Peak house

The doubters on this miserable site and elsewhere in the world of ballsy real estate investors can give it up now. We have seen the end. It is called B-20.

The bank cop (OSFI) – as predicted – yesterday lowered the hammer on the residential market with new rules soon to take effect and virtually guaranteed to dry sales and lower prices. They’re also designed to protect the banks, drop mortgage risk and shield us from our own house lust.

The changes will restrict credit by ensuring most borrowers qualify for lower loans. Soon we’ll have a universal stress test, applicable to everyone regardless of how big a down payment they have in their jeans. The minimum rate is the Bank of Canada benchmark of 4.89% or the current rate plus 2%. No escape. Going short or variable won’t save you. Neither will having 50% to put down. And it doesn’t matter how much money the bank of Mom slipped you. If you fail the test you join Russian athletes.

This effect is stunning.

Six months ago pretty much any moister with a skateboard, a gig to McD’s and parental money could slide into a condo with a loan at 2%. Now the effective rate’s 5%. There has been no other year on record in which mortgage rates more than doubled in a few months. If you buy the theory that house prices got stupid because loan rates crumbled, then you know what’s likely to happen now.

The industry knows it. They hate it.

Mortgage Broker, RateSpy founder and industry spokseguy Rob McLister is unequivocal: “This is easily the most groundshaking mortgage rule of all time, and that’s not an understatement,” he says. Paul Taylor, the mortgage industry boss chimes in: “I am disappointed with the decision to implement a new stress test at whichever is greater of 200 basis points above the contract rate or the benchmark rate. The new qualifying rate will have negative implications for the Canadian mortgage finance market and the national economy as a whole.”

Ontario Real Estate Association head, and ex-politico Tim Hudak is ticked: “OSFI’s new stress test for uninsured mortgages is overkill. These changes will hurt middle class families and punish careful savers the most, forcing them to take on more debt and higher interest payments.”

So how bad is it? Are these guys just moaning because their fees and commissions will piddle away? Or is this a market-killer? Too much, coming on top of the foreign dudes tax, the empty house tax, the CRA crackdown on speckers, the universal rent controls and the assault on Air BnB?

It appears to be a game-changer. With 20% down a family that qualified to buy a $726,000 house last week will swing a deal for only a $570,000 place after the test arrives. That’s 21% less purchasing power. It’s what happens when sub-3% mortgages turn into 5% ones. Given the laws of supply and demand, house prices are on the road to a 21% drop over time – and that would be from GTA prices which are already 20% below last April’s delusional level.

So what to do?

First don’t listen to anybody in the mortgage business tweeting this advice: “If you’re in the mood to buy something, GET PRE-QUALIFIED TODAY as these changes happen January 1st (or before).” Sadly, a lot of inexperienced moisters and ill-informed newbies will do exactly that. The slaughter of the innocents. Guts and juices everywhere.

Seriously. If the OSFI Plus-2 Stress Test is going to choke credit and turn a $725,000 house into one worth $570,000 later, why would you rush out to qualify so you can pay $155,000 too much? Just wait, have less debt, pay it off faster and laugh at your cousin who bought in April of 2017 and tried to shame you.

Second, be real careful about the 905 and the Lower Mainland (including Victoria). House lust slopping over from 416 and urban YVR drove prices in the hinterland to the moon in a totally unsustainable fashion, and big declines lie ahead. After all, the burbs are not the city. There will always be less demand, more new housing stock and all the crap hassles of commuting.

Third, if you’re unhappy with your mortgage lender and want to switch, do it now (if possible). You won’t be stress-tested upon renewal if you stick with your bank, but if you switch you must qualify at the brutal level. If the value of your home has declined in the meantime, you could be offside there, too, since a new appraisal will be needed.

Does this mean your existing institution can offer a less competitive rate and [email protected] will snicker a little into her wicket every time you pass by? Duh. Of course. Short hairs. They got you by them.

Finally, can you get around this stressful new situation by going to a house-horny credit union like Meridian or Vancity where OSFI rules don’t apply? For a while, maybe. But the CUs are not capitalized the way banks are and have a finite pool of real estate money to hand out. More likely is that Ontario and BC will do the prudent thing, and harmonize regs. That’ll ensure omnivorous lenders there don’t create huge new credit union risk the provinces must backstop.

In short, could be epic. Hope you got ready. Peak house is so gone.

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Now, what’s this? Has poor Bill Morneau been given a Justin wedgy already, right after yesterday’s media debacle and today’s news about his personal assets? Is crusty space dude Marc Garneau on deck as the new federal money guy? And what’s this big announcement in the morning?

