Intervention

horse-love

All the wrinklies, thirsty underwear aficionados, and generally old farts who read this pathetic blog hate central bankers. No wonder. Bonds pay diddly. High-interest savings accounts aren’t. GICs are a joke. And when you add in Canada’s punitive taxation of interest (100% of it is added to your income and pillaged), plus inflation, saving’s a bust. A generation ago retirees clipped coupons and wintered in Florida or Arizona. Now they stay home and moan. (What do you call three crusty boomers in the basement? A whine cellar.)

But the same central bankers who’ve forced rates into the ditch have pushed mortgage costs down with them. It looks like the Millennials are net beneficiaries, gobbling real estate, onboarding debt and in the process inflating houses as never before.

Despite all the moister-bashing that takes place on this site, it’s not hard to understand why house porn has become such a fav of the selfie set. Unschooled in finance, ignorant of most liquid assets (except beer) and deeply suspicious of the markets, they’ve opted for the one thing that worked for mom & dad. They also look around and see house prices marching higher, debt costs barely above inflation, and figure what’s gone up has a good chance of going up more. So they bite.

Media excess helps. Like the story of a Van ‘student’ who made a $1.6 million profit flipping a Westside mansion. The rewards are exaggerated, and the risks diminished. The result is a concentration of wealth in residential real estate as we have never seen it before. At the same time, we have record levels of debt (now 170% of disposable income, on average). Starter semis in Toronto cost a mill.

(By the way, the common practice now for any new offering in Toronto is for the listing agent to hold off offers until a certain day and time, at which a blind auction occurs among bidders. Nobody can submit an offer without a certified cheque being attached – usually for $100,000 or so. Once offers are opened the top bidders are sent back to their waiting cars to ‘do their best’ without knowing what they are competing against, while the salivating vendors wait inside at the kitchen table. It’s all nauseating, and all too common.)

Back to the central bankers, for a minute, who are encouraging this highly speculative, risk-drenched behaviour. Having failed at stimulating sustainable, robust economic growth, monetary policy is now focused on slashing rates to the point of actually being negative, while stimulating economies through direct payments. Governments are also into the act, plying taxpayers with their own cash in hopes of a revival. That’s exactly why the T2 gang has started sending out unheard amounts of cash to people with kids, tax-free. It’s a wild gamble that debt can turn into growth.

Given that attitude, how can you blame the damp ones for aping it? And this is what many people find so worrisome. There are many reasons why having so much concentrated in one thing, so susceptible to change, constitutes danger. Besides, if owning real estate was such a great way to make money, why are Canadians (with 70% home ownership) in such dismal shape?

Our debt-to-income ratio (170%) is significantly higher than that of American households (132%) and has even shot higher than theirs was just before real estate crashed and burned (160%). We’re now snorfling new debt at a rate four times faster than the growth in incomes.

And did you see that survey this week? It found 56% of Canadians are $200 or less per month away from being unable to meet their debt. Half of us actually don’t care. And also a third of people are currently not paying their bills on time, making them technically insolvent. Add that to all of the other shocking factoids you’re read here – half of people unable to survive a single paycheque being late a single week, for example – and you can see the problem.

If anything goes wrong, we’re screwed. And at the top of the screwee list are the kids with big debts, little equity and nascent careers. Says the outfit behind these latest stats: “Many households have come to rely on cheap credit in order to cover expenses but we can’t continue to be comfortable taking on more credit to finance a lifestyle we can’t afford…“With so many already feeling unable to cover their bills and debts, there is tremendous vulnerability to any kind of economic shock – the loss of a job, an emergency, a divorce, even things like a reduction in overtime pay or bonuses – and especially an increase in interest rates.”

But not a day goes by without the Illuminati coming here to tell us rates will never rise. At least not until December 14th.

Well, the OPEC deal this week boosted oil, fueled the loonie and helps ensure the Bank of Canada is done with its rate cutting. This is the bottom. Which probably means houses are at the top.

If you see your daughter with an Agreement of Purchase and Sale sticking out of her bag, get her a pony instead.

