More stress

We’re ten days from a mortgage crunch. This week the Trudeau gang capitulated and will be making it harder for first-time buyers to get home loans. It’s not a bombshell. But it’s a bullet. Aimed at the heart of real estate speculation.

Effective June first everybody applying for financing – those with 20% or more to put down as well as the 5% newbie, CMHC-insured crowd – will have to prove they can carry debt at 5.25%. That’s up from a minimum of 4.79% as the stress test becomes the greater of the rate being offered by a lender plus two hundred basis points, or 5.35%.

Consequences? Now people can borrow, on average, about 5% less money. This impacts a fifth of all buyers and means some kids will be buying cheaper places or getting knocked out of bidding wars faster.

It’s a meh move. But not without meaning. As property prices have inflated beyond reason more and more buyers have been unable to cough up a 20% down payment, thus avoiding CHMC insurance. So extending the tougher rule to insured borrowers (those with small deposits) means everybody now gets tested.

This is not the real news, however. Two things matter more.

First, the latest inflation numbers are a harbinger of what’s coming. Did you catch the news? The number surged to 3.4%, the fastest pace of growth since 2011. This is nothing less than astonishing at a time the country’s largely in lockdown with the biggest city under a stay-at-home order, people growing hair at an alarming rate, government stimulus payments curtailed and the Third Wave devastating Main Street.

“If Canada can pose inflation numbers like these when much of the country was supposed to be staying at home in lockdown, absent US-style stimulus cheques and with at least temporary disinflationary currency effects, then just imagine what reopening may bring over coming months,” says Scotiabank’s prescient chief economist dude Derek Holt. He adds true headline inflation is actually at 3.8% which (a) blows right past the Bank of Canada’s upper allowable limit (before interest rates start to pop) and (b) is the biggest number since way back in 2003, when Stephen Harper still liked me.

Of course, we all know the cost of living is not increasing by 3.4%, or even 3.8%. Houses cost 30% more than last year, plywood is precious and golden retrievers fetch three grand. But this ‘official’ measure – which Holt correctly presumes will rocket higher when the economy actually reopens in August and beyond – means the CB will have little option but to withdraw stimulus. No, that’s never fun. In this instance it means bond-snofling will end and rates rise.

This bring us to the other news. For the first time, the top central banker is setting up the oversexed housing market for a cold shower. What the Bank of Canada governor says is always calculated and consequential, so check this out…

“It is important to understand that the recent rapid increases in home prices are not normal,” Tiff Macklem said this week. “Counting on ever higher house prices to build home equity that can be used to refinance mortgages in the future is a bad idea.” Borrowers are “taking on significantly more mortgage debt,” he warned. “Interest rates are unusually low…borrowers and lenders both have roles in ensuring that households can still afford to service their debt at higher rates.”

To reinforce this, the CB’s just-released report adds, “These highly indebted households have less flexibility to deal with sudden financial changes, such as a job loss or a drop in the price of their home.” The entire market is vulnerable now, the central bankers stress, with speculation polluting things in Toronto, Vancouver, Hamilton and (soon) Ottawa. Mortgage quality during Covid has “deteriorated” and almost a quarter of all borrowers have a debt-to-income ratio of over 450%. That’s historic. Worse than in 2017, when governments freaked out and slapped down housing markets in BC and Ontario.

So, what to make of this?

New stress test regs, worries about high-ratio debt, explosive inflation and sudden alarm by the central bank… this should make you wonder what’s coming. The June 1st mortgage changes on their own will do diddly to douse the flames of house lust. What the market really needs to cool fast is for the CB to man up and pop its key rate while winding down its excessive purchase of bonds and mortgages.

And what does the government say?

“Maintaining the health and stability of Canada’s housing market is essential to protecting middle class families and to Canada’s broader economic recovery,” mutters Chrystia, who must by now understand the horse long ago slipped the barn and stole a Porsche.

Thus, things will not stay as they are. But you knew that.

About the picture: “Here is Remus enjoying a sunny spring day in his garden’” writes blog dog Nonplused. “He is a rescue dog who was found in a ditch on a reserve when a pup.  He was fostered by a great woman until he was old enough for us to take him home.  Hats off to the Cochrane Humane Society and all rescue societies and foster parents all around the world.  I’ve been following you since I first bought “Greater Fool” (at an actual bookstore!).  Many thanks for all the advice and thought provoking subjects.  I’m not sure this photo is tear-jerking enough to make the photo selection, because I took this just minutes ago so obviously he is still with us, but given his backstory and as one of my friends put it, “He was born in a ditch and ended up here.  Dog heaven.  He probably can’t believe his luck.”  I thought it might go along with something along the lines “better days are ahead”.  He is a great dog.  Folks, don’t be afraid to visit the Humane Society.  You don’t need to pay $4,000 for a great dog.”