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March 18, 2019 | The Noble Goal

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.

If you’ve even remotely thought about ordering a yellow vest or voting NDP, please leave now. The following will make you crazy.

Elizabeth is a 1%er. Unapologetically. She’s also homeless, so you can guess where she and her husband hang out.

“We’ve saving for a few years hoping to buy a house in Vancouver. After reading your recent postings on mortgages being goosed I thought I would highlight the contrast at the high end. We didn’t realize what lenders do for non-CMHC mortgages and how restrictive it can be for higher income people.”

While this may seem like a deep dive into First World problems (which it is), there’s more to the story. It follows on yesterday’s post about how a politically-diddled real estate market ends up punishing everyone. In YVR, that’s the case in spades. Moisters are locked out by high prices and the stress test. Homeowners are losing equity and precious net worth thanks to anti-property taxes. And now, as Liz details, lenders are turning their backs even on those with high incomes, fat downpayments and house lust.

“I know a lot of people on the blog might roll their eyes, but this is not a ‘woe is me’ moment and should not be construed as such,” says Liz, “I simply wanted to highlight the contrast between the lower priced mortgage market and the higher end market. We are looking for a house between $2-2.5M and are not pleased with what we see offered in that price range. That being said the bank refused to qualify us for that much. We have a $450K downpayment and both have excellent jobs that are well within the top 1% of income earners.”

The bank qualified this couple for a purchase price of $1.7 million – which buys a nice garage on the Westside, despite having enough income to support a far larger loan. “Basically the bank requires a 50% downpayment on any financing amount over $1.25M. So essentially for that $2M house we are looking at a $625K downpayment. So this is effectively over 30%!”

Why would this be the case, when some kid with barely 5% to put down can borrow a big multiple of his income at the bank’s best-possible discounted rate?

Simple. CMHC insurance. First-time buyers with minimal cash pose no risk to the lender since the federal agency will backstop defaults. “[email protected] also told us that we were a “unique” couple since most of her clients buy condos and have CMHC so it’s ‘less complicated.’ Interestingly,” Liz adds, “she also mentioned that the bank enforces this rule pretty strictly because they have had an increasing number of higher income properties in Vancouver with owners who either have recently taken off out of the country when prices started to drop or who ran into financial difficulties and the bank was not able to sell the house for the value of the outstanding mortgage.”

“With prices the way they currently are in Vancouver, even the properties at the lower end of ridiculous are around $4M (in the nice areas) and according to this “sliding scale” requirement that would mean a downpayment in the millions of dollars is needed even if your income can support the payments! We were shocked at how conservative the bank was being because a few years ago anyone with a pulse was being qualified for large loans. What gives?”

It’s all about risk, E. The banks well understand what big new taxes and crashing affordability levels can do to a market. Condo buyers with small deposits and insured loans are safe bets given that the feds will cover losses if they walk. But wealthy people with 20% or more down borrowing a million or two are now suspect, given the assault on high-end properties. So this drying up of credit at the top end just exacerbates the crash now taking place in hoods once considered untouchable. The biggest victims are those who may have bought since values peaked three or four years ago. The losses in some cases are staggering. And mounting.

Dippers and yellows applaud this, of course. The destruction of capital is a noble goal, so long as it’s not their capital. BC’s tax regime, including that of Vancouver’s lefty mayor, is designed to bleed the rich in a country where the top income tax rate is already over 50% in a majority of provinces. As the country drifts, market intervention is seen as a good thing. The playing field is merely being levelled, people say. Wealth inequality is wrong. And these days real estate is wealth.

But, there’s always a but. Home ownership is no more a right than possessing a car. And there are lots of affordable places people can go to live. Deliberately manipulating a housing market to defeat existing conditions, as politicians love to do, carries its own set of risks. When pendulums swing, they seldom return to neutral. The seeds are being sown – by government – for a truly unfortunate social situation. When that occurs the 1%ers will be fine (they always are). The masses, 70% of whom own houses and have their wealth stored there, not so much.

When the elite and overlords have trouble getting loans from banks which fear defaults, what does this tell us? Well, for starters, we have a debt crisis. Unless the loan’s insured by the government or far below the value of the property, no deal. We all know the debt-to-income ratio is 450% or better for the majority of buyers of $1 million+ homes in the GTA and LM. Scary.

Second, major lenders are bracing for a far greater erosion in real estate values. That’s just prudent. So, as Liz discovered, they have Greater Fool rules in place. Third, the plop in sales in the largest markets is a leading indicator of economic conditions. When two-thirds of our GDP comes from consumer spending, it says something. Like, whoops. A housing crash will bring lower employment and falling incomes. Real estate prices do not decline while everything else (like your ability to buy) stays the same.

So the federal budget is tomorrow. Another opportunity to witness political manipulation. This time to encourage borrowing, debt accumulation and spending. There’s even talk of shared-equity mortgages.

No help to Liz, of course. One percenters don’t get no respect.

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March 18th, 2019

Posted In: The Greater Fool

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