Press Release: Canadian Banks Tightening Lending Standards

This article appeared on Wire Service Canada, Canada Free Press Release Service on February 15th, 2012.

Some expected the move, while others are against it. It seems Canadian banks are tightening lending standards in a move to avoid a U.S.-style housing correction, but a local builder, Bright Coast Homes Ltd., is confident Vancouver’s robust housing market isn’t expected to face a severe price correction. Press Release – Feb 15, 2012 – “I think the tightening of some of the lending standards is favourable in our current housing market,” said Ken Gee, project director of Bright Coast Homes Ltd. of Vancouver. “Home buyers can be confident that banks are screening new borrowers for their ability to carry the mortgage.”

Canada’s banks are in talks with the federal government about ways to curb mortgage lending in response to a “genuine concern” about the country’s housing boom and rising consumer debt levels, said TD Bank chief executive officer Edmund Clark.

“Household debt numbers are coming up to U.S. levels, so that is causing us a concern,” said Clark. The banks have responded by restricting some lending and raising prices on higher-risk borrowers. “I truly believe home buyers and investors should be taking advantage of the historically low interest rates right now,” Mr. Gee commented.

TD Bank joined Royal Bank of Canada this week in ending a promotional 2.99 per cent four-year mortgage rate, three weeks before it was set to expire.

Although the Vancouver housing market may be out of equilibrium, a significant correction is not expected, said Tsur Somerville, director at the University of B.C. Centre for Urban Economics and Real Estate at the Sauder School of Business.

“I think there’s some concern that prices don’t get so far out of whack that there’s a substantial correction,” Somerville said. “All you have to do is look around and you’ll see that if [a substantial correction] does happen, that would be a real big problem. So let’s not let the housing market be driven by a wave of cheap and easy-to-access money.”

The Bank of Canada is trying to reduce the exposure to mortgage debt and put the brakes on the housing market without using “really, really big hammers,” like raising interest rates, Somerville said.

“The government has already taken steps to control mortgage lending through its regulations and I think there’s a wariness about tightening those too much, so they’re encouraging the banks to look at their mortgage book more closely.”

In a recent Reuter’s article, it was reported there is an expectation that mortgage rates will stay low is taking the sizzle out of Vancouver prices.

At the same time, Chinese investors, who have long helped to underpin the city’s red-hot market, are holding back because property market curbs back home means they have less cash available. But with immigrants still streaming in from China and elsewhere, and the city frequently rated one of the most livable on the planet, most experts see prices fizzling rather than imploding with a bang. Vancouver price rises peaked at a stunning 19.8 per cent in 2006, dipped in 2009, and came roaring back with double-digit growth in both 2010 and 2011.

A house bought for $500,000 in 2001 would have fetched about $1.2 million a decade later, based on average price changes.