Gradually, Then Suddenly.

Ernest Hemingway had a famous quote:

How did you go bankrupt? Two ways: Gradually, then suddenly. If that doesn’t describe real estate right now, then nothing will. Deep down we all knew something was wrong. You could feel it in your bones. You couldn’t exactly place your finger on it, but you just knew something wasn’t right. Of course, there are people that have been waiting for real estates collapse for a decade now, and then there are the cheerleaders who will convince you that if you don’t buy now – you never will. But most of us I think just had a feeling that the other shoe was about to drop. 

This week we may not have seen the shoe drop, but it certainly got unlaced. When the history books are written, and we study the beginning of the end of real estate to the moon, this past week is worthy of at least 1 chapter, and perhaps even a quiz. Lets see what the last 5 days brought us:

Evergrande. Ah yes, you cannot have a global problem with a Chinese company somehow involved. Evergrande is, or should I perhaps say, WAS the largest developer in mainland China. While the Evergrande saga has lurched on since June 2022, this week the courts finally said enough is enough, and ordered the liquidation of the company. Holding over 300 BILLION dollars of liabilities, Evergrande had been working for over 18 months to restructure and try to secure new loans, new operating lines, and new investors, but they got nowhere. When the largest in any industry falls, it is never a positive sign. While Evergrande was the largest, it was certainly not alone. Since China tightened capital controls in 2021, over 40% of Mainland Chinese property developers have folded. There is a lot of debt sloshing around, and the value of the assets backing that debt is now in question, and has fallen considerably since the world started raising interest rates. Some may think that Evergrande will not really impact them, however, I can assure you that in todays ever connected world, here are thousands of investors ( maybe even Canadian banks ) that hold liens, loans and obligations on Evergrande. The unfolding of this developer will be about as organized as herding cats. Expect to see knock on effects in the coming days, weeks and months, and quite possibly in places you least expect it. Keep in mind that if a bank loses money in one area or division, they have to make it up in another area or division. 

Silicon Valley Bank. Flash back to March of 2023. Remember that? Remember when yields plummeted and we all thought that the big one was here? One day the US banking system was experiencing deja vu all over again, and the next day everything was fine. Well, everything wasn’t fine, and just because it wasn’t a headline anymore doesn’t mean the problem is solved. US Regional Banks this week gotten beaten quite heavily on the stock markets as they have been forced to raise loan loss provisions, and start to write down profits due to high exposures to commercial real estate loans. New York Community Bancorp in earnings this week revealed they have had to increase loan loss provisions a whopping 345% from recent quarters. New York Community Banks’ share price ended the week at its lowest point since 2000. The US Regional Bank problem is heating up, and it is far from over. Expect to see a lot of problems in the regional bank space over the coming months. A lot of the highest problem real estate exposure in the US is in real estate, specifically commercial real estate. Dividend cuts, plunging stock prices, falling deposits, the list goes on and on. The name of the bank will change, but the problem will be the same. Look for a potential repeat of March 2023. One night you will go to bed and everything will be fine – the next morning you could wake up to chaos.

Good ol Canadian real estate. Unless you were living under a rock this week, you have seen the headline of the real estate problem in Northern Ontario. Dylan Suitor, Ryan Molony and Aruba Butt are 3 of the people behind the now insolvent corporations that are wrecking havoc on Northern Ontario real estate. While you can read about it on CTV or CBC, the general problem is that they got in wwwwaaaayyyy over their heads. Buying up over 400 properties to buy, renovate, flip and rent, they are now bankrupt after creditors came forward. Owing a little North of 144 MILLION, they have been forced into bankruptcy. Of course we will discover later on in the process that they were probably living high on the hog, and living far beyond their means, thinking cheap money would last forever. You may think that what goes on in Sudbury, or Sault Ste. Marie doesn’t concern you, but I assure you all banks are going to be taking a microscope to their risk guidelines this week. Risk managers will pucker up tighter than a bulls rear in fly season. Canadian real estate is really starting to show cracks, and while this story is sensational, it isn’t the first problem, and it sure as shit won’t be the last.

Trouble in MIC paradise. Over the last 3 to 4 years we have watched as MIC’s have become one of the largest growing segments of borrowing in Canada. MIC’s have doubled their loans to the market, and a lot of these MIC’s were started when rates were cheap and property prices were high. Not all MIC’s are bad, and there are a lot of good ones out there. However, as we are learning there are a lot of shady ones out there as well. This week we started to see large cracks in what is going to become – I think – one of the largest lawsuit issues going forward. MIC’s were getting away with a lot over the last 3 or 4 years, and so long as the money was coming in – no one asked questions. However, the music has stopped ,and suddenly there are not enough chairs. 90% of all power of sales in Ontario are from a private mortgage holder or MIC. These are picking up lately. We are now starting to see the games that some MIC’s were playing. No actual mortgages?? What the fuck? Promissory note’s rather than an actual registered mortgage? Some MIC’s were playing fast and loose with the rules, and the time is coming that all will be revealed. A lot of clients levd their own home to put money into a MIC, just to bank the “spread”. A lot of these borrowers were getting a LOC on their primary home, to put funds into a MIC run by the broker. The regulators are going to have a field day with this one when it comes out. Again – there are plenty of long tenured MIC’s that help a segment of the population. However, more and more a lot of MIC’s are being revealed for being pure shit. This will continue, and hopefully people are punished for their bad deeds. 

The reason I mention all of these things is that your clients will want to know. Get versed in what the fuck is going on in your sector – even if it isn’t in your own market or right outside your front door. Clients will have questions, and they will deal with people that have answers. You won’t lose your customer base over night if you can’t help them. You will lose them gradually at first, and then suddenly.