October 20th, 2016 — Book Updates — E-mail this blog post to a friend
In case you were diverted watching Donald Trump’s butt being handed to him, you may have missed this. There’s big news to report from the Bank of Canada.
Our central bankers announced their latest thinking on interest rates this week, as the Canadian economy slumps. If we’re lucky, growth this year will be a hair over 1%. Not much of a rebound after that, either, with 2% expansion (they hope) in each of the next two years. It’s a dismal thing, for sure. If oil fades again, we might have a recession on our hands.
Meanwhile, says the bank, the mortgage changes which came into effect Monday will make it worse. The economy will sag as a result, since housing makes up a bigger portion of the economy than the entire manufacturing sector – plus oil and gas. Everybody (except homeowners in Vancouver and Toronto) now expect a serious fizzle to occur as mucho moisters are kept from indenturing themselves to buy crap houses at bloated prices.
This was the backdrop to a presser given by central bank boss Stephen Poloz. Half an hour before he started, financial markets put the odds of the bank cutting its key rate at 0%. An hour later they were 20% for a cut by January and 25% for one by the spring of 2017.
“Given the downgrade to our outlook, the governing council actively discussed the possibility of adding more monetary stimulus at this time, in order to speed up the return of the economy to full capacity,” Poloz said. Translation: geez, we almost did it, so watch out. While most economists had figured the mortgage bomb Ottawa dropped would allow Poloz to hold the line on rates, he told us something different. Things are worse than you think.
“The federal government’s new measures to promote stability in Canada’s housing market are likely to restrain residential investment,” the Big P added, “while dampening household vulnerabilities.” It means the central bankers actually believe they can reduce interest rates (mortgage costs along with them) and Canadians will not react because of the new regs unveiled this week. Whatever they’re smoking in Ottawa must be good.
Meanwhile markets are giving almost 70% odds that the US Fed will raise its benchmark rate on December 14th. The chances of that went up further Wednesday night when it became more evident American economic policies won’t be changing after the November election. If the Fed does what markets anticipate, there will be two more rate hikes south of us in 2017.
What does this mean? Plenty.
First, if Poloz chops our national bank rate from 0.5% to just a quarter-point, while the Yanks are moving in the opposite direction, we’ll get a dollar at 69 cents or less. That could be reality by the end of the year, or certainly in late winter. If it happens, you’ll wish you had made some US-dollar investments when the loonie was lofty at 76 cents. (Actually, you should always have about 20% of your portfolio in USD.)
Second, this is a bad environment in which to be loaded up on maple. The fact remains a vast majority of Canadian investors have 100% of their wealth in Canadian assets. Traditional bank-owned brokerages are still guiding their clients into huge weightings in moose-and-beaver stuff, heavy on domestic bank stocks, for example. Well, if growth is merely 1% this year with housing taking a whack, is that so smart?
Third, a rate cut by Poloz after Wild Bill’s mortgage mayhem, could negate the bubble-pricking intent in the last two delusional markets, while clobbering everywhere else. After all, no country cuts rates if things are going well – and as the loonie sinks, inflation will roar. Remember $8 cauliflowers? In places where speculators and house-horny millennials don’t move markets (which is everywhere outside of the GTA and Van orbs), none of this is good news. But in our gasbag cities, any rate cut will be seized upon by realtors and the Re/Max marketing machine as proof the meanies in Ottawa didn’t actually mean it.
Well, the jury’s out. National Bank economists say the next Poloz move will be up. Macquarie says the opposite. Capital Economics claims rates will be trimmed again because real estate is goin’ down.
Obviously, nobody knows. Not even Poloz. He’s making this up as he goes along. Inspiring.
October 19th, 2016 — Book Updates — E-mail this blog post to a friend
So what happens when the rules suddenly change and everyone with a normal down payment has to go through a stress test? What if many fail? It’s just so… stressful. Like having to pee in a cup before the real estate Olympics, and then freaking out awaiting the results. Life was so much simpler when the bank just gave you more money than you could ever repay, so you could buy a first house nicer than your parent’s last.
Just two days into the Wild Bill era of mortgage-testing, and already there are consequences. ‘Secondary’ lenders are suddenly feeling good. They’re the shadowy, unregulated guys running small lending shops happy to provide down payment financing, so borrowers can get over the 20% hurdle and avoid the stress test. But at a cost. Those loans generally come with a rate of between 8% and 10%. Ouch.
Sellers are starting to get it, too. Dave in the YVR hinterland sent me a listing of a house in Surrey a couple of weeks ago when the price was trimmed by twenty thousand. “Well it was taken off MLS last week,” he now reports, “but it’s back now at a $50,000 discount. Oh..they’ve somehow added an extra bedroom too, lol. Hard to believe people in the Lower Mainland aren’t seeing what I’m seeing.”
Here’s the house, before and after. Change the picture. Add a bedroom, Drop the price. Thanks, Bill.
This is a big week for your house. (a) Rule changes Monday which will guarantee that prices start to drift lower along with sales. (b) The continued hobbling of monoline mortgage lenders, reducing competition for the banks and leading to rate increases. (c) The spectre of big lenders having to shoulder deductibles on mortgage insurance (heretofore backed solely by taxpayers), also upping rates. (d) And the bombshell news that CMHC – more responsible for inflated properties and epic debt levels than anyone else – is raising the housing threat level to code red.
Says CMHC boss Evan Siddall, as he prepares the bombshell to be delivered next Wednesday: “High levels of indebtedness coupled with elevated house prices are often followed by economic contractions. We expect Mr. (Wild Bill) Morneau’s actions therefore to support our economy. Seen this way, the resulting delay in when people can purchase their first home, or their decision to buy a smaller home, rent or stay put is rather a small price to pay.”
That ‘small price’ will be borne by existing homeowners, now in an environment where buyers can afford less, will pay less and take longer to accumulate a down payment. That’s the result of a conscious and deliberate damping of demand, just like BC’s Chinese Dude tax. No government is increasing the supply of housing, simply making it harder to buy what already exists. So people who’ve seen windfall gains fall into their laps over the last half-decade are gambling with the future if they don’t crystallize them. Actually, it may be too late. At least in Surrey. It would’ve been wise to heed this pathetic blog’s call around Canada Day to get out of Lower Mainland property – before all this happened.
Well, CMHC’s Siddall says Code Red will not just apply to the godless GTA and delusional YVR, but also (and maybe especially) to bordering communities. As reported behind the Globe’s evil paywall (Make Newspapers Great Again) yesterday, he said this: “We’re observing the spillover effects in the central markets of Vancouver and Toronto, affecting nearby markets. In Toronto, it’s affecting Hamilton and Oshawa. Outside of Vancouver, it’s places like Richmond and the Fraser Valley. You’re seeing price acceleration. At the nationwide level, the evidence of problematic conditions has become high – that’s what red means. It’s not predicting a crash.”
As explained here earlier this week, a ‘crash’ now translates into ‘a US-style crash’ which means a national drop of more than 30% in real estate values. The federal agency does not say this is impossible or improbable. It’s just “not predicting” – “at the nationwide level.” At the level of, say, Surrey or York Region, it is absolutely possible and maybe even probable. Everybody should understand that when real estate turns on its owners, those most affected live in semi-urban, suburban or satellite-city environments where prices were pushed irrationally higher by urban refugees. As stated here yesterday, detached houses in Leaside or Kits will hardly be affected.
What happens nationally to property values is of interest only to egghead Bay Street economists and the omniscient trolls with no life who inhabit the nether reaches of this blog’s fetid, oozy comment section. For normal people, it means not being able to sell the house and watching you net worth shrivel. That sucks.
But you were warned.