When they started trading stocks on Bay Street Tuesday morning the word was out. “Real estate’s pooched,” said a suspender-snapping, Carrera-driving dandy. “It’s risk on.”
Within moments shares in Genworth, the country’s biggest private mortgage insurance company, were on the skids. By noon they’d collapsed a stunning 11%, and barely moved by the closing bell, when the day’s loss amounted to about 10% of the company’s market capitalization. Ouch.
In a statement Genworth had this to say about what happened on Monday: “First-time homebuyers will have difficulty meeting the required debt service ratios and homebuyers would need to consider buying a lower-priced property or increase the size of their down payment.” In fact about half (!) of Genworth’s portfolio of $370 billion in residential mortgages (of the $1.2 trillion in the nation) would no longer be eligible for mortgage insurance, Genworth said, under the new rules popped by money minister Bill Morneau.
“The Feds clearly want to crack the housing market,” lamented trade site Canadian Mortgage Trends, “and they may have finally done it, with a sledgehammer.”
“It seems like the knee jerk reaction is to RUN OUT AND BUY A HOUSE in the next 13 days! That is the last thing I’d be doing right now!” mortgage broker Ryan Kirwan commented to another industry publication. “With this new policy, housing prices WILL fall in the next 2-4 years. Meaning if you purchase a home now with 5% down payment, in 2-4 years’ time, you’ll owe more than what your house is worth! If you do decide to purchase a house, you better make sure it’s a home you’ll be staying in for at least the next decade!”
In addition to making every Canadian prove their house is their principal residence when they come to sell – or pay capital gains tax – the feds have seriously kneecapped the entire mortgage business. This happened just a day before the latest news that the Vancouver market’s falling apart, at least in terms of sales and confidence, thanks to the province’s Chinese Dudes super-tax. The pace of deals was down last month by a third, year/year, after an equally disastrous August. Listings, predictably, are starting to inflate. You can figure out what comes next.
The changes are legion and by Tuesday the impact was hitting home in the bank towers and the mom-and-pop mortgage shops across the country. Most significant is a giant increase in the effective mortgage rate for first-time buyers with less than 20% to put down. Until now the kids could get a cheapo mortgage by agreeing to take a five-year term at a fixed rate (about 2.5%), and thus avoid having to qualify for lending at the far higher Bank of Canada’s fixed five-year posted rate (4.6%). But the week after next, no more. It’s as if mortgage rates went up 200 basis points in 13 days.
In fact all insured mortgage borrowers have to meet that threshold. Worse, mortgage insurance won’t be available if you want a 30-year amortization, or have a rental suite in your house.
“Housing prices will tumble as a sizable minority of first-time buyers and those with higher (debt service) ratios no longer qualify for the mortgage amount they want,” predicts Canadian Mortgage Trends. “Forcing all insured borrowers to prove they can afford a payment at the posted rate (4.64%) will remove up to 15-20% of buyers from the market, say lenders.”
Other predictions making the rounds: the availability of mortgage financing will start to diminish almost immediately in Toronto and Vancouver. While buyers rush to meet the October 17th deadline, many lenders will stop doing deals within a few days. Mortgages with longer amortizations will start costing more – maybe a lot more. That’s a big deal since this is a huge chunk of the business these days. And there’s more speculation the Bank of Canada will cut its key rates since two of the nation’s biggest economic pillars – oil and houses – are seriously under pressure. After having allowed the bubble to inflate so wildly that up to 25% of the nation’s GDP is real estate-related, the ride back down could be painful.
Well, there you go. The catalysts required to pierce an inflated, bilious, dangerous Hindenbubble have been delivered by government. First BC, then the feds and soon (I hear) Ontario. Interest rates did not have to rise. The jobless rate did not have to swell further. The economy did not have to contract into negative growth. All it took were politicians reacting to a situation which government itself created. By offering ultra-cheap money and endless buying incentives to a population devoid of self-discipline, the inevitable occurred. We find ourselves over-housed, over-indebted and naked to risk.
“This market is now toast – too many changes at once,” a Vancouver insider told me hours ago. “Just get the popcorn and watch.”