May 20, 2020 | ‘Too Much of It’

Canada’s debt mess got real this week. Changes loom, including the doubling of required down payments for houses, tighter credit, more defaults, a brewing crisis in the autumn and falling real estate values.

The guy in charge of the nation’s housing agency had some shocking things to say when he addressed the House of Commons finance committee (of which I used to be a troublesome member). Evan Siddall is an enemy of the real estate cartel now. But he’s a burgeoning hero of the economy. Finally, a federal official with the stones to admit our house-lusty society has brought the country to a cliff. The virus pushed us hard along a predictable journey. It’s taken just a few weeks of pandemic to prove what this blog spewed for years. Property has pooched us.

With the economy collapsing by up to 40% in this current quarter and unemployment racing to 20%, Siddall warns it’s time politicians stop stoking real estate and face reality. “Homeownership is like blood pressure,” he told them. “You can have too much of it.”

And we do. Floating precariously upon an ocean of debt. Now for the consequences. Here are some of Siddall’s bombs

• The number of people deferring mortgages for six months, already at an unprecedented level, is expected to grow steadily. 20% of everybody by September. Not good. “Just as governments are taking on more debt to finance the COVID-19 response, mortgage deferrals are adding to already historic levels of household indebtedness.”
• Debt is washing over Canada. Before the virus household debt equaled 99% of the economy. That will explode to 130% by the autumn. “These ratios are well in excess of the 80 per cent threshold above which the Bank for International Settlements has shown that national debt intensifies the drag on GDP growth.
• Debt in relation to income is already a disaster at 176%. Into next year that will become 200%.
• Unemployed, indebted people don’t buy houses. CMHC says prices will tumble by up to 18% with a year. That’s a quarter million dollars off the average Vancouver detached house. “The resulting combination of higher mortgage debt, declining house prices and increased unemployment is cause for concern for Canada’s longer-term financial stability.”
• There’s a ‘deferral cliff’ coming in September, “when some unemployed people will need to start paying their mortgages again. As much as one fifth of all mortgages could be in arrears if our economy has not recovered sufficiently.”
• The virus, the economy, debt, deferrals and falling prices are toxic for new buyers. “We feel we need to avoid exposing young people (and through CMHC, Canadian taxpayers) to the amplified losses that result from falling house prices. Unless we act, a first time homebuyer purchasing a $300,000 home with a 5 per cent down payment stands to lose over $45,000 on their $15,000 investment if prices fall by 10 per cent.

Well, there you go. It doesn’t get much plainer. Apparently CMHC will be recommending to the Trudeau government the 5% down payment minimum be doubled. The agency wants to limit demand for housing, not encourage it. House prices and debt limits are “increasingly out of reach for young people,” and the virus has pushed us into a crisis of clarity.

In practical terms what does this mean?

Jacking the minimum to 10% (with a 5% mortgage stress test in place) would throw ice water on a market already hobbled by Covid. Meanwhile if 20% of all the mortgaged households in the land must defer monthly payments, how can they all resume in September when the jobless rate lingers over 15%? When the economy is a third smaller? When deferral means monthly payments are now greater? Impossible. So many will go into arrears.

Lots of families will have to sell. More listings. Fewer qualified buyers. This is why Evan Siddall says prices will fall. How could it be otherwise? The agency believes things will eventually improve – but that’s two years out. If a million households can’t last six weeks, how can they hang on until 2022?

“Trees don’t grow to the sky,” Siddall says. “The musical chairs game is going to come to an end. Young people, who are very highly leveraged will suffer.”

To my knowledge, this blog has never said this before. But here goes, without pleasure.

I told you so.

Garth Turner May 20th, 2020

Posted In: The Greater Fool

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