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October 22, 2017 | Dream On

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.

Another big week for poor Bill. More on that in a minute.

First, the B20 bomber and the much-misunderstood stress test. Will this new level of federal intervention in the horny housing market really make a difference? Critics, doubters and scared realtors are bravely saying, no. People will just go to credit unions, they say. The banks will get a round it by extending amortizations. And meanwhile scads of moisters are rushing to get pre-approved at pre-stress rates so they can accelerate a buying decision while prices remain lofty but rates remain low.

It’s important to understand the banks want this. And they provide more than 90% of Canadian mortgage financing. Increasingly worried about risk, they’ve been encouraging beggarly and prickish appraisals, beating up on self-employed people and untrustworthy commissioned salesguys and adhering strictly to debt servicing ratios. But they want more. They seek a way to be shielded from buyers who got a Bank of Mom down payment to avoid CMHC insurance and the existing stress test (which they’d fail). So B20 is it.

Says BMO: “This will have a significant dampening effect” on the housing market. “It will dampen the housing market in 2018, probably more significantly than we saw (with) the earlier federal measures.” This is also what bankers desire. Mortgage growth can slow and they’ll make billions. If existing loan portfolios can be rendered safer over the years to come with a universal +2% threshold, that’s good for profit stability and shareholders.

Recall this, too: B20 means anyone with an existing mortgage who wants to switch lenders must go through the testing process, as well as meet LTV (loan-to-value) guidelines. So if you got laid off, have a spouse on mat leave, are going through a divorce or saw your real estate decline by 20%, it could be bad news. The bank regulator has just given a significant reason to never, ever, ever, ever change your lender. So is your bank going to make you a super offer upon renewal to keep you as a client? Dream on.

As for getting around B20 by taking a 30 or 35-year amortization so monthly payments are lower, and thus the income required, no real rescue there. Anyone with less than a 20% down payment is required by law to apply for and be granted CMHC mortgage insurance (which costs a bundle) and cannot have an am of more than 25 years. People opting for a longer period will obviously be red-flagged by lenders. More significantly, if OFSI (the bank cop) sees leakage thanks to a flood of longer amortizations, it will act. Meanwhile you’ll be left paying way more interest. Bad idea.

Credit unions? Seriously? They’re minor players in a world of lending behemoths, thinly capitalized and in no position to substitute for the Big 5. Besides, outfits like Meridian and Vancity already pose big real estate-related risk to Ontario and BC, and you’ll likely see those governments opt to streamline CU regs with those of the feds.

The biggest threat B20 poses is to reduce the amount of available credit by 10% (TD’s estimate) or 20% (the mortgage industry guess). As mentioned here last week, it could mean a family shopping for a $725,000 house today will have to reduce their target to $570,000 after the test (which will be in place at most banks within three weeks). So if you have a $725,000 house to sell, guess what? You may now have a $570,000 property if you want to find a buyer. The feds (and the banks) are trying to walk back real estate valuations in a measured and sustained fashion, to reduce speculation, restore affordability and prevent the inevitable hard landing if nothing serious transpires. Besides, while B20 may reduce the size of new mortgages by up to a fifth, it does nothing to diminish the banks’ existing portfolios. It only trims risk.

What to do?

Don’t believe the crap being circulated about B20 being gutless or flawed. There will be no escape from its effects. By the way, you can thank all of the people who cheated after the moister stress test was brought in for insured mortgages. By getting down payments from family or subprime lenders, just so they could avoid the test (CMHC-insured loans crashed by 40% as a result), they forced OSFI to hammer down on everyone. Thanks kids.

Don’t bother getting pre-approved, either. Mortgage commitments are good for 90 days and only a fool would rush out and buy between now and the end of January. If houses could lose 20% of their value over the next year or two as credit is reduced, why on earth would you do this? So you can have lower payments on a house that just ate your equity?

Of course most Mills don’t care about debt, only payments. So look for another pop in condo sales in the next ten weeks. Then next year they can flood on here and complain about how they’re shafted.

Wow. At the bottom already. We’ve leave poor Bill until tomorrow. Talk about being screwed…

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October 22nd, 2017

Posted In: The Greater Fool

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