Buy America, sell Canada. If you’re one of the unfortunate losers addicted to this pathetic blog, you surely remember that. It was the advice here two years ago (repeated often since) when it became apparent the US was on the path to riches, and we were on the road to horniness.
So, we’ve arrived.
We now know this: American interest rates will be swelling, probably in June, because the States differs from me and no longer requires continuous stimulation. The jobs report on Friday nailed it. Almost 300,000 new positions created last month, the 14th month of massive gains, taking the jobless rate down to 5.5%. That’s considered about normal. So the American central bank can start trashing those emergency interest rates in place for the last six years.
The news also spiked the US dollar, diving ours down to 79 cents and cratering gold by thirty bucks. In fact, Canada looks anemic. The latest trade numbers were the second-worst ever, showing a massive deficit as imports swamped exports. Oil revenues alone were off 23%, and with crude back below fifty bucks, this won’t get better soon.
This is a problem. A dithering economy here with people borrowing their buns off to buy million-dollar houses means it’s tough for the Bank of Canada to unhook us from cheap mortgages, or our own stupidity. But as the States powers ahead, with a surging currency and a rate increase, without higher Canadian rates a 79-cent dollar will soon turn into 75. Up goes the price of imports, sandwiching indebted families.
It gets worse, which is why you love reading this blog. RBC now says idiot Canadians took on $80 billion worth of new debt in the past year alone. Guess when most of it appeared? You bet. In the period since the Bank of Canada dropped its key rate in January. This is what I meant yesterday about the perfect negative correlation between rates and house prices.
In fact the bank said as much: “We saw mortgage rates fall in the month (January) to the lowest they’ve been in 10 years. So that may be encouraging some activity to be brought forward in the market.” So while Americans have been creating jobs, we’ve been busy creating debits. Household debt exploded 4.6% in January alone. People owe $1.82 trillion, which is more than the entire economy of Canada generates. Mortgage debt bloated almost 5.5% year/year in the same month as the bank rate fell. Mortgages alone total $1.3 trillion.
Now recall what we were yakking about here yesterday. The subprime mortgage business in Canada is exploding (25% growth in a year) as people borrow second mortgages in the 12% range just so they can raise the 20% downpayment needed to buy $1-million-plus homes with $800,000 mortgages at 3%.
Does any of this sound remotely sustainable to you?
Job creation in Canada has been weak. Even January’s stronger number saw full-time jobs shrink, part-time positions swell and more people become ‘self-employed’. The 20,000 retail jobs erased at the end of 2014 have yet to show up in the stats, along with an even greater batch in the oil patch. When they do, the loonie will likely sink a little further. It’s this labour news that’s got housing consultant and ex-realtor Ross Kay’s shorts in a twist. He’s now making this prediction for Cowtown: “Calgary will see sales plummet, shocking all analysts who thought a 35% drop was all that was coming.”
Speaking of the energy capital of the country, Greg works downtown, and Friday morning had this report as he snapped the picture below: “This parkade was always full by 7am, even a few weeks ago. This morning at 8:15 it had 204 spots empty. Traffic seems lighter in general.”
Of course, YVR and the GTA are not Calgary. But I sure hope nobody in either of the two remaining bubbly burgs feels immune from what’s around the corner. The advent of average million-dollar homes in both cities just underscores what cheap rates and house lust will do to a previously perfectly-fine economy.
Our household savings rate, once above 19%, has plunged to the 3% range. RRSP contributions this year are believed to have dropped by more than half. Our debt-to-income ratio has risen faster than in any country other than bankrupt Greece. Four people in ten live paycheque-to-paycheque and half of us could not get by if we missed only one of them. Family debt levels are higher here now than they were in the US before the housing crash.
America got stupid, got whacked and seven years later has repaired.
What stage are we at? Any guesses?
