Us & them

This week (Wednesday afternoon) the feds’ economic update will crow about a lower-than-forecast budget shortfall, take credit for more jobs and growth and outline further ways to eat the rich. It will not promise to lower taxes, balance the budget or give you a pony. And it may be one of Bill Morneau’s last times on his feet as finance guy.

The multi-millionaire whose web of personal holdings shields him from the taxes he’s whacking others with is becoming a liability to Justin Trudeau. He threatens to taint the whole gee-shucks, ‘middle-class fairness’ meme the federal Libs secured power on. He reminds people the prime minister himself inherited family wealth and is a 1%er. Just like Bill. Meanwhile most citizens fret about debt and think about Sears.

On Monday a good reminder. A shocking one, actually. What a mess people have wormed themselves into. How can government ever solve what the Ipsos survey reveals?:

  • If interest rates rise 40% say they’ll be in trouble.
  • A third are already hurting, after a mere 0.5% increase
  • 42% reveal they can’t cover basic expenses over the next year without taking on more debt.
  • Four in 10 are within $200 of not being able to pay monthly bills
  • 38% of Millennials believe higher rates will bankrupt them
  • If rates swell, 70% assert they’ll be more cautious about spending.

Yikes. So the Bank of Canada’s now scared off from more rate hikes until early in 2018 – in large part because of B20, the NAFTA snafu, fading trade numbers and appalling levels of household debt. Meanwhile the Fed is 80% certain to raise the US benchmark in a few weeks, which should elevate long-term Canadian mortgage costs – just as the stress test takes effect.

So the gulf between the indebted, stressed-out, cashflow-challenged middle class and the entitled political elite yawns ever wider with each Bill Morneau revelation. (The latest is that he continues to receive over $1 million yearly in dividends and cash flow from his family biz – which excels in tax avoidance – while he serves as finance minister.) The rhetoric of increasing taxes on doctors, vets and job-creating small businesses is hard to swallow after the last few months.

In the House of Commons (which nobody care about anymore, alas) poor Bill is sliced & diced daily by the opposition. The fact he’s taken two years to put his assets into a blind trust, owns stuff (in Canada and offshore) within at least a half-dozen numbered companies, and practices aggressive tax avoidance displays stupidity or arrogance. Neither is a winning trait for a politician. Image is reality, after all. At this point Bill’s profile is of an out-of-touch monied elitist dude who’s telling the self-employed to eat cake.

It’s okay to be rich, of course. Trudeau is, having inherited millions. Morneau owns over $40 million in assets. He’s married to a billionaire family member. Lives in a mansion. So does Justin. That’s all cool. What hurts in politics is when you stop being one of ‘us.’

That’s how people get elected now. Us against them. Trump used it masterfully. It created Brexit. Catalonia. The populism that Angela Merkel fought. In Canada Justin Trudeau seized power from Stephen Harper by painting the Cons as them – the guys who forgot about your struggles, who spent more time worrying about rich buddies and their own skins than yours.

Hence the middle class theme that’s rammed through all government communications. It justifies a 53% personal tax rate for the wealthy, a 73% Hoovering of retained earnings, gutting of the TFSA limit and portraying the self-employed and professional class as serial tax cheats. Clever. Us good, them bad. And it almost worked.

But it’s not just about poor Bill, who was sabotaged by his own political staff and the weenies in the PMO. It’s more that the plan ain’t working. There’s no further proof required than that Ipsos poll referenced above.

If those numbers reflect the country as a whole, the middle class is in reverse. When four in ten families are within a few dollars each month of being insolvent, need more debt to get through the next year or would be bankrupted by a 1% rate hike, the government is failing them. Politicians have been real estate pimps. This is what you get. A home ownership rate of 70%, epic debt, and a middle class without cash.

The answer to helping the masses is not to shred the economic achievers among them. People need more incentives to save and invest, not to borrow and spend. If it’s not already too late.

It’s hard to comprehend such things when you’ve never struggled, started a business or had a mortgage. This is why Bill Morneau can’t last. He’s fake news.

