Entries from May 2017 ↓

Acceptable risk

“But I get 8%,” Jill said, her voice starting to rise on the phone. “And it’s secured. What could possibly be wrong with that?”

Poor woman. The typical mortgage investment corporation investor – older, unsophisticated, afraid of stocks and bonds but who understands interest and has owned real estate. So when she sold her home and needed retirement income she plowed a few hundred thousand into a MIC offering a return six times higher than a GIC and based on an asset she knew all about. Houses.

Of course, being a prick when it comes to bubbles and inflated expectations, I gave Jill the facts.  She’d just locked her precious, never-to-be-duplicated savings into second and third mortgages made to deplorables who didn’t qualify for bank loans to buy property at the most bloated levels in history, with no guarantee.

“B..buu…but,” she stammered, “They’re mortgages. Mortgages are backed by stuff – houses, properties.”

Yeah, first mortgages are, I countered. If the borrower walks the lender gets money back eventually. But not title. The trouble with MICs is they usually lend seconds at crazy rates and aren’t federally insured. Risk drips out of every orifice. Did you not wonder, Jill, why they pay 8% when the bank’s offering 2%?

She hung up.

These days MICs are big business, especially since Home Capital started croaking. Business has been booming for these subprime lenders whose mortgages can easily cost 10% to 12% or more for desperate borrowers the banks have shunned. Immigrants, commissioned salespeople with variable incomes, the self-employed, folks with a blemished credit record or anyone who admits to following this blog are among the walking dead who require such lenders. As Home cuts back on its lending to conserve cash and cling to life, little mortgage brokers (who may sell jewelry or falafels on the side) have been busy arranging loans which are then funded by pools of money from private investors. Like Jill.

Rates are stiff because they reflect true risk. The lousier the credit rating of the borrower the higher the chances of default and unrecoverable loss (especially in a declining market) and therefore the more interest the lender demands (passing it on to the investor). It makes you wonder: in a country where households owe more money than the entire stock market’s worth, with stagnant incomes and diminished savings, why can you still borrow from the bank at 2.5%?  The answer is simple: CMHC.

But there’s no taxpayer-funded monolith standing behind the MICs. If a borrower blows up – typically because a real estate correction puts them underwater and it’s easier to go bankrupt than make payments – the first mortgage-holder will sell the property to recover what it can. The second lender gets the scraps. Or nothing.

As Home Capital reduces its lending and the housing market lurches into a high-listings, low-sales, weakening-prices mode, rates are jumping. And this market is huge – with about $400 billion in mortgages made through subprime lenders now out there in the big cities, mostly in the GTA (Toronto, Brampton, Mississauga). The more borrowers who end up getting their money here, and the more Jills who foolishly fund them, the more risk the entire market is at. We don’t need to have the Bank of Canada spike rates. They’re already ballooning for an army of people.

And speaking of CMHC, word has surfaced this week that mortgage loan volumes have collapsed – at least those insured by the feds. There’s been a fat 41% drop, the agency says, the result of the moister stress test Ottawa brought in late last year, plus higher premiums – and declining real estate activity. You may remember that first-time buyers now have to qualify for loans not at the cheapo bank rate, but the central bank’s five-year standard rate of 4.64%. To get around that there’ve been more withdrawals from the Bank of Mom as parents borrow against their own houses to give down payment cash to their spawn. Yes, debt gifted to the kids so they can qualify for more debt.

All this is worrying people who don’t live here, look at us and shake their heads. Like the dudes at the International Monetary Fund.  Once again they’ve warned our housing market is unsustainable, point to the recent downgrades of Canadian banks as evidence, and say governments (like those in BC and Ontario) who blame foreign buyers are probably misguided. Far better to replace such discriminatory, xenophobic taxes with measures to curtail speculation, they say.

So, it’s all about risk. Borrowers buying into a declining housing market are embracing it. People like Jill who fund subprimes are swimming in it. Systemic risk bubbles higher as the mortgage pie gets less insured, less regulated. And now governments are certain to make the outcome worse.

