Entries from January 2019 ↓

Us & them

Politicians. Used to be one, of course. Learned a lot. (a) You’re most popular on the day of your election. After that it’s a steady fade. (b) People rarely vote for you. They vote against the other guy. (c) Talk about ‘us’ and ‘them’ a lot. It always works. (d) Tell people what they want to hear in order to get elected. Then perish in the consequences.

Which brings us to Jason Kenney, who will doubtlessly be the next premier of Alberta. I know Jason. He’s talented, aggressive, opportunistic and cunning. He came to Ottawa as a young, lean, tax-fighting vigilante. He left as a corpulent, Harper ex-minister and Commons bully. Then he reinvented himself, ascending to the leadership of the equally reinvented AB con party. Next an election. Then the mantle from Premier Notley who, as Dippers go, stays in her lane

Well, let’s flip to the annual meeting of the Calgary Real Estate Board this week, and Kenney’s epic speech. He followed (c) and (d) perfectly, trashing the mortgage stress test and telling the desperate, sales-starved agents it was all Ottawa’s fault.

Ensuring homeowners in Calgary or Edmonton can handle higher interest rates, he cried, is “an unfair attack on Alberta home ownership. One of the reasons why homes are less affordable in Alberta today is because of unfair rules imposed by Ottawa to deal with the overheated real estate markets in Toronto and Vancouver. We did not have a risk of overheating . . . Ottawa  has taken out a bazooka rather than a fly swatter to deal with this problem.”

The realtors lapped it up, of course. The housing market in Cowtown has been in a steady decline, with prices dropping annually along with sales levels. The local real estate board has identified the real cause: job loss. “The main factor is really that job market,” says its chief economist. “We continue to struggle with high unemployment rates, we are not expecting to see a lot of job growth, and that is weighing on our housing market…”

But Kenney would rather blame the East, and make Albertans feel victimized. It’s good politics. But is the stress test really unfair in markets outside of the GTA or the LM?

The purpose of the B20 test is simple. To reduce banks’ risk by preventing people from buying real estate they can’t afford. Since mortgage rates have steadily swelled from historic lows, and people will be renewing at higher levels, the test seeks to ensure they can handle the load. Especially in Alberta.

Kenney’s voters, as it turns out, carry more debt on average than any other Canadians, and most of that’s in the form of mortgages. Next in line are BCers, followed by Ontarians. Albertans also spend the greatest amount of their incomes, according to RBC, on servicing their debts – making them the most vulnerable to higher rates.

Who’s most in debt? Alberta tops the list

Making the squeeze more acute: homeowners in Alberta have taken out the greatest number of short-term mortgages. “While the proportions of variable versus fixed-rate loans don’t vary dramatically across Canada,” says the bank, “18% of mortgage borrowers have terms of two years or less in Alberta, which is by far the highest proportion in Canada.” That means more renewals to today’s higher rates by people who actually have the most debt and the biggest debt-servicing costs because (logically) they spent too much on real estate.

More from RBC: “The fact that Albertans—along with British Columbians and Ontarians—carry the heaviest debt loads on a per household basis in Canada inherently makes them more sensitive to interest rate increases. Their debt-service bills will get bigger, and possibly sooner than elsewhere in the country, when interest rates rise.”

So why should they be exempted from a measure to reduce borrowing, when they have already borrowed too much? Will more borrowing make anything better? Other than realtor commissions?

But wait. It’s about votes.

If fact premier-wannabe Kenney says, if elected, his party will work with credit unions “to help Alberta buyers sidestep the rules”. While the stress test only applies to federally-regulated lenders, many provincially-controlled CUs have adopted it as a prudent measure.

So, that’s the lesson for today, kids. People wanting your support will insist you’re being screwed, that someone else is responsible, and only they can fix it. It might be the Russians, the Chinese, migrants, tree-huggers or Ottawa. But it’s never ourselves. We’re just victims. It’s them. Not us.

Vote for me. Hold your nose.

The desperate

Nobody actually knows how many families are being driven into the rapacious arms of the sub-primers. But it sounds like lots. And what a price they’re paying.

For example, a report out of Calgary this week cites 6,000 applications being made to a single MIC (mortgage investment corporation), with people desperate to borrow funds at rates ranging from 8.5% to (shudder) 15.5%. This suggests that while traditional lenders (the banks) see their originations shrink dramatically, a torrent of people they reject are ending up taking money from the alt guys at a cost which is crippling. What a cruel price our house lust is extracting.

It’s not just oil-plagued Cowtown, either. The alt guys are everywhere. They abound in Vancouver, and in Toronto this is the fast-growing segment of the lending market.

MICs are private lenders, unregulated by the feds, not subject to the stress test requirements and specialize in funding people the banks are afraid of. The money they hand out typically comes from wealthy individuals willing to accept the risk involved, or individual retail investors who salivate at a higher rate of return and have no clear idea how dodgy this can be. Sadly, most are retired, older and conservative. They would never dream of buying blue-chip, dividend-paying stocks but happily accept interest from residential mortgages, thinking it’s a far safer asset. Wrong choice.

Alt lenders specialize in funding people with lousy credit, between jobs, unable to renew a bank mortgage or who want to buy real estate and can’t pass the stress test. In return for upfront fees (a grand or two) plus an interest rate two to five times higher than at the bank, they get the loan, typically with a short term of a year or two. For these families, MICs can be a godsend. Without the cash, they might lose a home, be unable to consolidate debt or restructure their lives. But the rapid growth of the sub-prime lenders is clear evidence of the financial mess so many people are in.

It’s also testament to B20, the stress test. By reducing the amount of bank credit by about a fifth, this has crushed a lot of people at the lower end of the wealth spectrum, or who wrestle with job loss. Obviously, those numbers are growing, and CMHC is now trying to determine by how much.

A question: should people in financial distress be given mortgages at crazy costs? Would it be better for them to lose their real estate, and escape this incredibly expensive debt? Is it ethical for retired, old people to suck off 8% returns from MICs on funds provided at usurious rates to desperate families? Just asking.

In BC the MIC business hasn’t even been regulated by the province – until this week. But it will take another year to impose even this gossamer level of oversight. Meanwhile the federal government has in recent days thumped the idea that it will be extending the stress test to the alt landing business.

You will recall such a move was suggested a week or two ago. It threw the mortgage industry into a frenzy. A widely-circulated Reuters report said flatly that fed officials were actively considering ensuring all borrowers – from all lenders – could afford to pay 2% more than their contracted rate. That’s bad enough when the mortgage offer is 3.7%. But when it’s 9.5%, this is slaughter.

Anyway, false alarm. Bill Morneau says it ain’t happening, which is more consistent with his recent assertion the T2 government is about to make it easier – not harder – to buy a house. Especially if you’re a needy Millennial. That had led to speculation the stress test would be capped, the home buyer credit goosed and 30-year ams make a triumphant comeback. So all that may still happen, ether in the coming federal budget or the election campaign.

And speaking of the big picture, here’s a warning. Pessimism among business leaders has jumped and optimism slagged, says a new survey. At the end of 2017 almost half of these guys were bullish on the future, but by last month that had plunged to just 26%. Mostly they fret Trump’s nationalism will sideswipe our economy. Hmmm.

The boss worries about the economy. The worker gambles all on a house. One of them is nuts.