Were borrowers prolonging the inevitable reality as they financed lifestyles and rising living costs?
The popularity of private lending surged over the past decade as homebuyers and investors rushed to tap into new funding sources – but the sector has now shifted in line with a cooling market, according to a broker in the space who highlighted increasing caution across the board.
The positioning of borrowers and lenders in private lending has changed, Daniel Vyner (pictured top), principal broker of DV Capital Corp., told Canadian Mortgage Professional. “Most of the dynamics that fuelled private lending during the recent market runup have largely dissipated, at least for now,” he said, “giving way to a new set of realities.”
Property values shot through the roof in many regions – particularly red-hot urban markets like Toronto and Vancouver – thanks to an ultra-low-interest-rate environment during the COVID-19 pandemic.
That trend made private mortgages a “hot commodity” during the boom years, Vyner said, as investors weighed the potential pros of private lending against the potential drawbacks.
But many of those borrowers failed to take account of a downturn like the one seen since 2022 and the possibility that price appreciation wouldn’t be a permanent trend.
“Buyers, homeowners, and investors were prepared, and often financially rewarded, to pay a premium for access to private capital, especially when traditional borrowing wasn’t possible,” Vyner said, “to purchase, speculate and ATM home equity, operating on the premise that value appreciation would eventually offset higher borrowing costs.
“It was relatively easy to consolidate high-interest debt, finance lifestyles and rising living costs, buy time, and prolong the inevitable reality that the music will stop.”
Cooler borrower appetite, but a continuing glut of lenders
The frenzied market gave way to a much more cautious outlook among real estate owners, particularly those who have or once had accessible equity and are more conscious of its value. Refinancing appreciation is no longer the reliable tool it once was, Vyner said, to supplement household income with the same ease.
The spiking popularity of the space saw a flood of new lenders arrive in the private mortgage sector in recent years, leading to a vast array of choice for brokers and borrowers alike.
But while Canadians are now increasingly cautious about the outlook for the sector, Vyner said there doesn’t appear to have been any significant exodus of lenders from the private market – at least, not yet.
What’s followed is a hypercompetitive environment marked by slashed prices and lower rates among private lenders.
MIEs hold the advantage in current private market
Vyner argued that there’s potentially more money currently chasing viable deals than there are viable deals available. “Private lenders, rightfully so, are exercising caution and restraint, resulting in intense competition – particularly on pricing,” he said. “With limited desire, ability, and appetite to compete on risk, many lenders appear to be engaged in a race to the bottom on pricing.”
That’s an environment he believes will probably favour fund managers and mortgage investment entities (MIEs) equipped with deeper pockets than individual or other private lenders.
Canada Mortgage and Housing Corporation (CMHC) showed earlier this year that despite higher borrower caution towards private lending, the country’s biggest 25 MIEs still outpaced the overall national residential mortgage market in terms of growth of assets under management.
Those 25 biggest MIEs held $10.9 billion in assets under management in the fourth quarter of last year, CMHC said in its latest residential mortgage industry report, a 7.2% jump compared with growth of 4.2% in overall national residential mortgage debt.
Vyner says the growing strength of those MIEs could leave smaller and non-MIE private lenders with a difficult choice: “vacate certain segments such as low-LTV [loan-to-value] deals in prime markets, or take on higher-risk deals that MIEs are unwilling or unable to fund,” he said. “Both paths involve trade-offs but have created differentiation in the private lender marketplace.”
For brokers, the glut of private lenders currently operating in the space – and the downturn that makes this market a much more volatile one than the low-rate, high-price-growth environment seen in years gone by – only strengthen the need to tread carefully, according to Vyner.
“With an abundance of private lenders, products and options, brokers must navigate a more complex marketplace to best serve their clients,” he said, “and remain active and relevant in an increasingly competitive space.”
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