Credit Crunch - Poor Quality Lending Leads to an Opportunity For Real Estate Investors

By Mark Jennings-Bates

After arriving in the UK yesterday on the way to South Africa, the news is almost identical to the US.

Today the UK Labour government has announced a takeover of the un-saleable assets of a major national financial institution. The Bradford and Bingley bank in the UK has been subjected to the same lack of legislation in the mortgage market with regards to the approval process.

Sadly, for more than a few years the bank has been lending on what is affectionately known (in the US) as a "no docs no decs" basis. In other words, walk into the bank, no declaration of income, very few documents to sign and walk out with what is no better than a "promissory note" secured with a real estate title.

The government of the UK sold the sale-able assets to Santander, one of Europes largest banks and the UK taxpayers, not unlike the US taxpayers have taken on the burden for the ill-secured liabilities.

What does this have to do with real estate and Canada. To be honest, the main message is very clear, thank your lucky stars you have a very differently regulated banking system. Are we immune to these problems? Not completely, because some of our institutions purchased asset backed papers, investment instruments that cleverly bundled the poor quality mortgages into them. But we are not involved in sub-prime mortgage lending to the extent that other countries are and in fact in Canada, most sub-prime lending is done at a private level because of the restrictions in place. We will not see the depth of problems that the US and UK are seeing and that is good news.

What of the housing markets? So far, as I wrote about at the beginning of the year, the crystal ball is still foggy. The underlying trend of in migration will support a very sound housing market in the Okanagan. A common theme in our articles has been the migration of boomer-aged retirees into this region and that still is happening and will continue to happen. Mortgage crisis or not, these people are still affluent, do not require financing and do not care about the value of housing relative to income. A sad fact for entry level buyers in the Okanagan because the imbalance between pay scale and housing values will continue. The affordability of housing will not be addressed by a roll back in prices (which will not happen to a significant degree), but with creative planning tools that the City of Kelowna has already commenced implementing. The very real challenge to watch out for is inflation.

As a free-enterpriser, I believe that government should keep it's hands out of business, but clearly, greed over the last number of years has led to very poor quality decision making both at large corporate and government levels. The issue is not a matter of letting a bank go out of business or not, it is global illiquidity of a financial system that cannot be allowed to fail. The world has learnt from the great depression of the 1920's and realizes that there are ways to manage the journey.

In order to bail out the financial system, which in my opinion was very necessary, the governments of the western world have been printing money, lots of it. Whenever, a government prints money, that enters into our economy; an economy which can only be driven by consumption. In the process, the new money circulates, more of it ends up in bank accounts and people become willing to pay more for commodities, housing included. It is very realistic and quite likely that we will see several years of commodity inflation, giving good reason to look at good values in housing today from an investment point of view.

As a real estate professional in the Okanagan, it is evident that the quality of housing available for under $500,000 today is better than it was just a year ago. More choice, and better finishing can mean an opportunity for an investment, if, like me you believe that we will see inflation over the next several years as a result of printing so much money.

The downside? Inflation leads to interest hikes. Today in Canada, you are already seeing the ramifications of sustained low interest rates. It is not possible for banks to make enough of a spread on their lending when base rates are very low single digit. As a result, rates are being adjusted; however, expect to see economic growth in the next few years and resulting interest rate adjustments. Does all of this make sense? Not to many, but neither does a $750 billion US bailout of the one of the world most dominant banking systems in the land of free enterprise.

As a consumer what is the safest strategy? Don't leverage. In unpredictable economic times, borrowing the least amount of money is the safest way to weather the storm.
Mark Jennings-Bates is a British Columbia Based Realtor with Coldwell Banker Horizon Realty, the country's #1 Coldwell Banker office. His website, http://www.BCResortHomes.com offers subscribers the ability to access unique and high level investment insights into trends in British Columbia's interior with a focus on resort and lifestyle investments.

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