It has long been suspected that Canadian banks were playing a less-than-honorable role in the foreign investment rush taking place in the country's real estate market. Now, questions about precisely how they have been helping fuel the obscene rise in house prices in places such as Vancouver and Toronto have been partly answered.
It would appear the Big Five banks (and likely others) have been doing this by giving foreign clients preferential treatment when it comes to qualifying for loans – a level of banking bias the likes of which Canadians have never witnessed.
A Globe and Mail investigation into Canadian real estate practices revealed on Wednesday that banks use a different set of loan requirements for foreigners than they do for those who work and pay taxes in this country. So, if you are from mainland China, for instance, and have no credit history in Canada but are looking to buy a place in Vancouver, you can likely borrow large sums of money from a Canadian bank without having to verify your income – this would include foreign students attending university here.
According to internal documents obtained by The Globe, loans officers at Bank of Nova Scotia, for instance, have been told they do not need to verify the incomes of new immigrants if they have a loan down payment of 35 per cent. For foreigners, the no-verification threshold jumps to 50 per cent. At the Bank of Montreal, it's 35 per cent for both; the bank also requires that foreign clients have the equivalent of 12 mortgage payments on hand at the time the loan is issued.
So much is wrong about what is taking place one hardly knows where to begin. But let's start with the now-evident role the banks have been playing in the vicious, inflationary upward spiral in house prices. Although a federal regulator has warned all of the banks that income verification for foreign clients has been lacking, the practice continues. As long as one bank is doing it, they all will – especially if there is no punitive price to pay beyond a mild reproach. Meantime, there are ample data to underscore the role of foreign purchasers on the price surge in markets such as Metro Vancouver and Toronto.
At the same time, economists for most of the big banks have been warning about the economic perils represented by a potential housing bubble, and the corollary debt bomb it could set off. Yet they never mention the role their institutions are playing in creating these dangers.
There is also the not-so-little matter of what this lack of income verification could facilitate: money laundering. If foreign clients do not have to document and prove the source of their income, it opens the door to those looking for a haven for ill-gotten gains. Real estate is the perfect vehicle in which to invest illicit funds. And it would seem our banks are more than happy to accommodate people with this intent.
What the recent mayhem in the real estate market has confirmed is that many people take Canadians for dupes. Look at the shady practices (such as shadow flipping) that were taking place before they were uncovered by The Globe: Realtors and others using the most unscrupulous means possible to take advantage of unsuspecting buyers, right under the nose of government and regulatory bodies.
On the weekend, The Globe revealed that a network of house speculators was flipping homes for profit and dodging taxes in the process. The person who blew the whistle told The Globe he had earlier approached the Canada Revenue Agency and the police and got nowhere. This is what passes for consumer protection in this country.
But it is the banks' role in all this that is especially infuriating. It was not the foreign clients they now seem to prefer who helped them become what they are today. It was families in big cities and small right across this country. It was parents opening accounts for their kids, who would later open ones for their own children. It was plumbers and electricians, school teachers and nurses. These are the people who helped make five, once small Canadian banks into global players.
Well, it would seem gratitude does not go as far as it once did. Today, when Canadians walk into a bank to negotiate a mortgage, they will wonder if someone in the next room is operating by a different set of rules. And if so, why?