The crisis

When egghead Sal Guatieri crunched some numbers in his office in the big, white Toronto bank tower, it was a shock. He recovered, then wrote this to bank clients wondering about the Vancouver real estate market. “The monthly drop was more than double the second worst one on record,” he shared.

And that says it all. Almost. There’s one piece missing.

Guatieri was looking at the collapse which hit YVR in August, the first full month after BC slapped its hasty 15% tax on Chinese Dudes. Of course, sales for detached houses had been crumbling already for a couple of months, so the levy was all the braking needed to bring things to a shuddering halt. Not only did the number of deals tank, but so did prices – down 19% month/month, and turning the yearly change negative.

Last month, no rebound. Sales were 32% lower than a year earlier, and off almost 10% from the prior month. Again, this was totally the result of a single tax imposed on buyers representing no more than 10% of the overall Vancouver market. In other words, it didn’t take much to stick a fork in the globe’s biggest realty gasbag.

But the September result, says Sal, as grim as it might be, “was before the latest rule changes from the federal government. Stay tuned.”

BMO chart

Indeed. We could be on the cusp of a rolling collapse in the Vancouver market, and anyone in Toronto who thinks the Kingdom of 416 or the wastelands of 905 are exempt might have a rude awakening coming. Just to refresh: starting in five days all buyers wanting mortgage insurance (which includes just about every moister) will have to qualify at the withering rate of 4.64% (the Bank of Canada’s standard) rather than the contract rate of at least 2% less. So someone who could have afforded a $650,000 house now has to shop in the low fives.

Remember – there’s an inverse relationship between rates and prices. When one goes up, the other goes down. For the past eight years the cost of money has faded and houses bloated. This one change alone equals a big rate jump, and real estate values will certainly react.

But there’s a lot more. New restrictions on what kind of loans can be insured have instantly cut off funding for many self-employed people, for investors financing rental units or people trying to lower monthly payments with longer amortizations. Some lenders have suspended those loans, while increasing lending rates. For example, First National Financial (the country’s biggest non-bank mortgage lender, funding an army of brokers) says its borrowing costs and fees have gone up and at least a quarter of its entire mortgage portfolio will no longer qualify for CMHC portfolio insurance under the new rules. No wonder its stock tanked.

So the ‘stress test’ for borrowers means they qualify for smaller loans, while mortgage rates are rising and access to money is being reduced – diminishing competition and likely leading to most costly loans. Now aren’t you glad you listened to your Dad and became an exotic dancer and Trump supporter instead of a mortgage broker?

But there’s more.

If Wild Bill Morneau pushes ahead with the plan CMHC is promoting, and forces lenders (including the banks) to share the risk on high-ratio mortgage defaults by paying a deductible, they say borrowers should expect to pick up the tab. Right now bankers have no skin in the game, knowing taxpayers (through CMHC) are on the hook for any and all defaults that might erupt if house prices croak.

This, of course, is moral hazard. Lenders don’t force high-risk kids with no savings and gossamer careers to pay more to borrow money than others with huge down payments, because they don’t have to. They accept no risk. So they lend with gay abandon. And you can see the results of lax lending and dirt-cheap funds. Yep. Million-dollar beater digs.

Will Morneau shove this through to conclusion and over the furious lobbying effort now being mounted on Bay Street?

You betcha he will. In fact, WB might just be morphing into F. And who would have imagined that?