy housing market from March to August,” Taylor Little, CEO of Vancouver-based alternative lender Neighbourhood Holdings, told Mortgage Broker News that the alternative space, while continuing to enjoy a historic surge in interest from buyers, is facing a few hurdles that brokers may wish to reserve a little headspace for this year.
Where will the capital go?
The highest of those hurdles may be the amount of capital alternative lenders have access to and where those funds ultimately wind up. The anxiety-triggered cash crunch lenders were feeling at the onset of the COVID-19 pandemic is barely a memory at this point, its erasure hastened by the past eight months of housing insanity. Couple that demand with the colossal balances accruing in Canadian bank accounts and you have an environment where alternative lenders should have little problem getting their hands on ample amounts of cash.
The challenge for brokers, Little explained, is that not all alternative lenders will have access to equal amounts of capital. Some brokers and borrowers will be left out in the cold if their alt lending partners can’t pony up the requisite pile of dough.
“One thing you always need to look out for as a mortgage broker in working with alternative lenders is, do they have funds?” Little said, adding that Neighbourhood has largely made asking the question unnecessary by securing a hefty backlog of commitments from investors that will allow it to facilitate whatever new business comes its way.
“We’ve got capital basically on standby ready to go,” he said. “That’s strategic on our end, to make sure we can capture the demand this year.”
With interest rates as low as they are, many alternative lenders’ profit margins are so thin that their owners’ furrowed brows can be seen through them.
“Things are getting very tight for sure. We’re seeing rates fall below 6% in some cases, which is, for non-bank lenders, pretty low,” Little said.
Things are unlikely to get any easier in 2021. If Little is correct and the alternative space is indeed fund-flooded this year, the cost of capital will drop; those providing it will have to accept a lower return on their money rather than face the prospect of not lending it out at all.
“Neighbourhood can continue with low rates effectively indefinitely,” Little said, “but we’re not sure how long our competition can continue to lend at these rates.”
Such a competitive environment means brokers may need to work a little harder to ensure their clients are getting the lowest rates and, over the long-term, the most affordable mortgage possible.
“I think now, with a lot of new entrants and a real institutionalization of the alternative space, it’s definitely worth shopping around and seeing what else is out there, because lots of lenders are bidding on lots of business and trying to capture some of that for your client at an attractive rate might involve a bit more detective work to figure out who’s offering what and when,” Little said.
Another consideration Little encourages brokers to ponder this year is how concentrated each lender partners’ business is in terms of geography and asset class. Are they backing a disproportionate amount of condo deals at a time when COVID-19 has many condo investors questioning their ability to carry their investments? Did they dive head-first into the urban exodus and lend millions in communities whose appeal could sputter once the pandemic is a thing of the past?
“One reason why we lend across the country is we don’t want to be beholden to any one specific market’s characteristics,” Little said.
While the condo market’s woes are expected to be short-term, making exposure to the space less of a concern, the unknown future of Canada’s booming secondary and tertiary real estate markets could leave alternative lenders, who have done oodles of business in these communities over the past year, facing substantial risks.
“Personally, I’m sceptical that this flight will continue post-COVID,” Little said. “I think there will be a need for people to be more present physically in the place they work. That really decreases the utility of living far away from where your office might be.”
The urban exodus is a double-edged sword for alternative lenders. It generates millions of dollars’ worth of new business and, by its very nature, helps diversify their lending portfolios. But if some economists are correct and employers soon begin requiring their employees to work at a central location, some – possibly many – of these former urbanites may no longer see the same value in the homes they recently purchased in rural locations. At that point, when maximizing distance from others is no longer a priority and interest rates are significantly higher than they are today, these homeowners are unlikely to be selling their homes into the same furiously competitive market in which they bought them.
“If we find, two years from now, that a lot of people regret moving away from the city and are looking to sell their homes in smaller centres, that’ll be hard for lenders,” Little said. “It’s much easier to sell a house 50 kilometres from an urban centre than it is 500 kilometres from a Costco.”