As yesterday’s comments showed, that’s on you.


Despite squawks from the dippers, lefties, commies, shrub-huggers and whale strokers who read this sustainable yet Harley-riding manly blog, a few words to BC:

You’re screwed.

According to the chief economist at Alberta Treasury Board Financial, where they know lots about poochedness, our strangest province has allowed a stunning 40% of its GDP to be dependent upon residential real estate. This makes sense since (we’re told by the BC public worker’s union) virtually 100% of detached houses in Van are now ‘worth” at least $1 million, with close to half  sheltering blinky, pale mortgage-busters called ‘tenants.’

For context, about 20% of Canada’s total economy is house-dependent – and that’s a record. The most since numbers were gathered. This is beyond the 15% of California’s economy that real estate represented before the market blew up forcing the bankrupt state to issue IOUs. In short, it’s historic, unprecedented and emblematic of how speculative and delusional most BC residents have become. Now, with a bevy of eat-the-rich politicians about to swarm into the wheelhouse, the result seems predictable. Economic torpor, then a slow descent. But maybe I’m wrong. It might be fast.

The coalition of Dippers and Greens seizing power in a bloodless coup appears unified on a strategy to destroy real estate equity. First, they’ll double the Chinese Dudes tax, from a merely punishing 15% to a death-spiral 30%. That will send a strong message to the world that no foreign investment is wanted in BC. Genius.

Second, the tax will be extended across the entire province, and no longer just apply to YVR. So long, Victoria.

Third, there will be a capital gains tax introduced on real estate profits for people who have lived in a house less than five years, starting at $750,000. Once in place, of course, the time can be shortened or the ceiling reduced to capture more and more gains. And what government would ever eliminate that cash cow?

Fourth, a big jump in property transfer tax. No, a b-i-g increase seriously punishing people who live in semi-nice houses worth a couple of million or more. In fact by the time the $3 million mark is achieved, the tax would be equal to 12% of assessed value. Yes, that’s $360,000. Yikes. Look for values to suffer at the top end of the market.

Fifth, punishment for people who own more than one property for investment purposes with an annual tax equal to 2% of the property’s value, or $2,500 a month on a $1.5 million unrenovated butt-ugly, 50-year-old Vancouver Special. The tax will remain in place until the owner’s income is verified.

And meanwhile tenants will be subsidized with rent controls and a cash payment, while the province foots the bill for building 114,000 ‘affordable’ houses.

Does anyone seriously believe the real estate market can withstand this? On top of the slew of federal initiatives including that mortgage stress test for moister buyers, plus the looming collapse of Home Capital, the largest non-bank lender?

At the heart of the socialist view of the market is that people have a right to real estate, not just shelter. They do not. It’s also an assault on property as an asset class, plus a way to create de facto wealth redistribution and (natch) raise the millions and billions that will be required to fund subsidies and enhanced social programs. Perhaps this is exactly what BCers want. Somehow I doubt it, since so much of the huge equity families now have in their houses (many people’s entire net worth) is supported by an epic level of debt. Governments can easily, quickly – in an ideological fog – pass laws to destroy equity, but they’ll never reduce the borrowing. So, be careful what you wish for.

Enough about BC. We all want to talk about mighty Stouffville, instead. At least Tom does, who lives in this once-hot, hot, hot bubbly burb north of the Big Smoke:

“Been watching closely and collecting sales data using free (admittedly grey-market) tools online charting sales.  In my neck of the woods I’ve charted a complete collapse in weekly sales.  In late March we had more than 20 sales/week, and as of a couple days ago, we’re down to 1-2 sales/week.  Amazing.  Attaching my sheet for your reference in case you wanted to use any of this in your blog.  Stouffville is the 2nd highest sales decline in the GTA (after Richmond Hill) and the public number is 60%, but from my numbers it’s looking more like 90%.. Prices to follow?”

You bet, Tom. Thanks for letting BC know what’s coming.