Mortgage firms tighten lending standards in Calgary as housing boom turns sour

The oil that fueled Calgary’s housing boom has created the conditions for a bust.Genworth MI Canada Inc., the country’s largest non-government mortgage insurer, said last week it’s preparing for more losses this year and into 2016. 

Home Capital Group Inc., the largest non-bank mortgage lender, is tightening standards in the oil-rich province of Alberta to reduce the risk to the company of falling housing prices.

“The warning signs are out,” said Gerald Soloway, chief executive officer of Home Capital. “It’s only prudent for everybody who participates in that market to heighten their alertness.”

More than five years of rising oil prices spurred thriving sales of million-dollar trophy homes in Calgary and a doubling of home prices in the last decade. As the oil crash forces energy firms in Alberta to cancel projects and fire workers, housing sales fell the most on record in December and January, with price declines expected to follow. Home Capital has begun to factor in a 10% drop in Alberta home values when making loans, Soloway said.

Alberta “has gone from the top spot in the economic growth rankings to second from last on the provincial leader board,” said Derek Burleton, deputy chief economist at Toronto-Dominion Bank, in a note to clients. “A significant softening in job markets will set the stage for a second major housing correction in Calgary and Edmonton” not seen since 2008.

The number of homes changing hands in the province plunged 44% in December and January, the most for the two-month period since 1988 when the Canadian Real Estate Association began tracking the data. Royal Bank of Canada, the nation’s second-largest lender, lowered its forecast this month and now sees sales of existing homes in the province sliding 16 per cent this year. Toronto-Dominion Bank, the largest bank, said sales in the province would drop 31% this year and forecasts a 5.1% average price cut.

As the housing market declines, demand is rising for rental properties, according to Mainstreet Equity Corp. Alberta was the fastest growing province for rental revenue in the quarter ended Dec. 31, according to the Calgary-based property manager.

Average vacancy on the company’s units in Alberta declined to 5.8% in the quarter from 7.6% in the year-ago period, and rent jumped 10% to $1,022 per month. Mainstreet has about 60% of its properties in Calgary and Edmonton, according to financial documents.

He said this downturn won’t be as severe as the one in the 1980s, when the oil services industry suffered from both a global recession and oil price decline. At the time, energy companies folded and unemployment jumped to 11 per cent, while mortgage rates of more than 15% made homes unaffordable.

Today, those rates are at record lows after the Bank of Canada cut its lending rate to 0.75% this year, with the country’s six largest lenders also reducing borrowing costs.

“It’s a little bit like driving through a snowstorm,” said Soloway of Home Capital. “You don’t expect it to be permanent, but it’s going to be around for a while and you just slow down and drive carefully.”

Bloomberg.com