If you didn’t have to pay your property taxes, would you?
Nah. Didn’t think so. Neither do more than six thousand families living in Vancouver who’ve decided to take advantage of a plan cooked up by the myopic muppets that voters choose as leaders. Astonishingly, citizens over the age of 55 can elect to not pay their taxes, instead just handing over interest on the outstanding amount – at the rate of 0.7%. Ahem. Yes. That’s less than 1%.
So why would you pay $6,000 a year when instead you can pay $42, deferring the entire amount until you sell your house for a windfall profit to a greater fool? In fact this pogey-for-geezers program was even extended to families of all ages in 2010. So long as they can find 2.7% interest ($162 on a six grand bill), no tax.
This is not a new thing. But the explosive use of the program is – up 500% in the last decade. Yes, during the greatest bubble in Canadian history, when 90% of the homeowning population of Vancouver became paper millionaires. And it also comes (as we told you yesterday) when the province has decided to send tax rebate cheques to everyone living in a house worth less than $1.6 million. That’s the new BC poverty line.
The two plans together will cost taxpayers about a quarter billion dollars, which makes the kids go crazy. “It seems counterintuitive because the very group that reaps the most benefit from the escalation of home values are those who have been in the housing market for longer and very often it is those who are 55 or older,” says the dude in charge of Generation Squeeze, being weirdly polite.
Well, remember that revolution I spoke of yesterday? Bay Street may be beating you to it.
Analysts Jason Bilodeau and David Doyle (Macquarie Capital) are calling out one major bank and two serious mortgage lenders because real estate is headed for a wall. The downgrades involve CIBC, Home Capital and Genworth – major players in the residential mortgage business that Macquarie thinks will be whacked as housing loses a potential 30% of its value. Investors are being warned to trim their exposure to these giants – while everyone’s being cautioned about the economic ripples that would ensue.
You know why. Households are leveraged up the wazoo. Mortgage debt is epic. Wages are flat. And real estate now accounts for way too much of the overall economy. Warns Macquarie: “Many key metrics are at or above levels seen in the U.S. prior to its most recent housing crisis and are growing worse.” And add in the Moister Street Test, new restrictions on loans to the self-employed and landlords plus the coming premiums lenders will have to pay to insure the loans they make, and the whole sector looks unsustainable. Plus, interest rates are going up. Maybe way faster than most people expect.
About half the loans Home Capital now has on the books would not qualify to be made under the new rules. Genworth’s business is mostly high-ratio, high-risk stuff. And the Bank of Commerce has more domestic exposure than most other banks, who enjoy a big revenue stream from foreign ops.
“If a housing correction unfolds, we believe that there is likely to be material downside to the current operating outlook for domestic lenders,” Macquarie says in its report. “A true correction in Canadian housing activity would likely have material negative implications for economic activity and employment, mortgage industry loan growth and consumer credit performance.”
News agency Reuters blew the whistle this week on bundled loans – which are right up there with the Bank of Mom in getting around federal mortgage-tightening guidelines. The net result is to lever people into houses who actually (according to the rules) can’t afford them.
With a bundled loan, borrowers combine funds coming from a subprime lender (there are lots of them around, and growing) with more cash emanating from a Mortgage Investment Corporation, which is unregulated. It allows buyers to have down payments of only 10% and still avoid having to obtain (or qualify for) mortgage insurance.
By the way, the share of the entire $1.6 trillion mortgage market now occupied by unregulated, subprime lenders has doubled (to almost 13%) in the past 10 years – just as real estate values and household debt have exploded. Says housing bear economist David Madani, “This is what happens at the late stage of a housing bubble — the quality of lending goes down.” Along with parental lending, these shadowy bundled loans are a growing way young buyers are skating around stricter lending standards, plus loan-to-value rules.
So, if and when a housing correction sweeps over us, more and more people will be in personal financial trouble. More lenders will feel it. More economic damage will occur. And the more you’ll wish (a) you never pushed your poor daughter to buy that condo and (b) that you’d sold the house for big bucks last year, rented for a while, then vultched like a vicious Viking.