June 8, 2020 | Da hammer

In three weeks it gets tougher for the kids to score a mortgage. CMHC’s badass boss Evan Siddall warned us the hammer would drop. Here it comes.

These are the changes:

First, borrowers will get less financing based on their income. The maximum share of earnings that can go towards a home loan is dropping from 39% to 35%. The gross debt ratio (mortgage payments plus credit cards and other monthlies) also declines. Second, no Bank of Mom borrowing (or other unsecured loan) will be accepted as downpayment equity when calculating what a person can borrow. Third, credit scores of borrowers must top 680, instead of 600.

This is not changing:

5% down. Yes, evil Evan hinted to MPs recently he’d be asking the Trudeau cabinet to double the minimum downpayment, but apparently he was denied. Too bad.

This is why:

CMHC (and a mess of credible economists and forecasters) think brokers are blowing smoke when they say the pandemic will have no lasting impact on real estate values. Not believable, says Siddall. Not with double-digit unemployment, an economic contraction and several industries on their knees. The feds are forecasting a national price plop of up to 18% – shaving a quarter million off SFHs in 416 and YVR.

The move, says Siddall, is to “protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.” The big fear: a mess of underwater homeowners two years from, tipping the market into chaos.

This is what it means:

In general, first-timers will be borrowing about 12% less next month than now. In a sane world, that would reduce prices.

This is the reaction:

“If the government proceeds with this, the dampening of housing activity will worsen the economic pressures, further impairing the economy,” says housing economist (and booster) Wilf Dunning. “On the surface, it is remarkably poorly timed,” says Scotiabank’s economist. “Restricting access to credit in a period of economic need is certainly an unconventional policy approach.” And, says blogger/broker Rob McLister, “Regulators usually make such changes when times are good, not when housing is teetering on the edge.”

So, yeah, it’s controversial. In the short-term (this month) the changes will actually increase sales, demand and prices – just as local economies start to open and real estate agents vibrate and grow damp with anticipation. Since the CMHC announcement, showings (virtual and in hazmat garb) have exploded. Listings are rising rapidly. Offers are starting to fly. As Re/Max lashes out at the federal housing agency it and other property-floggers are telling buyers that normal has returned.

Meanwhile the lowest mortgage rate in history has just been bestowed upon us by the predatory lender known as HSBC. Yes, 1.99% for a five-year, fixed-rate term. (The variable also drops, to 1.75%)

Yikes. This is like dangling a drippy ribeye in front of a MAGA camo dude. Cheap money certainly undercuts the regulator’s efforts to curb house lust and debt snorfling. And that’s why the stress test is in place – regardless of how big a discount the lender’s giving, you still have to lump over that qualifying hurdle.

For someone renewing these days, 1.99% is irresistible. It’s a total slam-dunk rates will be far higher when that mortgage term expires. In fact, they’ll be fatter 12 months from now. This is a gift – so long as you don’t try to end the contract early. (HSBC has a high mortgage-break fee structure, just like the banks.)

So, here’s the nut of this debate. CMHC says the virus “has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians.” It’s hard to argue that when eight million people are on the dole and a million homeowners aren’t making payments. Joblessness may still be double-digits come Christmas.

But, but, but.  Look at what Mr. Market says. Last Friday’s employment stats threw more gas on an historic rally that continued Monday. In little more than 50 days stocks have gained 40%. Is there a giant contradiction here? Will real estate rebound just as fast as equities?

Short-term, maybe. June’s numbers will be thrilling to the Audi set, as sales volumes and average prices inflate from pandemic levels amid pent-up demand, cheap mortgages and beat-the-new-rules action. But beware of the bull trap. This rally does not have legs.

Facts are facts. Household debt is rising. Employment income has fallen. Millions will see their government cheques phased out. Major industries (airlines, hospitality, travel, tourism, conventions, theatres, sports) aren’t coming back for years. Meagre savings have been consumed, Banks, stung by deferrals and setting aside billions for bad loans, will be more risk-averse. There’s a case for saying Peak House was the spring of ’17 – those idyllic, bubbly, care-free, multiple-bids, naïve days of our innocence.

Remember when the only thing we had to worry about were rockstar realtors? You dunno what you got till it’s gone.

Today’s factoid: Zillow has discovered homes with black doors sell for an average of $6,271 more than expected.

Garth Turner June 8th, 2020

Posted In: The Greater Fool

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