Here we go?

Well, get ready. This could be it.

Media Advisory

October 16, 2017

Superintendent of Financial Institutions Jeremy Rudin will be available to the media regarding the release of an important publication, by teleconference at 8:30 a.m. (EDT) on Tuesday, October 17, 2017.

This availability is for accredited media only. Accreditation requests should be submitted to Annik Faucher at [email protected] by 8:00 p.m. today (October 16). The dial-in information for the media availability will be provided to journalists following accreditation.

When the US housing market blew up, taking the middle class with it, some people foresaw the disaster. Hedge fund guy Steve Eisman was one of them. “Things are ripe for a pretty severe correction,” he says. This time he’s talking about Canada.

The ‘Big Short’ player (read the book) is the latest in a string of Americans and others to come here, look around, shake their heads in amazed disgust, and pronounce us pooched. The catalyst, he adds, will be the Plus-2 universal stress test, now scheduled to arrive with the snow (and possibly announced Tuesday morning).

To remind: the regulator (OSFI) is weirded out that banks have huge numbers of uninsured mortgages made to people who lied about their down payments. After newbies with less than 20% down were required to pass a stress test proving they could handle rising rates, borrowers looted the Bank of Mom or got loans from cheesy subprime lenders so they could avoid it. CMHC insured loans fell by over 40% but real estate activity or borrowing did not. It became clear bank risk was shooting higher as a result.

So, OSFI will soon require everybody to qualify for every mortgage at current rates + 2%, regardless of how much they plunk down on a property. Mortgage dudes figure this will reduce overall credit by about a fifth. Realtors fear the same effect on prices. Eisman agrees with me. A slow melt’s coming.

“Canada is not going to crash,” he told a certain pathetic business news network on Monday, “but it hasn’t had a credit cycle in 25 years. I think they’re about to have one.” He also says CIBC is the most vulnerable – no bank failure coming, but earnings will decline.

Seems reasonable. Death by regulation. How Canadian.

Adam Button agrees. He’s a currency analysts and central bank-watcher who argues rates can’t really rise a lot because inflation’s kaput in a world of globalization, free labour movement, Amazon, driverless vehicles, AI and Adele. Besides, if the Bank of Canada were to crank its benchmark rate too much, the entire country would fall apart.

“The pain would be catastrophic,” he writes on a mortgage industry site. “Rates will never rise to beyond 5% in Canada [because] far too many people wouldn’t be able to make their payments. The government’s last round of new mortgage rules was a noble effort to reign in the housing market, but the horse has already left the million-dollar barn. Many borrowers would be forced to sell their homes, and those who could afford to stay would have their spending power cut dramatically.”

So, mortgage rates now in the 3% range have room to swell, but we’re not going to see 2% added. Not that it matters – given what OSFI is planning.

“A two-percentage-point rate increase on a $500,000-mortgage boosts the payment by at least $500 per month. A 5.00% rate on a million-dollar mortgage means $50,000 spent per year in interest alone. That’s a devastating bite out of a household’s disposable income, which is crucial for sustaining the economy.”

So the blunt instrument of interest rates will be laid aside, he argues, in favour of what regulation will accomplish – a slow choking-off of credit that would likely create a multi-year devolving of house values, walking us back from the brink of a US-style nuclear event.

“The Bank of Canada has already gone too far. The two solutions governments are trying first are the two things they always do in a market crisis: blame foreigners and blame the speculators.

“So far the execution has been sloppy, but politicians have sent a powerful signal that they are now part of the equation. So don’t worry about interest rates, worry about what’s coming from regulators.”

What a week. And it’s only started. Justin Trudeau propping up his wavering, deer-in-the-headlights finance guy at a major media event. The feds dropping the small biz tax rate to divert people from the withering new hit to come. More key announcements promised within days. And now the surly bank cop’s regulatory slaughter of residential real estate.

Who needs Trump for theatrics? We have our own drama queens.