What could go wrong?

Last year over 65% of the money the Big Maroon Bank with The Penguins made on all its retail operations came from – you guessed it – mortgages. But this spring there’s a been a deep, almost shocking, reversal. Listen to what Christina Kramer, head of CIBC’s retail banking, told analysts on a conference call Wednesday:

“We expect there to be an origination decline in the 50 per cent range relative to the same period last year. A year ago, two-thirds of our revenue would be related to our mortgage business and today that’s about a quarter.”

The ‘origination decline’ she’s talking about relates to mortgage volumes, as the bank expects the number of new home loans to plummet by 50%. That was enough to shove bank stock down 1.5%, but shares in CIBC (at $115) are still not far off their high of $123. Kramer’s colleagues were quick to point out that while the mortgage business sucks large right now, other things have perked up – like deposits. What a difference a little bit of extra interest makes, as the risk-averse and timorous listen to [email protected] and plow savings into those brain-dead GICs. It’s amazing how many people become aroused when they can make more than 2%.

So will housing whack the banks? Some people think so. The Big Short guy made some headlines the other day telling investors Canadian financial institutions were ripe for a tumble as the real estate market continues to wobble and possibly fall over. This is a uniquely American view, and based on experience there. As you know, the yanks securitized dodgy mortgages, turning them into AAA-rated investment assets that Wall Street harpies sold to unsuspecting clients. (“Hey, they’re residential mortgages? What could possibly go wrong?”)

The US housing crisis turned quickly into a credit crisis as investment and retail banks swooned when a wave of mortgage defaults turned the blue-chip assets into dung. Wall Street institutions failed and Washington spent (literally) trillions trying to revive the economy and restore faith in the financial system.

So through that lens, Canada looks pretty bad right now. Households owe more money than the size of the entire economy (over $2.1 trillion), 60% of which is in the form of mortgages on houses that may have tripled in value in the past few years. Classic bubble, based on loose credit and cheap rates. Real estate has soared. Incomes have not. So debt has soaked up the difference.

Meanwhile we’ve allowed real estate and related activity to constitute almost a quarter of the whole economy, more than manufacturing and oil put together. With interest rates now rising and serious new credit controls reducing mortgage activity (as the CIBC just revealed), it appears Canada’s banks are sitting with massive exposure to an asset class that can only tumble.

But what about mortgage insurance? Doesn’t Canada has in place a regime that will instantly protect the banks if homeowners started mailing back their keys? Yes, we do, and CHMC stands behind about $600 billion in mortgages. But that’s less than a third of the home loan debt outstanding, and does not take into consideration another $320 billion in HELOCs (40% of which aren’t being repaid).

More concerning is the whole reason we now have a stress test for new borrowers. Big numbers of moisters were getting around the old test in place for people with small down payments by scoring loans from the Bank of Mom. If they could plop down 20%, no test. So no mortgage insurance. No protection for the lender. And banks like CIBC found that while half their portfolios were uninsured, a large number of those borrowers might be sketchy. That’s why the bank regulator freaked, and now everybody has to prove their viability. Which is why mortgage borrowing just fell 50%.

Scary? Hmm, somewhat. Recall that when the credit crisis hit – created by the effects of American house lust – our bank stocks were mutilated. CIBC shares, for example, traveled from more than $100 down to about $40 – a collapse of 58%. Of course, during it all the bank continued to be profitable, and never cut its dividend payment to shareholders. This also proved to be one fat momma of an opportunity, since the bank’s stock has since risen by 175%. Those who know money is best made when the gutters flow red, cleaned up. Some things never change.

So this particular bank has over $200 billion in mortgages, which might concern you. But it also just announced an increase of 25% in quarterly profits, and is making money hand-over-fist. Like the other guys, Big Maroon has expanded its reach deep into the US, and reaps a harvest on everything from credit cards to insurance, wealth management to commercial banking and its retail deposit-taking, among other things. As I explained the other day, the banks want to now be seen as technology companies who have financial operations. Someday there will be no more CIBC branches, as credit replaces cash.