Once upon a time

cat-eyes-modified

The Donald wins. As with Brexit, markets never imagined voters could be that thick. Volatility envelopes the globe, unfortunately inflated by concern about a European banking contagion. The US dollar soars as money flees into to safe havens. Commodity prices drop. Oil sinks. The Canadian dollar and economy along with it.

Suddenly spending $1.2 million on a semi with a crappy reno two blocks from a homeless shelter doesn’t look that swift. With the foreign-buyer tax in place in both Vancouver and the GTA markets were rolling over anyway. Now sales swiftly decelerate. The financial mood changes as abruptly as the weather. Your spouse get a layoff notice. And you’ve got a mortgage renewal. What now?

Hmm. While the above is fictional, it’s not out there. The anti-establishment, anti-bank, anti-corporate, anti-global, anti-trade, anti-foreigner meme swirling around western society these days is enough to propel a German Shepherd into high office. People do dumb things just to spite others, or to see what happens. This may be one of those moments.

Anyway, what could a mortgaged homeowner whose equity is starting to melt away expect? Did you see the following comment posted here last night from a banker blog dog?

“We started pulling bureaus on all mtg renewals 2 months ago. If your beacon is under 600 you pay .25 extra so this has already started to increase rates only in a very small number of cases but as we begin the inevitable sharp increase in unemployment and losses, the number of mtg renewals needing the extra charge will increase dramatically.

“If you do not have at least 20% equity at renewal time and a good credit score you can be asked to make a lump sum payment to reduce the mtg principal down and/or increase the mortgage payment to shorten the amort, and if you cannot do either, then die. Those dumb enough to have bought with 20 down you will be sent a letter asking to find another lender and you pay a high open mortgage rate until you do.”

Seriously. Have all those Millennials (and others) gobbling up houses and condos over the last three years with 5% or 10% down and mortgages they didn’t lock up for five years considered what might lie ahead? Of course not. Real estate always goes up and makes everybody rich, plus ‘the government’ would never let interest rise because we’d all be screwed.

In reality, your lender has no obligation to renew any home loan once the term expires. Nor is it required to renew under the same terms and conditions. Our banker dog’s quite correct – the institution can demand a lump sum payment, more interest, higher monthlies or slash the amortization period, murdering your cash flow. If this happens during a market correction, you might end up being not only underwater (owing more than the property is worth), but required to find a pile of cash so the mortgage will be renewed – at that higher rate.

And what if you decide to walk?

That’s a really bad idea. Miss a payment or two and the bank will call you. Miss one or two more and you’ll get a demand letter from the lender’s lawyer, telling you to immediately cough up the money, plus some extra for the letter. If you don’t, the bank can foreclose, seize the property then sell it for market value. If that doesn’t cover the outstanding mortgage amount, you’ll be responsible for the shortfall, plus the bank’s costs.

But wait, I hear the moisters cry, isn’t that why we paid all that money for mortgage insurance? To insure us?

Nope. All those premiums forked over by homeowners went to finance insurance which protects the bank against a default. It does not benefit the person in financial distress – who’s still liable for the mortgage amount, plus costs. The lender will come after you first before it files a claim.

(By the way, did you know it’s possible to default on a mortgage even while you’re making payments? If you let your house insurance lapse because you can’t afford it, or skip property tax payments or even let the place run down since you lack the dough to maintain it – you’re likely in default. Check that mortgage doc you never read.)

As I said, the scenario above is fictional. But you can be sure there will be something that comes along which causes Canada’s two remaining delusional housing markets to roll, leading to a meaningful correction and banker repression.

For example, did you see what TD said the other day in its quarterly economic forecast?

“Our baseline forecast is for a gradual softening in overall Canadian housing activity over the next two years. To the extent that yields stay at current levels, or decline further, upside risks to our baseline forecast would materialize.”

Now, combine a Trump win with his repeated calls for the Fed and Janet Yellen to jack interest rates (which will begin happening anyway on December 14th) and there’s something else to worry about.

The point is, the status quo may not be for much longer, if America is Great Again. Just sayin’.