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May 10, 2018 | Wasted

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.

Internal comments from one of the Big Five show mortgage originations have choked. The decline from this time last year is in the 45% range. ‘It’s a disaster,’ was the observation. And the body count in mortgage departments is quickly changing. Be happy you don’t work there, or in a branch with lending quotas.

As forecast here, the Bank of Canada benchmark mortgage rate has just increased by twenty bips, to 5.34%. That happens automatically when the chartered banks all increase their home loan costs, which transpired over the last ten days. It’s the new stress test hurdle. Anyone shopping for a mortgage or switching lenders upon renewal must prove they can handle payments which are the greater of (a) 5.34% or (b) the rate offered by the bank, plus 2%.

It matters not how much equity you have in your home nor the size of down payment. All face the stress test. It’s an effective barrier to people who formerly could save money by shopping the market, plus it means a loan from the Bank of Mom no longer exempts new buyers from proving they can finance at higher rates. As mentioned here yesterday, a household with a $100,000 income and fifty grand for a deposit must now shop for a house costing far less.

Those failing the test won’t get a loan from a bank. Or, soon, most credit unions. It’s that simple. This is why the subprime lending business has been growing by leaps and bounds. Those lenders don’t actually care if you can technically afford payments or not since they’re willing to take the risk – and assume ownership of your house if you fail. So, a whack of people are now carrying financing at 8% or above. They’re the ones at Tim’s who used to be at Starbucks. They’re doomed.

Complicating things and slowing the market is the tsunami of mortgage renewals in 2018 – almost half all existing loans are coming due. Now only are many borrowers unable to switch lenders (because of B20), but they’ll be renewing at higher levels – reducing cash flow. Selling your house and moving up the property ladder is also tougher. Higher posted rates means increased penalties for breaking an existing mortgage, while the stress test kicks in when you apply for a new one. If you wonder why markets in Toronto and Vancouver are eroding from the top, chew on that.

The point of the regulatory bottleneck is simple – reducing risk to banks. Low rates and fevered buying pushed house prices too high. Then a crush of HELOC borrowing developed, largely financing more real estate purchases. Unknown numbers of families leveraged their own appreciating homes to hand over down payments to adult children who couldn’t otherwise afford to buy. That way the kids had the 20% required to avoid mortgage insurance, plus escape the old stress test for new buyers.

But no more. When half the banks’ mortgage portfolios were uninsured, the regulatory dropped the hammer.We knew the impact of the stress test would take months to become evident. And we’re rapidly approaching that point.

Last month – usually peak real estate rutting season – was a mess. For example, just over 40% of pre-sale condos available in Vancouver sold compared to almost 95% in January. Detached home sales crashed 34% in YVR and 38% in the GTA. Prices in Toronto declined 14%, and in Vancouver condo sales dipped overall by 24%. The old adage has been proven true again – when prices fall, buyers leave. When prices surge, buying explodes. Human emotion, not logic, sets the tone. Greed has turned into fear. Properties are seen as risky assets likely to decline further. Higher rates and higher taxes just underscore what regulatory castration has done. And it’s just begun.

So, many renewers are trapped. And what a coincidence all the banks have raised lending costs when you can’t get out! Almost like they knew about the tidal wave of maturing loans…

As for wannabe buyers who can’t pass the test, three choices. (a) Move and buy a perfectly fine house where real estate costs less and the locals have no idea what FOMO means. Mom will understand. Really. (b) Buy a lesser property. (There actually used to be things called ‘starter homes.’) or, (c) rent.

Go subprime? Forget it. They are the walking dead.

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May 10th, 2018

Posted In: The Greater Fool

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