Entries from June 2018 ↓

No pants

When the US real estate blew up a bunch of the blame was heaped upon lax lenders and, of course, their idiot clients. Lots of people borrowed more than they could ever repay, banking on ever-higher house prices to save their butts and make them rich. It worked for a while. Then disaster.

One fav was the IO mortgage. By making interest-only payments, reducing the actual debt by nothing, people could buy more house and stomach the monthly. Of course, if property values went down (which happened – American real estate declined an average of 32%), they were toast. As a result, these kind of loans are largely extinct.

In Australia, same deal. Soaring real estate costs and a unique down-under form of house horniness encouraged scads of people to take out IO loans which (by law) have to roll over into regular ones (principal payments required) in three years. This year a massive $360 billion in such loans will roll, jacking ownership costs and leading to more downward pressure on prices. (Ozzie RE is a mess.)

Well, we now have an IO mortgage here in the land of maple, where mighty condos grow. It’s the creation of Merix Financial, a company that likes lending to people with dinged credit, unstable jobs (like bloggers) plus speckers and flippers. A few days ago it unveiled a product that will finance real estate with loans of up to $2 million, complete with 30-year amortizations and no-pants payments for mortgages of 65% of less of the property’s value.

Of course, you make monthly payments but never pay the loan off. So, if the property loses value (as is happening in most places), it’s easy to end up owing more than the place is worth, even after making years’ worth of payments. Plus, it’s a demand loan. If (say) Trump invades Hamilton and tells T2 to get stuffed, precipitating an economic crisis, the lender could tell you to pony up. Do it, or lose the house.

But the benefit is obvious. Cheap payments. If you’re not retiring the loan, but merely servicing it, the monthly is lower – even if the IO interest rate is higher. So, who would be attracted to such a thing?

The likely clients are: (a) people who want to buy houses they can’t afford. For them the 30-year am plus the no-repayment feature means they can carry a loan for less – hundreds of dollars less a month. (b) Investors acquiring rental properties with the ability to deduct interest charges from gross revenues for tax purposes. (c) Speckers, flippers and renovictors who want cheap financing and know they’ll be dumping the real estate in a short time. (d) Those who would rather use the extra cash to feed their investment portfolios than plow it into more real estate equity, for no return. (d) Folks with unpredictable incomes (like realtors) who want the ability to throw money at a mortgage when they have it, but otherwise just scrape by.

So, is this a good thing? Or evil?

Depends, naturally. Interest-only loans certainly have a place and a purpose, allowing you to rent a pile of money while keeping costs low. This works best for investing, when the cash can be shoveled into income-producing assets and 100% of the carrying costs are deductible from taxable income. That’s the big idea behind HELOCs – home equity lines of credit – which allow those who have too much of their net worth in real estate to suck a bunch off and put it into things that will grow (like ETFs). On the other hand, when the borrowed money is spent (not invested) the interest must be paid with after-dollar dollars, and the debt remains.

Given our stupid real estate values, strained household finances and the horrible state of moister finances, it’s likely Merix is really targeting house-lusty couple who couldn’t afford to sate their inflated housing expectations with a normal loan. Yes, they still have to pee in a cup and pass the stress test, but the lower monthly payment allows a much bigger borrowed amount. In fact, Merix may just have found a way around B20, right?

By the way, the odds of higher mortgage costs in two weeks shot up again yesterday. They now stand at 70% after the Bank of Canada’s Stephen Poloz told reporters rates will climb despite Donald Trump’s one-man trade war because the economy’s heating and inflation mounting. “We’ve said clearly that, given where the economy is, we’re in a situation where the economy will warrant higher interest rates,” said Poloz. That seems straight-up.

The decision arrives July 11th. This will be the fourth increase in 12 months. The Fed has moved six times in 18 months. There’s much more to come. Which is why we now have interest-only mortgages. But perfectly safe, like weed.

Me first

Will they do it again in a few days? The odds were slam-dunk a couple of weeks ago before the latest Trump trade tantrum that rates would pop. Now? Meh. Not so sure. Chances are the Bank of Canada will add a quarter point on the 11th, but reluctantly. Because our nation is at more risk today than in decades.

Seriously. You should pay attention to this.

So much has changed in scant months. NAFTA was busily being negotiated during the winter. Now it’s likely paws up. Real estate markets – a major piece of the country’s economy – are being leveled by the stress test. Consumer confidence has fallen sharply as the trade war develops. Our prime minister was called cheap and dishonest by the world’s only omnipotent leader. The currency has lost ground. Household debt continues to rise. Our steel and aluminum industries have been whacked hard. And now the biggest blow appears to be coming.

Meanwhile the news people are talking about? Weed. Legal in October. Molson says it’s planning a weed-infused beer. Ottawa is reportedly ready to approve not only pot plants in your bathroom, but also your backyard. Provincial governments are planing to become drug pushers with new retail outlets. Rome burns. We fiddle.

Anyway, the White House is expected to decide in a few weeks whether or not to slap a 25% tariff on cars made in Mapleland which are then shipped to the States. At stake are the jobs of some 120,000 souls – good ones, generally with high wages, decent benefits and above-average pensions. The auto trade tallies about $62 billion in trade between the two countries. That’s 15% of our entire exports (oil is 20%), accounting for a fifth of all production jobs in Ford Nation.

Trump’s tariff would be a fell blow to everyone. Immediately affected would be the car manufacturers, dealers, parts makers, retailers and transport companies. As production was drained off to America, the job losses would be relentless. Then, of course, we’d all pay more for vehicles. Potentially a lot more, as the entire production chain becomes less efficient.

A report by Moody’s this week also made it clear Trump could be blowing off America’s nose to spite its face. GM and Ford, for example, depend on Canadians and Mexican-made cars (and especially trucks) to satisfy US domestic demand (up to 30% of it). So Americans will pay more, too.

“Both manufacturers would need to absorb the cost of scaling back Mexican and Canadian production and moving some back to the U.S.,” Moody says. “They would also probably need to subsidize sales to offset the tariffs for a time, with higher costs eventually passed onto the consumer.”

The idiotic, destructive, expensive, protectionist, America-first Trump move would not just kneecap Canada. Toyota sends over 20% of its cars to the States. For Nissan it’s 30% and 70% for those awful Kia guys. At a stroke, imposing such prohibitive tariffs on vehicles so integrated into the global supply chain would cause a form of industrial chaos unseen since the end of the last World War.

However, it may be coming.

If that’s the case, the currency could well weaken further, especially if the BoC signals on the 11th that it’s turning tail. A US$ now worth $1.33 in Canadian Tire money might be closer to a buck-forty before you know it. I hope you heeded the advice here, often repeated, to have at least 20% of your portfolio in American-denominated assets.

The carmakers will suffer, obviously, so expect that to be reflected in North American equity markets. Investors hate trade wars because they increase costs, decrease efficiency, diminish corporate profits, fuel inflation, dampen economic growth and cost jobs. They’re not good, nor easy to win. Those who profess such things will be proven as wrong as they are dangerous. Just ask the boys at Harley how this is all going for their business.

On Canada Day our country will retaliate against the US with tariffs on billions of dollars’ worth of American goods. That means you will pay more to buy stuff, without earning any more or having your tax load reduced. No benefit. Just more cost. At the same time, we grow closer to losing a slew of jobs and seeing one of the most successful international relationships in the world shredded. That’s what a trade war means.

This week a movement began in the US Senate to restrict a president’s ability to impose tariffs, allowing one man to ignite a global meltdown, affecting humanity. That’s in case an unstable despot ever achieves the White House.

Oh, wait…