“Interest rates are going up.” Did you catch that? Those words just blew from the lips of the finance minister. Whoa boy. Cue the condo crisis.
That elfin bruiser, F, was commenting on the latest salvo from the Bank of Canada, which is doing everything but setting its shorts on fire to alert people to what comes next. And it’s hard for anyone in government to make this more obvious.
Here’s exactly what the guy said when scrummed by reporters:
“People have to be wise in how they look at things. Interest rates are going to go up. They have nowhere to go but up. So people need to be sure that they can afford higher mortgage interest for example. It isn’t necessary for everyone to have the most expensive house they could possibly buy, maxing out the potential mortgage they could get from a financial institution. In fact, it’s probably easier on people if they do a little less of that and have more cash in their lives…”
There ya go. Parse that. Says F: (a) Mortgage rates will rise. (b) Your monthly could be a bitch. (c) You’ll regret all that damn granite. (d) So if you pigged out on a mortgage… (e) get liquid.
In case you don’t know how Ottawa works, the Bank of Canada governor (Brother blog dog Carney) cannot signal changes in interest rates, lest the bond market swoon and croak. But the finance minister sure can, and is. Because there’s supposed to be a Chinese wall (yeah, them again) between the central bank and the elected government, F can muse on monetary policy without it actually being policy. But it is.
Mortgage rates in Canada will rise before they move in the US. You’d best be ready.
All the reasons why were there in the BoC Review, released some hours ago. You’ve read them here in nauseating detail before. Now they’re being spit out as bullet points aimed straight at the heart of the Canadian middle class.
- Canadians could “experience a significant shock if house prices were to reverse”.
- Crazy housing prices are directly responsible for record piles of household debt. So, lower real estate values equals personal crisis.
- Like the Americans did six years ago (before they blew up), Canadians have been using their houses like ATMs. “The evidence indicates that a significant share of borrowed funds from home-equity extraction was used to finance consumption and home renovation in Canada from 1999 to 2010.”
- Lines of credit backed by homes (HELOCs) made up almost 50% of all consumer credit last year, largely to finance home renovations, a surge from 11% in 1995. That’s smart – borrow from your home to invest in your home. Investing incest.
- Houses need only fall in value by 10% to slash GDP by 1%. Remember, all it took was a 2% decline in GDP to start trashing America.
- House horniness among the property virgins is indebting an entire generation. In 2010, the debt load of a typical household led by people aged 31-35 was $120,000, up from $75,000 in 1999. That’s a 60% increase.
- And, of course, the average family in almost every major city cannot afford the average home.
This week, once again, the warning shots are coming from everywhere. Maclean’s has a cover story on the impending explosion of the housing bubble. Australian web site MacroBusiness has just posted a lengthy piece on the evils of CMHC and the dangerous thing called Canadian real estate. In today’s Globe, business prof and writer George Athanassakos looks at all the things this pathetic blog has been bleating on about and concludes:
“Canada’s high house prices in relation to incomes, combined with record household debt levels and overinvestment in residential construction, combined with a slowdown in demand, will cause a severe correction in the real estate market. This time it is not different. It never is.”
Meanwhile, 80% of Toronto’s teeming condos are being bought by speculators. Our major banks scoff federal rules, giving borrowers downpayments in the guise of cash-back mortgages. CMHC is scraping the bottom of its $600 billion barrel. Personal debt now equals 92% of the economy. Crowds camp all night in February to buy $700,000 houses in a few minutes. And the government warns, warns and warns about what comes next.
How can anyone stay blinded to the reality of the moment?
F may have defined stupid when he pushed through 0/40 and helped ignite a fire he cannot now extinguish. But the little pecker has this right: “have more cash.”
Get liquid. Last call.