Four weeks ago at Scotiabank (and others) you could take home a five-year closed mortgage for 2.89%. This week it’s 3.19%. Yeah, still cheap. But things are changing.
Yields have been creeping up in the bond market, which is hardly surprising. With double-digit returns so far this year in equities, money’s flowing out of government securities, bringing prices down. And because banks finance fixed-rate mortgages in the bond market, bingo, up she goes.
So the Big Bank in Ottawa doesn’t need to change its own rate one sous for the cost of home loans to rise, as they are now. This is something nine in ten realtors don’t understand, as they cling to the myth that emergency rates are now permanent.
Also in the air is a new round of tightening, almost invisible. As I told you a few weeks ago, 30-year mortgages, even with 20% down payments, will be eliminated entirely this year. The effect is to raise mortgage payments and reduce sales by up to 10%. And the bank cop, OSFI, has been crawling up the butt of major lenders, pushing them to quash risk and make borrowers jump through new hoops.
As one senior bank lender put it in an email to realtor clients this past weekend:
“What this means to me is…. (1) It is more important than ever that your clients are “future proofed” with their mortgage…..a customized strategy to prepare them for the eventual rate increase they will inevitably face. (2) documentation requirements and due diligence on the part of all lenders has gotten tighter recently, as a result of OSFI audits being conducted at all lenders…..and we should not expect this to change any time soon….. getting a mortgage now….is not as it was 3 years ago….so we need to work together to align client’s expectations as to the paperwork that may be requested.”
Why’s this happening?
Simple. The feds know what’s coming. They’re getting ready. It’s why F intervened in the mortgage business several weeks ago, forcing BMO to abandon its 2.99% Special early, and preventing Manulife from marketing a product with an even lower rate. It’s why that 30-year loan is marked for death, and why teams of OFSI inspectors have been blowing through the mortgage departments of the monster banks.
Ottawa won’t use a Bank of Canada rate increase to topple the overheated real estate market, because that would be just too nuclear. Instead, it’s bubblicide by stealth – a suite of actions now starting to seriously scare some observers. One of them is the association of mortgage brokers (CAAMP) which recently made headlines by claiming F’s recent changes will erase 150,000 jobs over the next few years and carve a hunk out of the economy.
This is dramatic, but not extreme. Already construction starts have been scaled back sharply, and the mortgage business sucks. As spring fades into summer, housing sales will continue to slow, just as the feds tighten the screws further on lenders. It’s all heading for what F hopes will be that soft landing, allowing interest rates to stay low enough to breed economic recovery, but without fuelling the credit bubble he’s created.
However, it won’t work. Ottawa may have cut the market off at the knees, but it missed the castration.
Here’s Vince. He has a good example of why we’ll hit the wall:
My brother listed his 1 bedroom condo for $340k – pretty reasonable. South of the 401, just off Yonge. Place is fully staged — and it’s quite obvious that it is. (I almost think this can work against you in a down market because people think that you needed a stager to sell it.)
The buyers didn’t have an agent and decided that they wanted to meet in person to present an offer. First offer: $303. At this point, I should have told my brother there’s no point ‘negotiating against yourself’, i.e. if the offer is so low as to be unreasonable, it’s not a fair starting point.
He was furious, and made the only reasonable counter he could: $338. Second offer: $319 (still $20 under original ask). My brother countered with a final offer of $329.
The buyer came back with a whopping $320. (yes 1k over the previous offer) And my brother told them to piss off. Either these potential buyers are brilliant, or they read your blog, or both. Anyway he has had very few bites, even at what is a reasonable price. It’s rather concerning.
What’s concerning is the existence thousands of sellers who think just like Vince’s idiot brother – that they should get 2011 prices in 2013. They don’t get the concept of ‘market price,’ in other words a valuation determined by a complex set of factors including affordability plus supply and demand. We’re a nation of housing junkies, believing every seller is entitled to a profit, 100% of the time, because real estate always goes up.
Vince’s thick sibling actually turned down an offer which was 94.1% of the ask. Now he has no other prospects, and will probably end up selling in July or August for less than the paper he threw away. I’ve seen this happen over and over again in the last year.
It’s the human reason sales fall far in advance of prices. Real estate entitlement is endemic. We’ve all turned into greedy little Brad Lambs convinced owning a house or condo bestows the right to windfall gains. It will take some pain and fear to change that. And, of course, it’s coming.