Market Insights – Mortgage Investing in Canada
Along with the white hot real estate market in Greater Vancouver, we are also seeing a correspondingly super hot mortgage market with pricing being more competitive than ever before.
Many private lenders who have been in the mortgage market for an extended period of time have had to significantly adjust expectations in recent years. However, the first part of 2016 has seen even more intense price competition.
Part of the reason why we are seeing lower yields on loans is that the MICs in BC have been quite successful in raising capital over the past few years. Each new year, as unit holders make their RRSP contributions and MICs get new dry powder to deploy we see increased pricing pressure. It is important to note that MIC returns have been steadily reducing each year since 2009, while many continue to be leveraged funds! Also, the industry has done a good job in BC to educate mortgage brokers and borrowers are getting better representation with brokers “shopping” their deals to more private lenders than before. Finally, as has been the case for many years, consumer’s high level of price sensitivity continues.
The traditional spread of 600 basis points over prime for a private first mortgage has been compressed and we are seeing first private mortgages as low as 5.99% in BC with no lender fees.
Something to note that doesn’t typically make the headlines is that other than GVRD and GTA, the rest of the country is in a flat or falling real estate market.
Generally speaking as a lender moves from west to east across Canada, yields are increasing with rates in Quebec the highest in the country for private mortgages. Atlantic Canada, a very sleepy and somewhat depressed market has a lot of opportunity for patient investors as there is very little competition in the private mortgage market. We operate in BC, AB, ON and have personal ties to Atlantic Canada. (Comparatively, in the US, even with an abundance of competition, private mortgages are not having the severe price competition that we are seeing in BC, with first mortgage often 8%+ plus lender fees).
Based on the current market conditions in BC, we are recommending investors lower return expectations while lowering risk exposure, specifically addressing geography and LTV to maintain strong loan portfolios going forward.
As bankruptcy filings and consumer proposals rise across the country, we will be seeing more credit consolidation files. We feel there is value to be had in South Vancouver Island, South Okanagan and the GTA based on return/risk considerations. There continues to be an opportunity with offshore borrowers who are buying BC real estate and have less access to credit markets locally (depending on where the investor is coming from, some with good banking relationships are able to achieve conventional rates via HSBC, Credit Suisse, and other foreign banks). We feel in the coming months and years, there will be an opportunity for special situations loans.
In BC, we are currently seeing first residential mortgages up to 75% sell for 5.99% to 7.99% and second mortgages from 8% and up with the bulk of 2nds being places between 9% and 11%.
Here is an article that many of you will find interesting. It is about the peer to peer lenders in the US and the headwinds they are facing. Click to view