Lenders start to loosen purse strings

GRANT ROBERTSON — BANKING REPORTER

From Wednesday's Globe and Mail

Published Wednesday, Jan. 12, 2011 9:34AM EST

Last updated Wednesday, Jan. 12, 2011 4:43PM EST

Amid the worst of the economic downturn two years ago, small businesses looking for a loan faced an uphill climb.

The mood surrounding credit access for small companies is beginning to shift in Canada, according to the Bank of Canada’s survey of senior loan officers at major financial institutions, released this week. It suggests lenders are loosening their purse strings as they try to bolster their loan portfolios ahead of a recovery.

But the “heightened competition among lenders,” that the central bank flagged this week remains weighted toward more-established companies, or those with bigger operations. The competition is indeed heating up, but for the banking business of borrowers who have strong cash flow and a credit history.

“The market has gotten a lot more competitive in the last six months,” said Alec Morley, senior vice-president of small business banking at Toronto-Dominion Bank, which continued to lend during the downturn. “In some cases it’s getting a bit crazy from a banker’s perspective.”

The Business Development Bank of Canada also notes a more optimistic tone. “We see it with some of our clients [who have] other options for financing,” said Jérôme Nycz, senior vice-president of strategy and corporate development at the BDC.

However, for most small businesses, especially startups or entrepreneurs who are looking for seed funding, the change in mood has not meant a return to the days of more bullish lending. Instead, many have had to find new, more creative, financing options.

When clothing designer Wes Misener needed a few thousand dollars to get his boutique clothing line off the ground in 2009, the banks he spoke to were reluctant to extend a loan. For Mr. Misener, who had no borrowing history as a company and no deals with retailers, it was a near-impossible sell.

These days, even though his business has picked up, the picture is similar. Mr. Misener may one day be able to return to a traditional bank in search of financing, but until then he has found other sources.

To get the funding needed to launch his line of men’s T-shirts and underwear, the designer started by taking on debt himself, then applied for a $3,800 loan from the Access Community Capital Fund, a non-profit micro-finance organization in Toronto.

The fund operates a pool of money gathered from investors in the community, who receive a return on their investment. Based on a similar concept introduced in Ottawa, the fund provides loans of up to $5,000 to small businesses at competitive rates.

Most banks are reluctant to take on risks, and lenders prefer financing that is backed by assets. Access took a chance that Mr. Misener was good for the money, though his balance sheet couldn’t prove as much.

“We really took a fine-tooth comb through his business plan,” said Alex Kjorven, development manager for the Access fund. “But with microfinance you’re really looking someone in the eye and saying, ‘Is this somebody that has the commitment to pay back the loan?’”

Although an Access loan got his business off the ground, it may not be enough to fuel Mr. Misener’s next expansion, since sales more than doubled last year after he landed a deal with a Toronto boutique retailer. His next stop will likely be the Business Development Bank of Canada.

“To this point, I’ve had to kind of scratch and claw to get anywhere as far as financing goes,” Mr. Misener said.

Securing financing has become easier for Ken Leblanc, one of the founders of Property Guys, now that his business is bigger and more established. When his company, which helps people sell their homes without a real estate agent, started in 1998, it was routinely turned away by banks.

It now has 108 branches across the country. Mr. LeBlanc has seen a shift in the attitude of bankers, who seem more willing to lend to companies with fewer assets if they bring other benefits to the table. Even though Property Guys is a service firm with limited assets to put up as collateral, financing is easier to come by now.

“In the past they wanted to see assets, but they’ve taken things like intellectual property into consideration, and the value of the business,” Mr. Leblanc said.

Meanwhile, banks are also seeing more competition from credit unions, including those interested in picking up businesses that have been turned away for financing by banks.

Lindsay Finneran Gingras, a spokeswoman for Meridian Credit Union in Ontario, said credit unions have seen opportunity in the downturn. “Individuals came to us having grown frustrated with the hoops they had to jump through with the banks,” she said. “Because of the strict regulations, there was no flexibility.”

Home sales expected to have fallen in July as economy remains weak, tax credits run out

By Alan Zibel

Story Tools WASHINGTON (AP) - The housing market is taking a turn for the worse.

Tuesday's report from the National Association of Realtors about sales of previously occupied homes is expected to show sales plunged in July. Economists are predicting as much as a 26 percent drop from a month earlier to a seasonally adjusted annual rate of 3.95 million. That would be the worst month for sales in more than a decade.

Many say the market is hurting because buyers and sellers are in a standoff over home prices. Sellers have unrealistic expectations about their home values and are listing properties on the high end.

Buyers are afraid home prices will start falling after being flat nationally for about a year and even rising in some parts of the country.

"It really is a self-fulfilling prophecy," said Aaron Zapata, a real estate agent in Brea, Calif. "If all buyers perceive that home prices are coming down, then they will stop making offers — and home prices will come down."

The housing market is also being hampered by a weakening economic recovery. Unemployment remains stuck at 9.5 percent and many prospective buyers worry they might not have a job to pay the mortgage. Prices are low, but that's largely because foreclosures are running about 10 times higher than before the housing bust. And while mortgage rates are at the lowest levels in decades, many people can't qualify because banks are being selective in the tough economy.

