The lowest interest rates since ever have been with us for about four years now. Instead of using cheap money to retire debt, people have gorged on it. Like all those pitiful equity mutual fund investors who bailed out on the afternoon of March 9th, 2009, they have taken the mirror opposite of rational action. But this is way more consequential.
This week we were handed independent and believable evidence of what happens when a whole nation falls for house porn. When 70% of all families own real estate (76% in Toronto, 77% in Ontario), and have taken on epic debt to get it, how can we be that surprised at what the accountants found?
According to the Certified General Accountants Association, we’re so screwed. In less technical terms, it means household income that should be saved or invested is being sucked off as mortgage payments. A third of families now save nothing. A quarter of families have never set aside anything. The savings rate for all of us was 20% in the early 1980s, and is now 3.8%. A third of all Canadians have ‘no wealth’. Only 30% think it’s important to try and build wealth. And of those people who do have money saved, 80% say they’ll probably blow through part of it within three years.
So, not only have most of the people you know, including your idiot relatives and old boyfriends, squandered he cheapest rates of our lifetimes, but they’ve pretty much guaranteed a lousy future. Worse, they don’t think this is a big deal.
And here’s the hilarious part. This week’s new BMO survey (they sell mortgages, don’t they?) finds 45% of Canadians plan to buy a house within the next five years and 56% believe house prices will be higher by next spring. Fully half of people under 40 say they intend on purchasing a bigger house. At this pace we’ll have 100% home ownership and a 0% savings rate.
Says bank spokesperson Martin Nel, who did not giggle or throw up: “The relative strength of the Canadian housing market continues to bolster homeowners’ confidence.”
Now back to the accountants for a moment.
Most people aren’t even paying attention. The bean counters found over a quarter of folks don’t monitor ‘any of the key external factors’ that would affect their wealth. Like, oh, the economy. And we already know that two-thirds of all the money Canadians have in TFSAs is sitting in brain-dead savings accounts making less than 2%. We know from this pathetic blog there’s a widespread belief interest rates won’t rise again. Ever. And we know that 73% of the largest demographic group in the country (making up a third of the population) have no pensions.
Add this all up and it’s safe to say most people you know have no clear idea whatsoever of what comes next. They don’t have investments, nor worry about it. They do not understand equity markets, don’t trust anyone looking vaguely financial, measure success in stuff, think debt is totally fine and consider August extreme long-term planning.
These are the folks the banks go after. In past days I’ve shown you the deceit and misinformation of two of the largest. The Royal lied in print about the equity advantage of buying a condo. TD is misleading mortgage clients into thinking they can painlessly skip payments. This blog will have absolutely zero impact on their actions, because they know nobody normal reads it. Normal people are busy telling BMO they plan on buying a bigger house.
So all that information I gave you – on real estate sales levels from Halifax to Victoria, on the next wave of mortgage changes, on monetary policy and the generational shift out of real assets, on price/rent ratios, income growth and demographics – well, forget it. This train will run out of track all on its own. Few are listening, fewer acting. Each month that drifts by with sustained house lust even as the market weakens brings us closer to a hard landing.
An innumerate nation will find its level. The lowest common denominator wins again.
The teller rolled her eyes when she saw me looking at it. “I’d like to meet the idiot who dreamed that one up,” she said softy, as she did banky things at our wicket.
Between us was a poster of two young hormones, she pregnant and he beaming. “We’re taking a vacation form our mortgage,” it said. On a wall nearby was a picture of a nymph who’d written about her mortgage on a bus shelter. “My husband went back to school just last year,” it said. “He told me we could take a payment vacation to get away from you. I said he could take his studies to Paris for some of the semester. We can afford to do it with a payment vacation from you, my dear mortgage.”
Welcome to the new world of Canadian banking. It’s not enough to talk the kids into unrepayable mountains of debt to buy houses at inflated levels, now the bankers are aggressively suggesting people stop paying their mortgages. TD, for example offers a payment vacation (up to four months), payment pause (skip a payment once a year) or a payment reduction (cut up to one full payment).
Why would they do this? First, since 90% of the market for new mortgages comes from first-time buyers, most of whom have no savings, blow whatever money they have on a downpayment, and can’t budget, this is an emotional come-on. It makes the kids feel like they can get preggers, run away to divinity school or still be young and impetuous, when in fact they’ve entered into a Faustian pact. So, it’s marketing. A stab at increasing market share in a shrinking business.
Second, when people skip mortgage payments, the bank makes more money. Huh?
This is because all those vacation payments, paused payments, reduced payments and ‘we’re-goin’-to-Paris’ non-payments result in interest capitalization. The bank is not letting people miss making an obligation, but rather taking that amount and adding it on to the outstanding debt. Then, of course, that debt is amortized, which means over the life of an average mortgage it will be at least doubled in size.
This is what the mouse print says:
Flexible Mortgage Payment Features will result in interest capitalization. That means the interest will be added back to the principal outstanding on your mortgage.
- Interest is added back on each mortgage payment due date.
- The amount of interest being capitalized cannot cause your mortgage to exceed the lesser of a 90% loan-to-value ratio or exceed your original principal balance.
- The loan-to-value (LTV) ratio expresses the amount of a mortgage as a percentage of the total appraised value of a property, as determined by TD Canada Trust.
- If necessary, we will adjust the amortization period remaining at renewal so that the mortgage does not exceed the original amortization period remaining. This may result in an increase to the amount of your regular payments after the renewal.
Now, imagine you had one of those 30-year mortgages coming up for renewal in a year or two, and that you’d taken a ‘payment vacation’ a few times. Given that the maximum length for mortgages is now 25 years, and you’d actually increased the debt, you can imagine how ugly that renewal might look, even without a rate increase.
Canada’s bank cop, the OSFI (Office of the Superintendent of Financial Institutions), is already worried about this stuff. It’s been staging ‘major reviews’ of the mortgage portfolios of all the monster banks, concerned that four years of cheapo interest rates have encouraged consumers to become pigs, and turned bankers into pariahs.
Head bank cop Julie Dickson put it this way in a speech this week: “This environment can provide incentives for banks to grow their earnings asset base by trying to gain market share (a zero sum game), increase fee income activities, reduce expenses, enter new markets, and by increasing the proportion of higher-yielding assets (both in the lending and investment portfolios). Of more concern, products and businesses that are over-reliant on low financing costs tend to grow and borrowers are strongly incented to increase leverage.”
When it comes to real estate and bank mortgages, Dickson fears bankers will get too aggressive to “maintain revenues,” that some housing markets are “overvalued” and (mostly) that “customers’ debt serviceability could be masked by low interest rates.”
This is what ultra-low interest rates do. People borrow too much. Bankers hide risks and encourage indebtedness, such as TD’s bogus skip-a-payment (and look at yesterday’s post). House prices lose touch with reality. Then the trip back to normal is brutal.
Do not be mistaken. OSFI, the Bank of Canada and F want interest rates to increase, lest the combination of a credit bubble, banker greed and consumer stupidity blow up the economy. There is zero chance the key rate will fall further. This will not be Japan. You have but months (not years) left of 3% mortgages. And you’ve been warned. Repeatedly. F did it. Carney did it. Now here’s Julie.
If you still have the bulk of your net worth in your house, well, good luck.