Stocks surge to a record high, gold falls. So much for Cyprus. Now let’s get back to house horny.
First, F triumphs. The lawn ornament who walks like a man has managed to stare down a second bank trying to spark a well-publicized mortgage war and rope in a fresh load of virgins. The finance minister scared off Manulife from trying to throw a 2.89% five-yearer into the marketplace last week, and now he’s deftly emasculated BeeMO. The bank announced Monday its 2.99 Special will die on Wednesday.
This means you can pretty much kiss off the spring market, as rates rise back to the 3.09% mark. No, it’s not much of a hike and, yes, you can still get 2.74% money if you’re aggressive with most lenders, but any move up is an anathema to housing. Expect sales volumes to continue to badly trail those of last year, with prices to follow – as they already are in bellwether BC.
Why did the elfin deity do this? Simple. The peckerettes know full well where real estate values are heading. They also know mortgage wars appeal mostly to first-time buyers, most of whom have but 5% down. So a price correction over the next year of even a modest 10% would push all of these kids under water, as it would so many people who have turned homeowners in the last two years.
As the US experience has shown, people in negative equity stop buying cars, flat screens and trips to places where people wear mouse ears (Regina is so overrated). The macroeconomic concern is that an ocean of consumer debt combined with falling house values in a country where 70% of families own one, and 65% of the GDP is based on consumer spending, is toxic. So, sucks to your mortgage war. The minister will have none of it.
Is this unfair to certain lenders? Of course. These guys should be aggrieved that they’re slapped down for giving consumers cheap money while banks like TD Canada Trust deceive.
Ever heard of the peekaboo mortgage?
Here’s the come-on from your empathetic, caring lender: “Planning on taking a parental leave, a sabbatical from work, pursuing your studies while working part-time, or finance an unexpected expense? A payment reduction is a good feature to consider.” The TD (and others) allows borrowers to skip a mortgage payment completely, making only 11 monthly payments per year.
Why? Baby time. A new furnace. Or “take a sabbatical from work.” It’s marketed under three headings – Payment vacation, Payment Pause and Payment Reduction. But the result is the same in each case for those borrowers who have not prepaid their mortgages in advance (and who does?).
The portion of the missed payment which is interest (the bulk of it) is capitalized, which means it’s added to the principal amount of the loan. So when you miss a payment (or four) the amount you owe goes up, and thanks to the magic of amortization, you’ll end up paying it back at least twice over.
But there’s more: “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.”
The bottom line: the bank has found a way to reduce annual mortgage payments by about 8%, which effectively reinstates (during a five-year term) the 30-year amortization which F made illegal last July. Maybe he should kick a few groins over there.
Finally, let’s not overlook an important leading indicator of the housing market. And it’s flashing red.
When a few thousand people were asked if they intend on buying a house in the next year or so, an historic number – 85% – said no way. This is the biggest annual increase in negative sentiment in the history of RBC’s annual poll. Three-quarters of respondents blamed changes in mortgage regs which make home loans more expensive (despite cheap rates) and slightly harder to get. This should tell you how fragile a thing real estate has become.
The larger reason buyers are retreating into their shells is fear. Being irritatingly human, people think things that are falling in value are more dangerous that those which grow more expensive daily. For homeowners trying to sell at last year’s prices, this is the kiss of death. Those houses will become more and more illiquid, with many selling only when they’re finally priced below market value.
By the way, the survey also showed half the people in BC think it’s turned into a market for buyers. The fact they aren’t should keep you up tonight.