Cracks Appear in Toronto's Housing Market as Home Capital Drops
(Bloomberg) -- Canadians fretted for years that home prices in the country’s largest city are rising at an unsustainable rate. Now they’re doing something about it.
Ontario, the country’s most populous province, announced on Thursday a set of measures aimed at cooling the Toronto housing market, including a tax on the foreign buyers who’ve been blamed for speculation. The province’s securities regulator on Wednesday also accused an alternative mortgage lender, Home Capital Group Inc., of making misleading disclosures, sending its shares tumbling.
Home prices across Canada have increased unabated even as regulators and investors warn that the market is in a bubble that will end in pain for the banks that financed the growth. Like in the U.S., alternative lenders have offered financing on more aggressive terms, allowing buyers who might not have qualified otherwise to purchase expensive properties.
“It’s going to come down, and a lot of people are going to get hurt,” Prem Watsa, head of Fairfax Financial Holdings Ltd., said Thursday during the Canadian investment firm’s annual general meeting in Toronto. Watsa compared the real estate bubble in Toronto to previous situations in Ireland and Dubai.
Ontario’s provincial government said it will apply a 15 percent levy on non-Canadian citizens, non-permanent residents and non-Canadian corporations buying residential properties containing one to six units in the greater Toronto area. A limit on annual rent increases also will be imposed on all buildings constructed since 1991.
When young people cannot afford homes “we know we have a problem and we know we have to act,” Ontario Premier Kathleen Wynne said Thursday at a briefing.
The issues at Home Capital relate to an investigation into loans with faulty income information. The company cut ties with 45 brokers in 2015 after finding falsified borrower income information, the same flaw that sunk many subprime lenders in the U.S. during the housing crisis. The Ontario Securities Commission alleged Wednesday night that the company’s former officials didn’t satisfy disclosure requirements, made “materially misleading statements” and failed to comply with other securities rules.
“I think a lot of this mortgage fraud in Canada has been covered up and you’re now starting to see tips of various icebergs hitting the boat," Marc Cohodes, an investor who’s betting against Home Capital’s stock, said in a telephone interview.
Home Capital “has always carefully considered its disclosure obligations,” the company said in a statement Wednesday night. “The company believes that its disclosure satisfied applicable disclosure requirements, and the allegations are without merit.”
Home Capital’s stock dropped 19 percent to C$18.10 at 1:56 p.m. in New York, the biggest decline in almost two years. Shares of Equitable Group Inc., another Toronto-based alternative lender, fell 7.2 percent to C$59.23.
Canada dodged the global housing bust a decade ago, escaping without bank failures. Home prices have soared since then, however, as the country’s central bank held down benchmark interest rates to encourage demand amid a global recession. Now with Canada’s economy hurt by declining commodity prices, it will be difficult for the Bank of Canada to raise interest rates enough to quell real estate speculation.
Lawmakers have tried in vain to cool prices since 2010 through measures like reducing the amount of time a loan can be amortized and raising the minimum down payment. In October, Finance Minister Bill Morneau announced changes that tightened access to mortgage insurance for commercial banks, required borrowers to be stress-tested at a higher interest rate and closed a loophole that benefited foreign purchasers.
Still, home prices in Toronto increased 6.2 percent last month alone, the biggest one-month gain on record, according to a benchmark price index by the Canadian Real Estate Association. The average home price surpassed C$900,000 ($670,000).
“There’s no fundamental story that we could tell to justify that kind of inflation rate in housing prices, and so it’s that gap between what fundamentals could manage to explain and what’s actually happening which suggests that there is a growing role for speculation,” Bank of Canada Governor Stephen Poloz said at an April 12 press conference.
Vancouver, Canada’s most expensive real-estate market, has cooled since last year after a 15 percent property-transfer tax was imposed on foreign nationals and overseas corporations buying residential property. Wealthy Chinese buyers had been blamed for the run-up. The luxury condos and fast cars they buy for their children were even the subject of a reality show, “Ultra Rich Asian Girls."
Canadian Prime Minister Justin Trudeau on Thursday sought to dispel any notion that Ontario’s proposed homebuyers’ tax is a sign the country is shunning foreign investment. The levy aims to differentiate between buyers who are “living to move” or merely betting on the housing market, Trudeau said. But both he and Ontario officials acknowledged that Canada needs better information on who is purchasing property in the country.
Canada faces “a dearth of data on who’s doing what,” Trudeau said in an interview.