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Bubble talk

Where's Canada's hot housing market headed? And how will it impact credit unions?

The state of Canada’s housing market is a hot topic not only here at home, but also for many onlookers around the world. For years, some market watchers, especially outside of the country, have been using words like “bubble” and “frothy” to characterize the seemingly unstoppable growth in overall average sales and prices in Canada.

Most Canadian economists, alongside the Bank of Canada, have preferred to use the phrase “soft landing” to describe where they see the housing market headed, acknowledging prices are unlikely to go up forever.

Low interest rates continue to fuel sales in many cities across Canada, and in turn prices, making home ownership more affordable, even in places where prices are steadily increasing.

While some markets such as Toronto and Vancouver are seeing skyrocketing sales and prices, other such as Calgary and Edmonton have been hit by the drop in oil prices that has led to layoffs and uncertainty in the oil-dependent economy.

The divergence between these and other markets underscores what economists have been saying for years: Canada’s housing market can’t be summed up as whole.

All real estate is local
Gregory Klump, chief economist, Canadian Real Estate Association

“All real estate is local,” says Gregory Klump, chief economist at the Canadian Real Estate Association (CREA).

But even in those markets that are seeing steep sales declines, Klump says there is no trend of distressed sales. Instead, many in the market who don’t have to sell are holding out for better days, believing as many economists do that Canada’s overall economy, dragged down by lower oil prices, will pick up, eventually.

The proof will be in the direction interest rates are headed. Many economists are expecting the Bank of Canada to start increasing rates again in 2016, assuming the economy begins a meaningful recovery.

If and when interest rates do rise, they will create another shift in the housing market, with varying impacts in cities across the country. Overheated markets could cool off as the cost of borrowing rises. Meantime, cities with weaker economies could see sales pick up again if rising interest rates signal economic conditions are improving.

“It’s watch this space,” says Klump. “Myself and every economist in Canada are watching.”

The impact on credit unions

It’s not just economists — buyers and sellers will be closely monitoring what happens next in Canada’s housing market. Big banks rely on mortgage activity that is obviously tied to Canada’s housing market, as do credit unions.

In fact, Canada’s credit unions have become increasingly dependent on mortgages to grow their business over the past decade. Residential mortgage loans account for an average of 58 per cent of all credit union loans today, according to Credit Union Central of Canada (CUCC).

In 2014, credit unions had about $90.8 billion in mortgage debt outstanding. That compared to about $92.9 billion for the Bank of Montreal, one of the Canada’s big five banks.

“Residential mortgages are at the centre of what credit unions do,” says Rob Martin, CUCC’s senior policy adviser. “It’s extremely important to us.”

Credit unions are also taking an increasingly larger share of the mortgage market.

Credit unions have about a seven per cent share of the market as of 2014, a nearly 10-per-cent increase from 6.4 per cent in 2004. Meantime, the banks have remained flat at about 73 per cent over the same time period. (All data, for banks and credit unions, excludes Quebec).

When other tiny lenders are stripped out, such trust and loan companies and pure-play mortgage lenders, credit unions make up about 10.4 per cent of Canada’s residential mortgage market, and the banks have the remainder 89.6 per cent.

The share of market is highest in places like Manitoba (35.9 per cent), Saskatchewan (21.6 per cent), and B.C. (17.7 per cent), and around five per cent in Ontario, Nova Scotia, and Newfoundland and Labrador.

“We are by far the biggest competitors to the bank, and we are growing our mortgage market share,” says Martin, also noting that the banks’ share has remained flat over the past decade.

Credit quality is also improving among credit unions. According to data from the Canada Mortgage and Housing Corp. (CHMC) on securitized mortgage pools, mortgage arrears appear to be lower for credit unions at 0.13 per cent compared to 0.29 per cent for all residential mortgages across the country.

“I think it points to the quality of the lending,” says Martin. “We are prudent in how we are writing the loans. It also points to the ability of credit unions to know their customers.”

How credit unions cater to mortgage clients

Credit unions are also coming up with a number of innovative products designed to match the diverse needs of the growing mortgage market.

For example, Vancity (509,000 members, $18.6 billion in assets) offers the “mixer mortgage,” which allows first-time homebuyers to share the cost of buying a home with one or more friends, roommates, co-workers, or family members. It’s a welcome option in the Metro Vancouver market, where the average price of a detached home is now about $1.2 million and condos are more than $425,000.

“Sharing property costs and home ownership among two or more individuals gives you more options for purchasing the home you want in the neighbourhood you want,” Vancity said on its website promoting the product.

Other products include the Go Green Mortgage offered by Ottawa-based Your Credit Union (11,000 members and $410 million in assets) for renovations or any newly built house that meets the Canadian government’s standards for an energy-efficient home.