Guess you’ll have to come back here tomorrow. Bring an old sweater or tinned food for Mr. Morneau. Please be generous.

Minister of Transport to Provide Next Steps in Tax Fairness for the Middle Class and Support for Small Businesses

On behalf of Minister of Finance Bill Morneau, Minister of Transport Marc Garneau will provide details of next steps in the Government’s plan to improve tax fairness while fulfilling a commitment to lower the small business tax rate, at an event in Montreal.

A media availability will follow.

Here we go?

Well, get ready. This could be it.

Media Advisory

October 16, 2017

Superintendent of Financial Institutions Jeremy Rudin will be available to the media regarding the release of an important publication, by teleconference at 8:30 a.m. (EDT) on Tuesday, October 17, 2017.

This availability is for accredited media only. Accreditation requests should be submitted to Annik Faucher at [email protected] by 8:00 p.m. today (October 16). The dial-in information for the media availability will be provided to journalists following accreditation.

When the US housing market blew up, taking the middle class with it, some people foresaw the disaster. Hedge fund guy Steve Eisman was one of them. “Things are ripe for a pretty severe correction,” he says. This time he’s talking about Canada.

The ‘Big Short’ player (read the book) is the latest in a string of Americans and others to come here, look around, shake their heads in amazed disgust, and pronounce us pooched. The catalyst, he adds, will be the Plus-2 universal stress test, now scheduled to arrive with the snow (and possibly announced Tuesday morning).

To remind: the regulator (OSFI) is weirded out that banks have huge numbers of uninsured mortgages made to people who lied about their down payments. After newbies with less than 20% down were required to pass a stress test proving they could handle rising rates, borrowers looted the Bank of Mom or got loans from cheesy subprime lenders so they could avoid it. CMHC insured loans fell by over 40% but real estate activity or borrowing did not. It became clear bank risk was shooting higher as a result.

So, OSFI will soon require everybody to qualify for every mortgage at current rates + 2%, regardless of how much they plunk down on a property. Mortgage dudes figure this will reduce overall credit by about a fifth. Realtors fear the same effect on prices. Eisman agrees with me. A slow melt’s coming.

“Canada is not going to crash,” he told a certain pathetic business news network on Monday, “but it hasn’t had a credit cycle in 25 years. I think they’re about to have one.” He also says CIBC is the most vulnerable – no bank failure coming, but earnings will decline.

Seems reasonable. Death by regulation. How Canadian.

Adam Button agrees. He’s a currency analysts and central bank-watcher who argues rates can’t really rise a lot because inflation’s kaput in a world of globalization, free labour movement, Amazon, driverless vehicles, AI and Adele. Besides, if the Bank of Canada were to crank its benchmark rate too much, the entire country would fall apart.

“The pain would be catastrophic,” he writes on a mortgage industry site. “Rates will never rise to beyond 5% in Canada [because] far too many people wouldn’t be able to make their payments. The government’s last round of new mortgage rules was a noble effort to reign in the housing market, but the horse has already left the million-dollar barn. Many borrowers would be forced to sell their homes, and those who could afford to stay would have their spending power cut dramatically.”

So, mortgage rates now in the 3% range have room to swell, but we’re not going to see 2% added. Not that it matters – given what OSFI is planning.

“A two-percentage-point rate increase on a $500,000-mortgage boosts the payment by at least $500 per month. A 5.00% rate on a million-dollar mortgage means $50,000 spent per year in interest alone. That’s a devastating bite out of a household’s disposable income, which is crucial for sustaining the economy.”

So the blunt instrument of interest rates will be laid aside, he argues, in favour of what regulation will accomplish – a slow choking-off of credit that would likely create a multi-year devolving of house values, walking us back from the brink of a US-style nuclear event.

“The Bank of Canada has already gone too far. The two solutions governments are trying first are the two things they always do in a market crisis: blame foreigners and blame the speculators.

“So far the execution has been sloppy, but politicians have sent a powerful signal that they are now part of the equation. So don’t worry about interest rates, worry about what’s coming from regulators.”

What a week. And it’s only started. Justin Trudeau propping up his wavering, deer-in-the-headlights finance guy at a major media event. The feds dropping the small biz tax rate to divert people from the withering new hit to come. More key announcements promised within days. And now the surly bank cop’s regulatory slaughter of residential real estate.

Who needs Trump for theatrics? We have our own drama queens.