Sure, if this housing market thing comes unglued, investors might panic sell off the banks as they shed perceived risk. That could take much of Bay Street down with it (financials make up 34% of the equity market). In that case, back up the truck. I’ll drive.

Orange crush

Will the Dippers take Ontario? Polls now say the NDP has a shot at winning in a couple of weeks. The so-called ‘Tory Tumble’ is stunning. Just like the way reigning Libs will be punted to the curb – unless people are lying to the pollsters.

What does this mean? Why’s it happening?

If the orange guys get the keys in early June Canada will have socialist leaderships in three of the biggest provinces accounting for 67.5% of the entire economy. Included will be all of the national real estate bubble and (outside of Montreal) every significant housing market. This has never happened before and would constitute a serious move to the left by the electorate.

Interestingly, the Conservative collapse is most notable now in the 905 ring of the GTA, where Doug Ford thought his core support lay. Nope. Seems 36% of those stressed-out suburbanites in their seven-figure particleboard-and-glue palaces say they’re NDPers. Plus, gender politics has come into play. Most men are blue. Most women hate Ford. And everybody wants change.

What would an NDP win mean in Ontario (and the rest of the country)? Here are some highlights, taken from the Andrea Horwath platform:

“We will make housing more affordable to Ontarians with a speculation tax.”

Yes, the worst of BC real estate policy could be coming to Ontario. “Housing speculation and flipping are driving up housing prices,” says the NDP platform, ignoring the real causes. “We will implement a new speculation tax that will not be limited to foreign buyers. It will be based on British Columbia’s Speculation Tax, and will apply in the regions where the Non-Resident Speculation Tax (NRST) applies. While the NRST applies only on sales, our anti-speculation tax will apply annually. It will be targeted toward foreign and domestic speculators who do not pay tax in Ontario.”

In other words, a yearly tax on any non-Ontarian owning property in the swatch of land holding most of the population, regardless of whether they live in Canada or elsewhere. It has nothing to do with ‘speculation’ or ‘flipping’, of course. No impact on affordability. But the rabble won’t get it.

“Andrea Horwath and the NDP will roll back Liberal corporate-income-tax giveaways”

In the same year Donald Trump goosed the US economy by cutting company taxes by a third, the NDP would raise Ontario corporate taxes by 13% – from a rate of 11.5% to 13%. Apparently letting businesses make money so they can expand and hire people is a really dumb idea, since we would all be better off working for the government. The Horwath team would also expand employer health tax premiums plus a business education tax.

“Asking the wealthiest Ontarians to contribute more”

People in Ontario who make a lot of money (over $230,000) already have a marginal tax rate of 53%, which means they give up more in tax than they keep. But that’s not enough. “Ontarians earning more than $220,000 will see their income tax increase by one percentage point, while people earning above $300,000 will see their marginal rate increase by two percentage points.” And they’re going after all those expensive realtor-owned Audis, too. As in BC (the current NDP nirvana), there will be a surcharge – “a modest luxury tax” – on cars sold for more than $90,000.

$15 an hour is just the starting point.

On Planet NDP, the workplace is a battleground between employer and employee – not a place to get along and succeed. So the minimum wage would immediately jump to $15 an hour, then be indexed annually with the cost of living. With modest 2%, in five years the minimum would be almost $17, and meanwhile all full-time employees would be mandated to receive “at least” three weeks paid vacation.

More taxes, more spending. An anti-business bias with seemingly little regard for competitiveness, job creation or productivity. But, we get free drugs. Free tuition. Child care. More government, more overhead. It’s a formula to curl the toes of fiscal conservatives, but (if polls don’t lie) one that most want.

Or do they?

Almost all elections are about change now, not policy. People vote against existing leaders, not necessarily for the new ones. In Ontario (as in BC) the establishment Liberals are held responsible for every woe, from crazy house prices to crappy jobs for Millennials to high energy costs and $1,800-per-month daycare bills. Tory leader Doug Ford, brother of the rebel, crack-smoking former mayor of Toronto, is a scary dude to many people (especially women, it turns out), and his party seems like it would have a hard time organizing a sock drawer. So, bingo, NDP.

You have two weeks to prepare.