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The fix

Tuesday, October 11, 2016 23:25
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We might as well let Wild Bill pooch this entire week. So here ya go: the fifth pathetic post in a row on how everything you thought you knew about residential real estate just changed.

The bubble’s done. Not over, but pricked. The next few months will see the air whizzing out of the upper end of the GTA’s gasbag, while Vancouver turns into T2 roadkill. Between now and October 17th there’ll surely be a surge of moisters trying to beat the new rules, but after that expect sales to crater and realtors to turtle.

The extent of the correction will be unknown for some time. Maybe a year. Sales can collapse but prices stay sticky since most people live their lives in disbelief (just look at Calgary). But as listings augment, there’s but one direction for house values to go. That’s exactly what the current crop of politicians want, since housing, now dangerously a quarter of the entire economy, is out of control.

In the past four days we’ve examined many implications of what happened Monday, including stress tests, new foreign dudes taxes, vacancy taxes, higher property taxes, principal residence tax changes and the certainty Ottawa will start to wiggle out of the mortgage insurance business, heaping risk upon the lenders. All of this is somewhat historic. Those who think the real estate market will continue to march ever higher have been watching way too much W network.

Here are some of the latest voices worth noting:

From two despondent, wrist-slashing mortgage brokers in Calgary. They see higher rates and lower prices:

“The main change that will kick in on October 17th will require borrowers to qualify for a mortgage at the National benchmark rate (currently 4.64%) instead of the actual contract rate that is being offered.  This significantly lowers the mortgage amount borrowers would be approved for.

“We are still uncertain on how each individual bank/lender will accommodate these changes with some of their other lending programs but to give you a quick example, one of our lenders have already responded and they are going to increase their interest rate 0.15% for any refinances and limiting amortization to 25 years. So it is still early to tell you exactly what each bank/lender is going to be changing, but according to many professional opinions, it is sure to lower property values over time as well as the probability of increased interest rates due to the higher risk to the banks/lenders needing to limit the amount of insured mortgages they are holding.”

From another mortgage broker, in an open letter to clients (reprinted in the awful Huffington Post). Forget your pre-approval, she says.

“If you were pre-approved prior to the rule change, this does NOT mean you will still be approved for the same amount and/or rate, especially if your lender based their pre-approval on a fixed rate, as that rate will no longer be available. For example, if a potential homebuyer was pre-approved for a mortgage at a fixed rate somewhere around 2.49%, that rate will now be closer to 4.64% for qualification purposes. Put differently, if a potential homebuyer with a combined family income of approximately $125,000 was told they could afford something in the $630,000 range, they may now be restricted to the $500,000 range, based on the new rules.

“…Over time, there simply will no longer be a market for over-priced homes. The long-running seller’s market will slowly become a buyer’s market due to lack of affordability, which in turn could result in decreased housing prices — as people will no longer be able to afford homes in what were previously known as “hot markets.” We may not see these effects right away — most likely not until the spring market — but we will see them.”

From Rob McLister, editor of Canadian Mortgage Trends. He sees his loan-selling colleagues running away from risk:

“It’s unclear which insured-lenders will still do refinances, rentals, super-jumbos ($1 million+) and 26- to 35-year amortizations come December. As we’ve seen, some lenders have already announced their (hopefully temporary) withdrawal from these categories. Lenders I spoke with today were scurrying to arrange purchase agreements with balance sheet lenders to create liquidity for these mortgages. It’s going to be a week or two before we know the bank’s appetite. They won’t rush to load up their balance sheets with non-standard mortgages. That, we know.

“Some lenders may die off or consolidate if the Department of Finance doesn’t relent on its decree, but many will find a way to keep doing these uninsurable deals at higher interest rates.”

From Sherry Cooper, former bank poohbah, now economist-spokesgirl for Dominion Lending Centres. Rates, she says, are going up as bankers are forced to eat risk:

“I believe that the ultimate proposal for lenders to take on the burden of more risk could … have a far reaching impact; this is something that CMHC proposed a number of months ago, almost a year ago, and it does appear that it’s going to happen, and it means the banks will probably have to cover 5-10% of the potential loss in their mortgage book.

“The risk of their mortgage book moves up, that means they have to hold more capital against their mortgage lending which makes the cost of capital more expensive and you better believe they’re going to try to pass that off to the consumer.”

We could blather on. Few saw this coming. Even fewer were consulted. It’s now evident the feds were working on this comprehensive package of bladder-piercing policies for months, careful not to tip their hand, to achieve maximum market impact. Just as BC did with its bombshell Chinese Dudes levy on July 25th.

That’s politics. When logic and caution fail, just shoot ‘em.


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