Cracks

Well, this was inevitable.

There are now cracks in the federal Liberal caucus over – guess what? – the stress test. Word is that Lib MPs from both the GTA and Vancouver are pressuring finance minister Bill Morneau to trash or modify B-20. It’s negatively affecting middle class jobs, they allege (realtors, mortgage brokers, drywallers, bankers, coffeetruck drivers) while trashing the dreams of young constituents who yearn to be mortgage slaves.

This comes on the heels of a promise made days ago by Tory boss, young Andrew Scheer that if elected his guys will “modify” the test to make houses more affordable.  In this case, “modify” probably means “eviscerate”, making houses more expensive and harder to buy. But that’s political logic for you.

Meanwhile, of course, trashing or changing the stress test is not a Morneau decision. It’s not even supposed to be political. Or debated in Parliament. Instead, it was an action taken by the bank cop, OSFI, in order to protect the big lenders from the Bank of Mom.

You may recall two years ago that real estate was going nuts, fueled in part by parental money. Through gifted bags of money (usually taken from a HELOC on the family home), young buyers got around the stress test of the day – which required that anyone with less than 20% to put down be tested. So Junior’s mortgage ended up in a bank’s portfolio, uninsured, despite the kid being a high-risk borrower. That freaked out the regulator, so the test was expanded to cover all buyers regardless of the size of their down. For the last year and a half everyone’s had to prove they can pay the contract mortgage rate plus 2%. This was also extended to any renewer who wanted to switch lenders.

Combined with a slew of new taxes on houses in BC, a foreign buyers tax in the GTA and absurd property valuations, the test (called B-20) helped croak the market. Sales have slid in most places. Toronto prices have fallen 15-20% from the peak. Vancouver is toast.

The stress test apparently punted about 20% of first-time buyers who no longer could borrow, or only borrow less. And now it’s a political football.

Last week the IMF (International Monetary Fund) warned against changing/gutting B-20, but with a federal election just five months away and whiny, entitled, hormone-laden and house-horny moisters comprising the biggest voting block, you can be sure somethings gonna happen.

In recent days the boss of CMHC, Evan Siddall, has knocked heads with the top mortgage association dude, Paul Taylor. They’ve traded barbs in OpEd pieces, speeches and media skirmishes. Taylor wants B-20 blown up, or at least to exempt renewers and lower the rate bar so more young couples can buy. Siddall argues the test reduces economic risk, further chills the market, chisels away at our terrifying pile of household debt and reduces the role of real estate in the nation’s GDP.

Mortgage blogger and broker makes this interesting comment:

“The latest attack by CMHC’s CEO suggests he may not be as objective as he’d like the public to believe. One has to wonder if he’s cracking under all the criticism, or being asked by his friend and Finance Minister Bill Morneau to take heat off Liberal housing policies.”

Ya think?

Siddall works for the feds. CMHC is a wholly-owned government agency. Its minister is the Honourable Jean-Yves Duclos (not exactly a household name) who’s also responsible for Families, Children and Social Development. Duclos’ web site was last updated a year ago, so he may not be the sharpest political operative. Whatever. We know who calls the shots. Ask Jodi or Jane.

Trashing B-20 is a tasty thing to do if you’re trying to stay in office (or get there) but relenting on it would seriously skew the market at a time a mortgage war has dropped rates and job creation’s in high gear. It’s hard to see how increasing demand is going to lower house prices. So taking a foot of the brake is a really bad idea, and Siddall’s correct to stand his ground.

Having said that, there’s no reason Ottawa should be the banks’ patsy. By stress-testing renewers looking to switch lenders, Siddall is trapping consumers, denying them choice.

Meanwhile, making it harder for people to borrow more while keeping new borrowers’ debt to minimum level benefits everyone. We are unbridled, undisciplined, reckless piggies when it comes to loans. The combination of inflated house prices and historic debt is a bomb with the potential to blow up the economy. Look south for evidence.

Alas, this is out of our hands. Out of Siddall’s, too. When elections close in, logic leaves. Given our demographics are now dominated by Millennials, the die may be cast. Last time they got weed. This time a pass on debt.

Sigh. Whither Canada?