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February 27, 2018 | Nothingburger

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.

In a moment, the real news.

First the latest from Mr. Socks and the Chateau Kid – the nothingburger federal budget, 2018, delivered at a time when interest rates are rising, our biggest trade partner hates us, the country’s debt is swelling, the labour market is wonky and the housing market’s wobbly.

So what is the centerpiece? Yes, parental leave. Gender sensitivity. Free parks admittance for kids. Pay equity. #Metoo funding. More spending. Pharmacare, maybe. More deficits. But no tax attack. And, best, the PM did not wear a sari to the House of Commons.

The Liberals will increase spending by $21 billion over six years and finance that with borrowing. The shortfall needing to be financed will be $18 billion this year and gradually (hopefully, fingers crossed, please) fall to about $13 billion a year by 2022-3. So much for ‘the budget will balance itself’ and the campaign promise to have four years of $10 billion deficits before breaking even.

The threats: rising rates could knock this projection into the dumpster. Ditto for NAFTA, if the Trump machine gears up against the existing trade agreement (seems likely after he yelled at Mexico’s president last week). And, because our corporate taxes are not being aligned with those to the south or our companies allowed to write off equipment purchases faster, we may lose investment (and jobs) across the line.

The good news? No increase to the capital gains inclusion rate. No diddling with dividends. No new swipes at small businesses. No increase in marginal tax rates. And because there is now only one more budget before the next election, none of the above is likely to happen.

So, it was a great day for the 1%ers who swarm here nightly. As for the rest of you…

Remember the Whining Mommas post from yesterday? Well, lots more moaning to come now that we’ve heard from Jay Powell, the new boss at the US central bank. His lengthy comments on Tuesday were enough to scare financial markets, and send the Dow to a triple-digit loss (don’t worry – it’s temporary).

The reason: according to Jay, it looks like 2018 will contain four additional rate increases, with the next one happening in three weeks. Powell says the economy is ducky, new job creation is strong, wages are rising, inflation’s up and the recent stock market volatility was meaningless. So, up she goes.

A year ago this blog was populated with deniers who said rates would never rise. Since then they’ve increased four times in the States and three times here. By this time next year that could stand at eight American trigger-pulls and six in Canada. As stated, this means five-year mortgages will be 4% by Christmas, with everyone stress-tested at 6%. There’s no smearing Max Factor on this porker. It’s still ugly.

Nothing else – not retreating Chinese dudes, moronic Dipper politicians, sphincter-tight lending regs nor moister panic – has the same impact on real estate prices as the cost of money. When lending rates dropped to 2% last Spring, we saw houses jump in value each month more than in a robust year. Valuations in the GTA and the LM hit all-time highs. Bidding wars erupted. Sale prices soared over asking. Realtors turned into shade-wearing rock stars with groupies and flashy cars. FOMO soaked the landscape.

So here we are. Rates up sharply, detached house prices down 9% in Toronto and three times that in the northern burbs. In Vancouver a similar story, while in both regions it’s only the buzz surrounding condos – being snapped by kids who have no idea of the correlation between rates and prices – that’s masking the real story. As so many people with homes face mortgage renewals this year – at higher costs on reducing equity – the move-up market has croaked.

Now, to the pachyderm in the kitchen…

We know Canadians have $230 billion in lines of credit attached to their houses, which may also be mortgaged. We know this debt has inflated by more than 7% in a year. We know a big chunk of people with HELOCs pay nothing and just let the balance grow. We know the majority never pay them back. But why is this the fastest-rising kind of debt?

Mortgage broker Shawn Stillman says he has the answer. It’s B20. The new mortgage regulations announced in last 2016 and implemented two months ago – which dictate anyone changing or adding to their mortgage needs to go through the stress test – have pushed people into sucking off their HELOCs for new credit.

“It doesn’t make sense to break the mortgage that predates the October 2016 rule change; it makes sense to keep that mortgage in place and add something else on top,” he told an industry site. “It could be their reckoning because they may have to pay the piper for taking on this debt and not paying back the debt. Where it becomes difficult is where you have to pay the principal and the interest.”

In other words, people who can’t make ends meet and in the past upped their mortgage principal to get cash for debt consolidation at a cheaper rate, now turning to lines of credit because of B20. They can therefore easily tap into built-up equity (to 65%), get a relatively good rate (prime plus a half) and – best of all – make interest-only payments, or none at all.

Of course, HELOCs are floating-rate, non-amortized demand loans. That means (a) the cost rises immediately with each central bank increase, (b) the lender can demand repayment at any time, such as when your local housing market tanks and (c) interest-only payments means the debt is never reduced. Making no payments means it rises monthly to the limit.

“People keep taking on debt because they don’t have a choice, and they’re choosing products they’re not amortizing, so they’re not paying down that debt, and it will eventually catch up to them at some point in time. They’ll have to pay more interest because rates will be higher, so they may simply not pay off their mortgage and sell the house,” says the broker.

Sell the house. And guess what that means?

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February 27th, 2018

Posted In: The Greater Fool

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