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Skin in the game

Thursday, October 6, 2016 17:02
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(Before It's News)


Death by politician. Who would have thought the very governments that (more than anything) helped create gaseous housing markets would be its executioners?

But here we go.

Just four days ago the feds assaulted real estate with such verve it’s taken this pathetic blog three whole days to detail the blood-&-guts specifics. New tax threats on principal residences. Stress tests for moisters. A crisis for mortgage brokers. Tumbling stocks of lenders. No insurance for rentals or entrepreneurs or 30-year borrowers. It’s a long, tough list.

And that came on top of the shocking 15% Chinese Dudes tax slapped on all Vancouver transactions at the end of July. As that market was already in distress, this had an immediate impact. Recent sales charts for August and September resemble Kim Kardashian’s bottom (or so I’m told).

Now the word’s out that Ontario will be following suit, with an announcement scheduled for after the long weekend. The Chinese Dudes Tax, GTA Edition, will also be at 15% (at least that’s the number being put before preem Kathleen Wynne), which would add $195,000 to the cost of the average detached home in 416. Ouch. Already Toronto has double land transfer tax, which glues an additional $44,200 to the price of a $1.3 million beater house.

Yep, government tolls, levies and taxes are outta control. Now there’s more.

The City of Vancouver will be launching a vacancy tax in the new year, hiring an army of bylaw rent-a-cops to snoop around and see who’s actually sleeping in the properties they legitimately bought and own. If the city deems yours to be vacant for an unacceptable period of time then, zap, you’re taxed. Now West Vancouver is going a step further. The city across the water is a week or two away from asking the province for the right to goose its property tax on anyone (Canadian or not) who owns a home there, lives there, but has a principal residence elsewhere.

Yep, that’s right. Two-tier citizenship. And what will the rate be? “High enough to be meaningful,” a local political potentate says.

Hey, there’s more.

A largely-forgotten hunk of the changes dumped on the marketplace on Monday will forever change how Canadians are loaned money, and at what rate. Money minister Wild Bill Morneau has finally pulled the trigger on mortgage insurance, and started a process that will see taxpayers shouldering a lot less risk for that $1.4 trillion mountain of outstanding home loan debt.

Until now CMHC has absorbed it all (along with private sector Genworth) since every high-ratio mortgage in the land (where the borrower has less than 20% equity) must have insurance protecting the lender from default. Borrowers pay for this. The lenders get the protection. The government backs it all. This is called moral hazard.

It means a moister with 5% down that she borrowed from Mom, with no actual savings or, like, money can borrow hundreds of thousands at exactly the same rate as her parents who have a 70% down payment, substantial liquid assets and ten times the income. Since CMHC (and the taxpayers) has wiped away the downside for the bank, it adds no risk premium to any loan. You know the result – a housing bubble based on copious, epic, awesomely orgiastic amounts of borrowing.

Anyway, it’s history. Or soon will be. The bet is by this time next year lenders will be forced to have skin in the game by financing deductibles on all these mortgages they make. That risk-sharing won’t come cheap. Bankers will go from having almost no liability to billions of dollars’ worth, and you can pretty much count on mortgage rates going up in general, and rising specifically for those borrowers who have a higher chance of blowing up.

Morneau’s department made a point this week of saying our system of mortgage insurance, and of totally insulating lenders from risk, is “unique in the world.” The goal, he said, is to “require mortgage lenders to manage a portion of loan losses on insured mortgages that default, rather than transferring virtually all the risk onto the taxpayer via the government guarantee for mortgage insurers.”

In the end, this could be the greatest housing market decimator of all.

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