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October 16, 2018 | The Wrong Guys

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.

So how much stress is the stress test stressing stressed-out mortgage dudes?

Oodles. Enough to have a small army of them swarming over Parliament Hill today (Tuesday), bombarding 50 MPs and policy poohbahs trying to get B-20 gutted. The damage they see being done to their business is palpable. Mortgage originations have plunged, credit has dried like an old prune and house sales are on course to be the weakest in decades. “Fewer Canadian now are able to obtain the mortgage they need to acquire a home, and many sellers now find fewer buyers to sell their home too,” says the Mortgage Professionals Canada boss. “As we first outlined at the time of the mortgage rule changes, it’s now clear that our concerns regarding the cumulative impact of said changes are decreasing competition and increasing costs for consumers.”

The ask: uncouple the stress test rate from the Bank of Canada benchmark rate, and make it a mere.75% higher than what a bank is offering its mortgage client. The difference would be dramatic. For example, a fiver at most banks now costs about 3.6%, but the current stress test level is 5.6% (with the central bank benchmark at 5.34%).

As mentioned yesterday, B-20 has meant a couple making $125,000 can now afford a $625,000 house compared to the $800,000 place they could swing a couple of years ago. The cooling effect this will have on prices is only just starting. As mentioned, it’s irreversible. About to get worse with the next rate hike in a week.

But, sadly, the mortgage warriors are making the same mistake a lot of misguided (if cute) bloggers here are guilty of. They’re lobbying the wrong guys.

The stress test didn’t originate in Parliament. Nor was it Bill Morneau’s fault. Instead this was cooked up by OSFI, the Office of the Superintendent of Financial Institutions, which is the bank cop. It was created when more than half of Big Bank mortgage portfolios became uninsured. The reason: scads of families were gifting money to Junior to buy a house with 20% down, thereby avoiding paying the CMHC premium. This was done to save the insurance money but also because the kid lacked the income required to pass the stress test then in place for first-time, insured buyers. As a result, banks found their risk needle was pushing red. OSFI reacted. Now everybody needs testing.

This is regardless of the downpayment size or if you’ll be buying CMHC insurance. It also applies to renewers who switch mortgage lenders when their term comes due – so it’s a kind of mortgage prison for bank clients.

Anyway, MPs have zero to do with the stress test. They never voted on it Parliament, and never will. OSFI is an independent agency of the Government, set up for the sole purpose of “contributing to public confidence in the Canadian financial system.” Yes, it does report to the minister of finance, but Morneau would seriously overstep his authority by ordering the regulator to throttle back on its efforts to protect Big Six assets.

Now, all this will become a tad more desperate next week. The Bank of Canada, by all accounts, is ready to pop its rates again on the 24th, adding a quarter point. At this moment markets expect one more move in early 2019 – then we all need to pause and see where the economy sits. Meanwhile the US Fed is expected to hike four times – one full percentage point – between now and Easter Bunny time. Our guys will have trouble hanging back without scuttling the loonie.

The icing on the central bank cake came yesterday with the BoC’s Business Outlook Survey. It showed a majority of the CEOs who actually run the country (unlike MPs) are optimistic and plan to spend money expanding in the next year. This, says a National Bank economist, means, “all in all, the Bank of Canada would be justified by the data to step up monetary policy normalization.” The score was 51 to 19 (CEOs planning to expand/contract) – the biggest spread in a decade. In other words, uppa she goes.

Says Scotiabank’s Derek Holt:

“The Canadian outlook has improved markedly in recent weeks. The long-awaited rotation of demand away from housing and consumption towards investment and exports is underway, as regulatory changes and higher interest rates are slowing the former and capacity constraints and very strong growth in the United States are spurring the latter.’

Says my colleague Ryan with the yellow Porsche & the trophy wife: “1) the US economy is the strongest it’s been in years as captured by the lowest unemployment rate in decades (3.7%), the US leading indicator continues to rise, and Q2 US GDP hit 4.2%; 2) corporate earnings remain stellar with the S&P 500 expected to deliver its 3rd consecutive quarter of 20%+ Y/Y earnings growth, 3) we’re heading into the strongest seasonal period with Nov to May being the best six month period historically for the markets, and 4) with the recent selloff the markets are very oversold on a technical basis. Basically, all these fancy charts and analysis suggests more upside in the coming months.”

And here’s a fancy chart to prove it:

 

Say, did you notice the market was up 547 points today? Enjoy the stress, mortgage dudes.

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October 16th, 2018

Posted In: The Greater Fool

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