Carlyle’s parents sold their semi yesterday. “They should thank their lucky stars, and BMO’s 2.99 special,” he says. No kidding. Boomer rescue. But let’s have a moment of silence for the kiddies who bought.
“Dozens came through to see it over the weekend,” he says of the half-house in the eastern wilds of GTA’s Scarberia. Sixteen years old, and in need of a new roof. Listed at $415,000, sold for $400,000. “A young couple, 20-something, ended up buying the house at 96 percent asking. How can twenty-year-olds afford 400k houses????”
More on that in a minute, since there’s a good chance an era’s about to end.
“Anyways I’m happy for my boomer parents (they needed to sell … Dad is almost 68 still driving rigs, mom almost 65). They are going to live at the trailer in Georgian Bay for the summer and then not sure. I’m trying to convince them to retire and do half the year in a Florida RV community during winter the other half at their trailer in summer. It’s all they are going to be able to afford on their pensions. Whatever equity they get from the house will be used to pay off debt – most of it :(. Basically they have nothing for retirement except government pensions. The words on your blog about boomers ring true to me as I see it happening. My folks are just in the first wave.”
But this isn’t about fool Boomers who blew six decades, putting it all in a house, saving diddly and now must retire to a trailer surrounded by losers. It’s about the fools who come after.
Yesterday this spiritually uplifting blog gave you the latest: federal bank regulators warning of sub-prime lending practices, no-income lines of credit and dangerous condos, while CHMC revealed it’s running out of money. This is big news. Big consequences, maybe.
Now remember the housing bubble is the result of two things. Crazy low interest rates engineered by the government. Plus a federal agency which wipes away risk, allowing lenders to make homeowners out of people too challenged to save. Oh, and that Property Virgins babe realtor’s tube top. Forgot that.
The agency is CMHC and borrowers putting less than 20% down (almost 100% of first-time buyers) must pay a hefty insurance premium. This does not insure them, but rather their lender. So banks can shovel money out the door, secure in the knowledge if their clients default on the mortgage, taxpayers will make them whole. A few things have happened as a result: banks have lowered their lending standards; people with putrid credit get the same low rates as Justin Beaver; and the real estate market’s erupted, resulting in higher prices (and bigger loans).
Something else, too. Banks have been using CHMC to insure ‘conventional’ mortgages as well – ones with a bigger down payment. This makes the mortgages more attractive when bundled into securities, called ‘covered bonds’ which are then sold to investors (does any of this ring a bell?).
Just two banks alone (BMO and Scotia) sold $4.5 billion worth of covered bonds in January, and last year investors snapped up $25 billion of these things – supposedly high-quality, being backed with residential mortgages insured by CMHC.
Ironically, these bonds then help the banks lower mortgage costs, so people can borrow their brains out and force house prices higher (requiring more loans). This is how you get stuff like BMO’s 2.99% fiver which caused such an endorphin rush among the horny.
Still with me? Good. Now we have a problem. Over a year ago CMHC convinced Parliament to boost its insured lending ceiling to a staggering $600 billion – about the size of the federal debt. Seventeen months ago there was $100 billion cushion left. By last autumn it was $60 million and in a few months it will be gone. It means taxpayers are on the hook (between CMHC and the national debt) for more than a trillion dollars. Scarier, CMHC has reserves so small they’d be wiped out if only a small fraction of its high-risk mortgage debtors defaulted.
More immediately, unless CMHC is bloated even further by an act of Parliament, it won’t be able to insure all the loans lusty young buyers and greedy old bankers wish to cover. Kinda like a money drought.
“It may serve to tighten the housing market,” warns TD economist Sal Gulati. In fact, it could do worse. The entire real estate structure now rests on the ability of 20-year-olds without any net worth to buy $400,000 houses from 68-year-old Boomers, thus rescuing them from themselves. It could be history’s greatest wealth transfer. The old guys get cash. The young victims get debt. If things tank, the bank gets the house, the taxpayers get gored.
If Ottawa doesn’t increase CMHC’s ceiling, real estate’s flames will lose their fuel. Prices will tumble and recent young buyers will be in negative equity until menopause. But if hundreds of billions more are added, Canada’s bubble grows more dangerous and the consequences more dire.
What will F do? Odds are he’ll up the ceiling, while restricting credit – eliminating the 30-year mortgage and dropping amortizations to 25 years. That will increase monthly payments for virtually every new buyer. At a time when prices are inflated and local markets volatile gasbags, it will do nothing but hasten, and deepen, the inevitable correction.
Carlyle’s parents may think life in a trailer sucks. But they’ve no idea how profoundly their asses were just saved.
Too bad who’s paying for it.