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October 12, 2018 | Stressed

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.

Most major banks hiked mortgage costs this week. Not a huge surprise. It’s interesting, though, that the jumps were in their ‘best, discounted’ rates, not the posted ones. For example, at RBC the five-year fixed popped up 15 beeps to 3.89%. At BMO the best fiver also rose, but sits at 3.59%.

Of course, this is not the qualifying rate. That’s where the stress test comes in. In order to borrow funds you must prove you can handle payments at the offered rate +2%, or the stress test rate of 5.35% – whichever is greater. A borrower at RBC, for example, would need the ability to carry the loan at 5.89% in order to get funded.

Wow. Seventeen months ago you could scoop a five-year in the 2% range. No test. The increase is positively Herculean. Or, as they say in Washington, Kanyesque.

Do not discount the market impact. Things are getting s-l-o-w everywhere. Sales have pooped out in Vancouver, Victoria, Edmonton, Calgary the flat places where they grow stuff and even into the mighty GTA. The condo market in Toronto is comatose. Showings no longer mean sales. DOM is growing. Do not believe anyone who tells you otherwise. Those little hairs on the back of realtor necks are terrified. They sense what happens next.

The mortgage stress test is determined by the banks’ posted rates. At RBC the five-year is 5.34%. The first bank to jump above that (today – October 12th) is Scotia, now at 5.44%. If the Bank of Canada ups its benchmark rate 12 days from now (looking like a slam-dunk), everything may escalate by another quarter point.

Even-higher rates should have been in place for a few days, but the bankers have been holding off. No wonder. Their mortgage business is plunging. As discounted rates rise, it’s tougher for people to leap over the stress test hurdle. In most markets sellers have not yet adjusted their prices low enough to meet the reduced credit limits of borrowers. So this standoff has resulted in historically-awful affordability numbers and falling sales. The only way out is for the cost of money to fall (ain’t going to happen) or for prices to tumble (it’s coming). In the meantime, keeping your Audi A7 lease current and your desk fee at Re/Max paid is no picnic.

Some people think the temporary stock market kerfuffle or erupting bond yields will spook central banks into non-action. Maybe, they pray, we’re at the top of the rate curve.

Ha. Fat chance. The Fed has increased eight times, or just about half the number in the usual tightening cycle. Our guys have moved only four times. Meanwhile the North American economy keeps growing and inflation along with it. The cost of living increase is now circa 3% in both countries – at the top of the central bank target. With unemployment in America at a 50-year low and competition for workers now a considerable challenge for companies, wages are going up. Meanwhile Trump is busy slapping tariffs on imports, driving up their cost and adding more inflation.

So central banks aren’t done yet. Not even close. Thankfully bond yields have backed off a little this week (giving some relief to stocks), but we’re in a world where the cost of money will keep creeping up and will never go down until the next recession looms (at least two years out). But even in  a downturn, we’re not returning to 2% five-year mortgages nor is the stress test about to disappear. The real estate party is over, despite what your BIL with fourteen pre-con condos says.

And now the bank regulator that gave us the test is mousing around the rules for equity-based mortgages. This simply means the regulator’s much more concerned about a borrower’s ability to pay than how much net worth they might have. So it doesn’t matter how fat the down payment is on a property or how much equity a renewer may have, it’s all about income.

Expect the banks, therefore, to become even tougher. And also remember that if you’re renewing an existing loan (so many people are this year) and switch lenders, you’ll have to go through the stress test and prove you can handle the payments at 5.34% or above.

Finally, be aware that in a rising rate environment, getting out of a mortgage can be worse that dealing with your ex-spouse.

So there you go. Harder to get a home loan. Stress-test-miserable if you try to switch. Punishing if you leave.

[email protected] won’t have to dress up to be a witch this year.

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October 12th, 2018

Posted In: The Greater Fool

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