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October 20, 2017 | No Escape

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.

No Bank of Canada rate increase next week. Phew. Talk about hammers and flies. With B20 taking flight, effectively adding a full 2% to mortgage rates, the housing market is already in for serious diddling. Plus, events of the next 10 weeks might make everything worse

Why is the central bank suddenly putting on the brakes after being all macho in the summer?

Oil is mired at fifty bucks. GDP growth is waning. Sears is firing. Trade numbers are weaker. So are retail sales. Real estate is wobbling. But mostly the worry is about NAFTA. That trade deal with the US directly impacts a quarter of the entire economy and millions of jobs. By all accounts, the talks suck. Ottawa is fighting for gender parity. Trump is fighting for jobs. We’re pooched.

Would Trump dump the deal? Well he walked the US away from the Trans-Pacific Partnership (TPP) and shocked the world by exiting the Paris Accord on climate change. Giving notice that NAFTA is dead would be no stretch since the guy doesn’t actually care what anybody (who didn’t vote for him) thinks.

So, no hike Wednesday morning. None until early 2018, despite the Fed pulling its trigger in December. Expect the dollar to lose ground for a while, especially if there’s a cabinet shuffle and Bill Morneau goes back to being simply a rich business dude brought down by arrogance and bad staff.

Let’s get back to B20 for a few minutes. The mother of all mortgage drones is loaded with nukes and groaning down the runway. What, exactly, happens next?

First, don’t listen to any industry chatter about mortgage lenders finding loopholes to circumvent the stress test, or to mitigate its affects by putting people into long (35-year) amortizations. While it’s true the bank cop (OSFI) did not spell out this aspect of the regs, rest assured any major moves to circumvent them will be squished.

Does that include borrowing from credit unions, which are not subject to OSFI rules?

“My wife emailed FICOM and the response she got from them made it sound like credit unions have no plans to follow these guidelines,” says Evan, “so I’m left wondering… is B20 really going to impact the market that much?”

Good question. For a while I’m sure the CU guys will benefit from a flood of new apps, since one in five borrowers today would fail the stress test and qualify for smaller loans. So the credit unions will happily take on more risk and become even more insanely exposed to a housing market which has a long road down. But they’re not banks and don’t have unlimited wells of money. Moreover, politicians in BC and Ontario are likely insist that B20 rules eventually be replicated by everyone. Finally, if the stress test is designed to protect people from being total hosers when it comes to taking a loan, why shouldn’t it apply to all?

Other questions include: when does the stress test take effect? When a house is bought? When it closes? When you get the mortgage funds? What about renewing an existing mortgage? Does it matter if I drive a Kia?

While January 1 is the date everyone’s throwing around, expect all the banks to have the test in place soon. Within a couple of weeks. OSFI instructed as much when it told them last week: “Where possible, federally regulated financial institutions are expected to comply with the principles and expectations set out in this guideline as of the date of this letter.” Remember – the banks wanted this rule change. It reduces their risk. They’ll get the paper cups ready just as quick as they can.

The test will take place when you apply and since almost everybody gets pre-approved these days, that’s when the moment of truth will arrive. Do you have enough verifiable income to pass the debt service ratio test at the offered mortgage rate + 2%? If not, the loan amount will be reduced until you do. As mentioned days ago, a family with 20% down who qualified to buy a $725,000 house before the test would be shopping for a $570,000 property after it.

So it doesn’t matter if you have an accepted offer, or if the deal closes in November or February. As soon as your lender has the test in place, it rules. Does that mean it makes sense to get pre-approved now while you still qualify to buy more? RateSpy had this advice on its site Friday: “If you need a mortgage or HELOC in the next 120 days and you expect your debt ratios to be high, apply ASAP. You don’t want to lose lender options as banks start announcing they’re implementing the stress test ahead of time.”

Sure, get pre-approved. But it’s useless. The approval will last, at most, until the middle of January and anyone buying in the 90-day period is likely to regret it. If overall credit shrinks as a result of the stress test with buyers qualified for lower mortgages, prices will naturally follow. That’s the object of this exercise – to dial back on inflated real estate equity while improving the quality of home loans. B20 adds 2% to mortgage costs – the equivalent of a huge spike in interest rates. Of course valuations will fade.

However, thousands will rush in, borrow and buy. Especially the moisters. May God have mercy. But she won’t.

 

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October 20th, 2017

Posted In: The Greater Fool

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