Dream on

Another big week for poor Bill. More on that in a minute.

First, the B20 bomber and the much-misunderstood stress test. Will this new level of federal intervention in the horny housing market really make a difference? Critics, doubters and scared realtors are bravely saying, no. People will just go to credit unions, they say. The banks will get a round it by extending amortizations. And meanwhile scads of moisters are rushing to get pre-approved at pre-stress rates so they can accelerate a buying decision while prices remain lofty but rates remain low.

It’s important to understand the banks want this. And they provide more than 90% of Canadian mortgage financing. Increasingly worried about risk, they’ve been encouraging beggarly and prickish appraisals, beating up on self-employed people and untrustworthy commissioned salesguys and adhering strictly to debt servicing ratios. But they want more. They seek a way to be shielded from buyers who got a Bank of Mom down payment to avoid CMHC insurance and the existing stress test (which they’d fail). So B20 is it.

Says BMO: “This will have a significant dampening effect” on the housing market. “It will dampen the housing market in 2018, probably more significantly than we saw (with) the earlier federal measures.” This is also what bankers desire. Mortgage growth can slow and they’ll make billions. If existing loan portfolios can be rendered safer over the years to come with a universal +2% threshold, that’s good for profit stability and shareholders.

Recall this, too: B20 means anyone with an existing mortgage who wants to switch lenders must go through the testing process, as well as meet LTV (loan-to-value) guidelines. So if you got laid off, have a spouse on mat leave, are going through a divorce or saw your real estate decline by 20%, it could be bad news. The bank regulator has just given a significant reason to never, ever, ever, ever change your lender. So is your bank going to make you a super offer upon renewal to keep you as a client? Dream on.

As for getting around B20 by taking a 30 or 35-year amortization so monthly payments are lower, and thus the income required, no real rescue there. Anyone with less than a 20% down payment is required by law to apply for and be granted CMHC mortgage insurance (which costs a bundle) and cannot have an am of more than 25 years. People opting for a longer period will obviously be red-flagged by lenders. More significantly, if OFSI (the bank cop) sees leakage thanks to a flood of longer amortizations, it will act. Meanwhile you’ll be left paying way more interest. Bad idea.

Credit unions? Seriously? They’re minor players in a world of lending behemoths, thinly capitalized and in no position to substitute for the Big 5. Besides, outfits like Meridian and Vancity already pose big real estate-related risk to Ontario and BC, and you’ll likely see those governments opt to streamline CU regs with those of the feds.

The biggest threat B20 poses is to reduce the amount of available credit by 10% (TD’s estimate) or 20% (the mortgage industry guess). As mentioned here last week, it could mean a family shopping for a $725,000 house today will have to reduce their target to $570,000 after the test (which will be in place at most banks within three weeks). So if you have a $725,000 house to sell, guess what? You may now have a $570,000 property if you want to find a buyer. The feds (and the banks) are trying to walk back real estate valuations in a measured and sustained fashion, to reduce speculation, restore affordability and prevent the inevitable hard landing if nothing serious transpires. Besides, while B20 may reduce the size of new mortgages by up to a fifth, it does nothing to diminish the banks’ existing portfolios. It only trims risk.

What to do?

Don’t believe the crap being circulated about B20 being gutless or flawed. There will be no escape from its effects. By the way, you can thank all of the people who cheated after the moister stress test was brought in for insured mortgages. By getting down payments from family or subprime lenders, just so they could avoid the test (CMHC-insured loans crashed by 40% as a result), they forced OSFI to hammer down on everyone. Thanks kids.

Don’t bother getting pre-approved, either. Mortgage commitments are good for 90 days and only a fool would rush out and buy between now and the end of January. If houses could lose 20% of their value over the next year or two as credit is reduced, why on earth would you do this? So you can have lower payments on a house that just ate your equity?

Of course most Mills don’t care about debt, only payments. So look for another pop in condo sales in the next ten weeks. Then next year they can flood on here and complain about how they’re shafted.

Wow. At the bottom already. We’ve leave poor Bill until tomorrow. Talk about being screwed…