A Tale of Two Vancities

The old adage is that markets are built on disagreement and in financial markets this is most certainly true when leverage is involved. Witness the latest "disagreement" between two mortgage lenders:

For best mortgage deal, move to B.C.

Mortgage rates are near all-time lows but for the best deal, move to British Columbia.

The province has Canada's most expensive housing but its residents are getting rockbottom rates thanks to a ferocious battle between B.C.'s credit unions and the banks.

B.C. home prices, Vancouver in particular, have long outpaced the rest of the country. The Canadian Real Estate Association said nationally home prices were up 8.9% in March from a year ago, but take out B.C. and the percentage shrinks to 4.3%.

The credit unions are another factor behind the higher prices in the province -loans from credit unions are as low as 3.64% on a five-year fixed rate closed mortgage. Canadians in other provinces, even hard negotiators, are lucky to get 4.19% from big banks...

But bond yields have dropped 30 basis points since April 11 and the banks have been slow to compensate for the situation, waiting to see if rates go back up. Mr. McLister says the banks raise rates more quickly than they lower them.

"We just have retail deposits and that's what we use for funding," says Norman Krannitz, vice-president of treasury of Coast Capital. "We looked at our deposits rates and they weren't going up so we decided to ride it out. We love the business we are getting."

Wow. Vancity is pulling out all the stops to get market share of BC's piping hot real estate market (well parts of BC's real estate market are hot, others not so much but that's a different story). How, then, does one square this with this announcement?

Home Capital ramps up uninsured mortgage lending

Home Capital Group made a strong return to uninsured mortgage lending in the first quarter, after scaling back considerably over the last year to avoid excessive losses from risky loans...

[CEO Gerald Soloway] said the company is being cautious when considering loans that will go toward properties in Vancouver or downtown Toronto, because the markets are showing signs of overheating. The company would rather lend in a stable market, than one that is posting swings in either direction.

So here we have two seemingly divergent assessments of Vancouver's housing market. On one hand, Vancity is aggressively offering mortgages, even fixed rate ones, to the mortgage market including those in Vancouver proper (one assumes). At the same time HCG is backing away from markets that they feel are in asset price bubbles. What's going on?

First we should point out that 5 year rates were on their way down -- yet again -- so we should expect a dropping of prime rates in the next month or so from the big 5 banks, barring any significant shift in debt markets. Nonetheless Vancity is financing 5 year rates from its deposits, not exclusively securitizing or duration-matching them as other lenders often do. HCG does something similar to Vancity in part but with a catch, that it is rated as investment grade BBB and not regionally-focused.

So on one side we have publicly-traded HCG with national exposure to mortgage assets and has its debts regularly rated and reviewed, so it seems reasonable there is some outside pressure to look more critically at certain regions of the country to assess default risk: bond analysts would certainly raise their eyebrows from behind those thick glasses if they didn't. Vancity, on the other hand, is primarily financed through BC-based deposits and is member-owned; it has more correlated exposure to mortgage default risk and deposit withdrawals, and by all accounts seems relatively unworried with the state of Vancouver's real estate market. Why would they? Is anyone even asking uncomfortable questions in the boardroom?

Does Vancity have some special insight into aggressively lending into Vancouver's real estate market, one where price-income ratios are among the highest in the English-speaking world, or is HCG raising a big red flag avoiding the "miracle" of Vancouver's housing market? We shall see!