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June 5, 2016 | Why They Worry

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Last week two Big 6 bank CEOs called for Ottawa to double the size of minimum down payments, to 10%. That was followed by the boss of a big BC-based credit union calling on the Trudeau gang to “immediately re-visit” the tax-free status of capital gains on real estate. This comes on the heels of a 29% year/year price romp in Van and a 15% jump in the GTA. Big important financial peeps are suddenly a lot more worried. This could end badly.

It’s all about risk. The bankers (like the credit union guy with 66% of CU assets in housing) know a bust would bring defaults, lower profits and flaccid share values. Everybody understands Canadians are over-extended, pickled in debt, falling behind in terms of wages, yet lust after our most-inflated asset.

Like Cartwright, who just sent me this:

“We’re looking at a $500,000 purchase price for a house (emotions running high after being extremely conservative for 5 years). Our young family has about $50k to put down. Parents will also need to co-sign (because of temporary job scenarios). We’re considering having them pull a HELOC on their house and then gift us $50k. This gives us the 20% down, enabling us to get a 30 amortization (near $150-200 lower monthly payments) while also avoiding the CMHC premium (around $18k). Between us we have enough liquid reserves ($60k) in the form of RRSP’s and TFSA’s to wipe out the $50k loan if it was ever called or if the rate went through the roof. Our cash flows are such that we can service the mortgage and loan along with all other housing costs, without moving into a bad zone with debt ratios. We have enough scraps elsewhere to cover closing costs.

“This idea stemmed from only being able to qualify for homes in the mid 400’s in our current situation. Consequently this idea enables us to get the purchase price needed to get into the neighbourhood we require (well aware of how dumb that sounds). Despite the slightly higher rate for the HELOC, it also enables us to repay as we go without a bunch of repayment rules. So – smart or stupid?”

Stupid, dude. Buying that house (you can’t afford) will put you $500,000 in debt, leave scant reserves, result in a 30-year amortization (bigger interest payments) and soak up your cash flow. It’s a classic one-asset strategy, exposing you to market risk (housing will correct), rate risk (you’ll renew higher) and employment risk (job loss would kill ya). Sounds like you have kids, yet no savings for them (RESPs), and buying this place will mean nothing to put aside for your family for years to come.


Moreover, thinking people (like the bankers) know this bubble won’t last. So when YVR and the GTA stutter, all markets will stumble. Buying now because (a) you fear you never will or (b) the house will make you rich with sure-thing cap gains is emotional, not logical. Face it, if you (i) need your parents to co-sign for your debt, (ii) you have to borrow from family to buy, (iii) you opt for a ridiculous 30-year amortization, (iv) you end up with virtually no equity, half a million in debt and only sixty grand saved plus (v) owning means you become an irresponsible parent, then buying is foolish.

House lust. Debt embrace. So many people have no idea what they’re doing.

Career mortgage broker Paul Therien made some salient points two days ago, to an industry publication:

“When I started in the industry the minimum down payment was 10% with a maximum 25 year amortization. The difference between now and then? The biggest change is the % of income that is required to service a mortgage. While property values have been increasing at unprecedented rates, income levels have not been following the same pattern. In many parts of the country the opposite has been happening and incomes have actually been declining.

“I believe what is truly at issue here should not be the % of down payment, but rather the average homeowners ability to effectively service the mortgage. When I was a newbie one of the qualifying factors used was always the # of dependents the borrower had. There was a cost associated for each and this cost was included in the serviceability calculations for any debt incurred. Today, few, if any lenders take this into consideration when looking at extending credit. Children are expensive, and they are much more expensive than they were 25 years ago. I can remember a study done in 1996 that outlined the true cost of one child from birth to the age of 21. The average was $500,000 or roughly $1900 per month (this included costs for shelter, education – including university, food, extra-curricular activities, etc).

“These costs of living have a direct impact on the long term sustainability of an individual’s economic situation and yet we no longer consider much of this when looking at the extension of any type of credit, including mortgages.

“With interest rates sitting as low as they have there is an entire generation of homeowners who have no concept of anything approaching a rate of 5%, never mind 8% or more. Borrowers who are maxing out their capacity at today’s interest rates are seeing equity build in their homes, and that is great. What is not so great is the actual percentage of tangible income being used to service their mortgage debt. 32% GDS is actually 43% of their net income and TDS is hovering at 57% – what happens when rates increase?

“Most people who are maxed out in their capacity do not have the ability to weather an increase of as little as 1%. Personal savings are at an all-time low with the majority of working Canadians not even having 2 months savings. In fact only 4% of Canadian homeowners have the means to survive any economic challenges to their household incomes. The major issue is because household incomes are not increasing at rates that can compensate for higher inflation or cost of borrowing and as a result savings are diminished. What savings they do have, usually goes into the purchase of the home.

“The number one question I am asked by people: “Paul, when is it all going to come tumbling down?” My answer… “I don’t know, but what I do know is that 15+ years of consistent growth is not sustainable. I don’t believe it will collapse, but I do believe that the wave we are riding will at some point reach the shore, and when it does we will see economic changes. We will either coast to shore or we will get crushed. It’s complicated and even the greatest economic minds of our time have no idea what will happen.”


Bankers, lenders, brokers – people who daily watch Canadians plunging into historic levels of debt to buy assets at unheard-of levels with money that’ll get more costly – are worried. If not for the buyers and society, then for their own skins. These are the voices politicians listen to, lobbyists who now see public policy changes as the last, best hope of avoiding a train wreck.

And that, Cartwright, could be a bigger threat than your own inanity.

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June 5th, 2016

Posted In: The Greater Fool

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