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Is Your Bank Holding You Hostage?

When Bank of Canada governor Mark Carney told an Ottawa press conference in late July that the recession is over in this country, it was a clear signal to all Canadians to stop wallowing in the gloom still emanating from south of the border. Canada will no longer be held a captive by the US-led, worldwide economic Armageddon.
Home builders from Halifax to Victoria should e-mail a copy of Carney’s remarks to every local banker with whom they do business, because builders tell us their lenders aren’t getting the message. And the housing industry needs financing, right now, to meet surging demand for new homes.
“Money is very tight,” says Eric Andreasen, vice president of marketing and sales for Adera Development Corp. “What will hurt most going forward, is that lenders are not financing new projects, and we’re running out of product. There’s an inventory vacuum building, and that will put pressure on prices.”
The Canadian housing industry has always been separate and distinct from that of the US, and a big reason is the inherent conservatism of the Canadian mortgage industry and financial institutions, which are much more closely regulated than their American counterparts. Unfortunately, in this case the timidity of lenders may restrain the housing industry from its traditional role of leading a robust recovery. While home sales are up in most Canadian markets, housing starts are still down, and many builders point to tight money as the root cause.
“There was really no need for our housing markets to collapse as they did last fall,” says Ron Bird of Lifestyle Homes. “The psychology of fear perpetrated by the media led to a knee-jerk reaction in our financial institutions, and credit dried up overnight. It’s still hard to get money today. They don’t want to lend for building spec inventory at all, even when we show them there’s a huge demand for spec homes to meet the needs of buyers moving to Calgary from out of town.”

Canadian and US Markets Headed in Different Directions
There’s now mounting evidence that the gulf between the Canadian and US housing industries is widening. Canadian builders are on the cusp of a boom, while US builders are fighting just to keep their doors open. But a lack of financing could nip the Canadian bud before it blooms.
“The market never evaporated,” says Bruce Nicol, vice president of Tartan Homes. “But sales were off considerably, and we had to let some people go. That all ended in the spring. The resale market in Ottawa is now red hot, and as the overall market came back, our own new home sales picked up. We now have steady traffic and our sales people are happy.”
In the Greater Toronto Area, new housing has joined the resale market with a resiliency economist Frank A. Clayton of the Altus Group says this is remarkable in a world experiencing the nastiest recession since the 1930s. New home sales for this June are up year-over-year by 16 percent, to 3,782 homes.
“It took about six months for our people to figure out how different the situation is in Canada, so our markets came roaring back this spring,” says Stephen Dupuis, president and CEO of the Toronto-based Building Industry and Land Development (BILD) association. “We just got caught in the global financial crisis, so we took a big pause, but that’s all it was.”
Canada’s resource-based economy is separating from the US in many other industries beyond housing. The recession is still visible in portions of Southern and Southwestern Ontario, where the borderless North American auto manufacturing industry, and its troubles, still dominate. Out west, however, oil and gas exports keep Alberta in the pink, while agriculture is solid across the region.
“All of the markets in Alberta are pretty strong, but not as strong as three years ago,” says Bruce Galts, president of the Alberta Home Builders Association. “Margins are not what they were then.”
That’s another troubling aspect of this budding recovery. Because it’s concentrated at the affordable end of the pricing spectrum in virtually every market across the country, it’s fragile.
Builders hunkered down to fight their way to profitability without knowing how deeply they would need to cut. They slashed prices on standing inventory, they renegotiated with trades to reach lower pricing levels and consumers responded to the improved affordability. We spoke to builders all across Canada, and virtually every one said the recovery is concentrated in smaller, smarter, more affordable homes, often townhouses or condo flats. A number of builders even told us the move-up market is still stagnant.
“As the market came back, we saw a couple of things driving it,” recalls Andreasen. “First, it had to be affordable, and second, it had to be ready for occupancy. The biggest obstacle we face is financing. I’ve got a project planned, but the lenders are telling me, unless it’s 70 per cent pre-sold, I won’t get the money to build it.”
To meet the demand for affordable homes and spec product, builders need financing that doesn’t bust their budgets. They’re lobbing that ball into the lenders’ court. Will the lenders be able to return it? We’re all waiting with bated breath to find out.

Bill Lurz has worked for over 30 years for such names as Professional Builder, Housing Giants and Canadian Building magazine. He is now senior editor of AVIDBuilder.ca.
Paul Cardis is the founder of AVID, Canada's leading provider of customer loyalty management and sales generation services for the home building industry. He can be reached at paul.cardis@avidratings.ca and you can visit AVID on-line at www.avidratings.ca.


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