Last April the realtors’ cartel in Toronto reported that the average detached house in 416, the best place in the galaxy, ever, hit $1,012,172. This happened on the back of the latest mortgage wars, punctuated by the first 1.99% home loan offered in Canada.
After that, prices fell. In fact, they dipped about 12%, perfectly understandable in a city where average incomes remain stagnant and citizens have become nicely pickled in world-class debt. This changed in January, when the Bank of Canada panicked over oil and dropped its key rate a quarter point. Mortgages didn’t change much, but that’s not what people thought.
So this week the cartel announced the average 416 house had regained the level of almost a year ago, to $1,040,018. It issued a media release claiming this constituted “an increase of 8.9%”. The Globe and Mail, easily duped, reported that for the first time ever, “houses in Toronto cost $1 million.” The Financial Post said, “Housing sales across the Greater Toronto Area climbed 11.3% in February from a year ago, helping to push the average sale price of detached homes in the city past the $1 million mark for the first time.” The TV anchorettes piled on, and this week viewers were breathlessly marched through beater houses with slanty walls and pink toilets, told that they are all now worth seven figures.
Meanwhile most families still make about $72,000.
It’s hard to know who to be the most disappointed with. The real estate board for its duplicitous Frankenumbers, including its misleading annual gain stat. Or the big-city reporters who have the investigative talents of foot stools.
In any case, it’s more evidence of a perfect negative correlation between house prices and interest rates. When the cost of money falls, people borrow more and real estate goes up. Without 2.6% five-year mortgages, houses in 416 would not cost $1 million. In any case, this is not what the reporters told us. Instead the news was of a milestone, the start of a new era in property insanity, so you’d better buy now. In reality, it’s the end of a cycle – a perfect head-and-shoulders formation as the million-dollar mark is tested yet again, and will inevitably decline in a similar fashion. This time the chart is rife with danger.
Well, first, houses costing a mill don’t qualify for CMHC insurance. That requires a buyer to cough up a 20% downpayment in order to deal with a major lender. It also means the government will no longer insure financing on the average home, which is interesting. So on a property changing hands for $1.04 million, the down is $208,000. Land transfer tax in Toronto adds $33,800, so with normal closing costs, the buyer needs about $245,000 in real money, plus a mortgage of about $810,000. (Renovating comes extra.)
Most buyers don’t have $245,000, of course. So as prices creep above the level of CMHC insurable-mortgaging, many are being driven into the subprime market. If that sounds scary, good. It is.
Without CMHC backing, loans cost more since the lender is shouldering all the risk. If you don’t have the 20%, you must borrow enough elsewhere to make up the difference, in order to qualify for a decent rate. That’s called a second mortgage, and you’re lucky if you find one today for less than 12%. Of course, this is typically for a smaller amount of money (maybe a hundred grand), while the main (or ‘first’) mortgage can be had to today’s current cost.
Subprime lenders are typically not regulated by the federal government, charge rates determined by competition, not the Bank of Canada, and can decide capriciously not to renew your borrowing when the term expires. The subprime lending market is estimated to have grown by a quarter over the past year.
You read that right. The 12-month growth in Canadian subprime lending is 25%, and while it amounts to less than 3% of outstanding mortgages, expect that to change. Benny Tal, big economist at CIBC, was saying this week that the million-dollar CMHC cutoff limit is leading to a surge in subprime lenders entering the market which, of course, is what happened in the US prior to the crash there. Tal also says he sees more and more families forced to borrow downpayments to buy million-dollar-plus homes, because (a) they don’t have the money and (b) that’s what houses cost.
Weird stuff for an economist to utter. But it gets worse. The banker openly wonders why the feds brought in the rule three years ago removing million-dollar properties from the public insurance gig.
“It’s a legitimate question. Why was $1 million chosen anyway?,” says Benny. “This is probably not consistent with the spirit of what they want to do, because the spirit of CMHC is to make housing affordable for young people.”
Did you hear that noise? F just rolled.