Home sales picked up in the spring when the government was offering tax credits, with the best incentives for first-time homebuyers. But the tax credits expired on April 30 and the market has been hobbled since.

Last month, first-time buyers made up just over 39 percent of sales, down from more than 48 percent in March, according to a survey of more than 3,000 real estate agents by industry research firm Campbell Surveys. If the economy slips back into a recession, analysts predict the housing market will get a lot worse.

Moody's Analytics projects that home prices could drop another 20 percent by early 2012 if there is another recession. Even if the recovery remains on track, Moody's forecasts that prices will falling another 5 percent and hit bottom early next year.

A continuing surge of foreclosures is also making the problem worse.

The nation is now on track to have more than 1 million homes lost to foreclosure by the end of the year, according to foreclosure listing service RealtyTrac Inc. That would eclipse the more than 900,000 homes repossessed in 2009, and compares with the more than 100,000 homes that lenders typically seized per year before the housing bust.

Those at risk of foreclosure are having a hard time getting help. Nearly half of the 1.3 million U.S. homeowners who enrolled in the Obama administration's flagship mortgage-relief program have fallen out, the Treasury Department said last week. That compares with about 422,000 homeowners, or roughly 32 percent of those who started the program, have received permanent loan modifications and are making their payments on time.

Real estate speculators, immigrants and crooks: Are they just scapegoats?

Much debate results from a lack of data on how the underground economy and other factors influence housing price

By Don Cayo, Vancouver Sun August 23, 2010

What drives Vancouver’s house prices so relentlessly to levels four times higher than Winnipeg’s, and more than half again what Torontonians pay?


Criminals are people, too. As are immigrants, old folks and any other demographic group you can name.
And, yes, these folks all do their bit to drive up the cost of housing in Metro Vancouver.

Because the fact is, the more of us there are, no matter who or how we make our money, the more demand for homes. This, coupled with a housing supply that's limited and skewed by our dramatic but difficult geography, pushes prices sky-high.

But do some of us drive up prices more than others?

Looking at a few specific neighbourhoods, the answer may very well be yes. But region-wide, not so much.
Vancouver's successive waves of wealthy immigrants, for example, no doubt bid up prices of upscale homes in the parts of the city that these newcomers see as choice.

Of course, the same could be said of poorer newcomers, who drive up the rents in basement apartments. After all, if they didn't come here, or if they had more money, half our mortgage-helper suites would be empty and competition for tenants would drive prices down.

Beyond these obvious observations, however, the analysis gets complicated. There's lots of speculation, but no data, on how much money organized (or, for that matter, unorganized) crime injects into the economy, how much spending power immigrants bring with them, or if or how much property flippers influence prices.

B.C.'s underground economy (shady cheats as well as gangland thugs) is likely north of 15 per cent of gross domestic product. This works out to more than -- maybe a lot more than -- $25 billion.

"Ultimately each drug dealer, each gangster, has to buy a Louis Vuitton bag for his girlfriend," says Andy Yan, a planner and researcher at Bing Thom Architects. "The minute this happens, the grey economy hits the real economy."

That's a lot of money, "and no doubt it plays a role," says Jock Finlayson of B.C. Business Council. "But is it an underlying explanation for the price of housing? I don't think so."

My colleague Kim Bolan specializes in crime, not real estate, but she agrees.

Bolan tells me top echelon gangs do invest in real estate and legitimate companies, but "if I think about all the gangsters arrested over the last two years, few had houses. Those who did usually just had one."

Not surprising, perhaps, given that real estate deals attract the attention of the anti-money-laundering FINTRAC system, whereas luxury car purchases and pricey condo rents do not.

But, as with the unknowable amounts in savings and offshore earnings that immigrants bring into B.C., proceeds of crime clearly put a lot of money into circulation. And that can't help but bolster demand beyond the limits suggested by the region's fairly modest level of officially reported income.

Housing supply, apart from the geographical constraints dealt with in Saturday's column, is further restricted by the generous amount of land set aside for parks and other public places, as well as the Agricultural Land Reserve, which becomes an ever-greater factor as housing sprawls farther into the suburbs.

Supply is further choked by the tendency, supported by tax breaks from every level of government, for senior couples or individuals to stay as long as they can in the large homes where they raised families.

Tsur Somerville, an economist who specializes in real estate at UBC's Sauder School of Business, notes that it's hard to say if this will be a bigger or a smaller market factor in the future. On one hand, there's a growing tendency for seniors to sell their big homes and invest the money in condos, which may cost as much but which occupy a lot less land. On the other hand, every year there are more and more seniors, and they're living longer.

Real estate consultant Paul Sullivan of Burgess Cawley Sullivan and Associates notes that even when seniors do sell out, and even when these homes are modest, they often aren't an option for most young buyers, especially in upscale areas.

"Where the one-level, 1,200-square-foot bungalow used to sell for $400,000," he says, "it's been pushed to $800,000, $1 million or $1.2 million as a development site.


"A developer can build a new home for $500,000 or $600,000 and sell it for $1.8 million. So if you want an entry-level home, you're competing with a developer who wants to buy the same house and tear it down."