Assiniboine Credit Union (112,000 members, $3.9 billion in assets) in Manitoba offers what it describes as an Islamic mortgage, based on a shared ownership concept called “musharaka.” The product, developed with the help of Islamic religious scholars, is for devout Muslims whose faith forbids the acceptance of specific interest or fees for loans of money. Under the program, the credit union and the homebuyer enter into a so-called “declining partnership agreement.” The credit union retains a percentage ownership of the property, but the title is under the buyer’s name, who has exclusive rights to live in the home. At the end of the contract the Muslim family is the sole owner of the home.

BlueShore Financial (41,000 members, $3.6 billion in assets), based in North Vancouver, B.C., has shaped its entire business around high-net worth clients in the Lower Mainland, with an increasing focus on mortgage lending. In particular, BlueShore is lending to wealthy repeat buyers who have built up equity over the years.

“We believe it’s safer,” says president and CEO of BlueShore Financial Chris Catliff. That’s because the larger single-family homes they are buying today have a higher percentage of land value in them, or about 75 to 85 per cent.

While land prices can fluctuate, “it almost always goes up over time,” says Catliff, even as the value of buildings on them go down.

The strategy has paid off for BlueShore, which Catliff says has seen its business build at a 12-per-cent annual compound rate over the past 15 years. About 98 per cent of its loans are real estate secured.

While that may appear risky amid concerns of a real estate bubble, Catliff says 80 per cent of BlueShore’s high-net-worth borrowers have high credit scores, which means they’re less likely to default. They also have very low loan-to-value rates on their mortgages because they are repeat buyers who have own real estate for decades.

Toronto-based DUCA Financial Services Credit Union (50,000 members, $2.2 billion in assets) is also increasing its focus on mortgage lending, which today accounts for just over 90 per cent of its $2.3 billion in annual lending activity. Of that, about twothirds are residential mortgages, says DUCA president and CEO Richard Senechal.

He says the company is seeing growth from and responding to the trend of increased densification in DUCA’s key markets across southern Ontario.

“What we’ve provided isn’t just a competitive offer in rate and value, but simplicity — the speed and ease with which you can get a mortgage,” says Senechal. “There used to be a much greater sense of awe when you went to get a mortgage. Today, it’s more of a commodity.”

“There used to be a much greater sense of awe when you went to get a mortgage. Today, it’s more of a commodity”
—Richard Senechal, president and CEO, DUCA

David McVay, a financial services industry analyst with McVay and Associates Ltd., says credit unions are building out their own mortgage specialist sales forces and adding more value into their products to build loyalty among clients, and attract new ones.

That includes broadening its demographic base to include younger clients. “The credit unions have an older demographic problem,” says McVay. “One way to address that is to attract first-time homeowners in the younger demographic.

What’s more, mortgages are a profitable segment with longer-term customer commitments. “It’s not beyond credit unions wanting to make money,” says McVay.

What’s next for the housing market?

The health of the mortgage business will depend largely on the future direction of the housing market.

The Economist and Moody’s continue to warn about Canada’s housing market, pointing in particular to rising prices, sales and unaffordability in two cities: Vancouver and Toronto.

However, Central 1 Credit Union chief economist Helmut Pastrick doesn’t believe the Vancouver and Toronto markets are headed for a collapse and expects prices in both cities to keep rising, driven by limited supply (especially for houses versus condos) and increased demand.

“High prices and overvaluation will not cause a housing correction,” Pastrick says, noting in a November report that current house prices in Vancouver and Toronto “are not overvalued from a long-term perspective, or for a long-term investor.”

The greater risk, he says, is an economic recession.

“High prices and overvaluation will not cause a housing correction”
Helmut Pastrick, chief economist, Central 1

“I am not forecasting a housing recession/crash in Vancouver or Toronto until the next economic recession occurs,” says Pastrick, adding that, “no housing recession in Canada or elsewhere has been caused by high prices alone. Something triggers the recession and subsequent price decline.”

Still, Pastrick predicts “outcries about unsustainable prices, worsening affordability, rising vulnerabilities and heightened risks will continue,” at least until the next housing recession, which he isn’t forecasting. When an economic and housing recession does come, they are usually temporary, lasting between one to two years, Pastrick says. Meantime, he expects home prices to continue to rise in both key provinces of B.C. and Ontario in the months to come.

For credit unions, the focus will be on which direction the market is headed, he adds, given their increased reliance on residential mortgages.

Credit unions will need to continue to fight to grow and maintain the current market share, regardless of the market’s direction.

Analyst McVay’s advice is to credit unions is to “make absolutely certain that you are taking care of your existing members.”

That includes being transparent in pricing, while at the same time aggressive in comparison to the banks.

“One of the big things credit unions have to do is build brand awareness,” says McVay. “That includes advertising and establishing a reputation of being competitive priced and more considerate. That’s where the opportunity is for credit unions.” ◊