Pandering

Last Thursday, says Wendy in Coquitlam, she received “The Letter” from RBC.

The bank holds the first mortgage on the aging townhome she and Tom bought in late 2020 for just over a million. “All we could afford,” she says, “and that was stretching things to the max.” (Her mom, Bev, helped with the down payment.) The loan came in at three grand a month – a variable-rate borrowing, the cheapest rate they could find.

Since then there’s been a baby, a mat leave, more expenses and a reduction in household income. Then Tiff came along. The Bank of Canada rate increased 1,600%. Inflation hit the Superstore on Lougheed Highway and Tom’s paycheque ran thin. Mortgage rates went crazy, but they figured they were okay, maybe. Monthly payments were set. Until last week. The letter came.

Two hundred bucks is a disaster in some households. Wendy just has to cope – and to reflect on why she and her squeeze bought a home they could not afford on their own (without mom) then proceeded to have a family, cutting cash flow and goosing expenses. Now they have less disposable income, no savings, a ton of bank debt, an obligation to Bev and an asset that’s actually falling in value. House lust victims. Seduced by VRM borrowing that was the cheapest in Canadian history – which everyone said would never change. The house has put he family at financial peril.

The Bank of Canada this week tells us one-third of all the mortgaged households in the nation have VRMs. Ouch. Half of them have already – like this couple – hit the trigger point where a low monthly payment doesn’t even cover accumulating interest. Within six months, 65% of all the variable-rate borrowers will be in the same boat.

Meanwhile, as we told you, rates rise again on December 7th, adding another half-point to the variables, pushing thousands more closer to that trigger. Expect another hike or two, economists say, in early 2023. It all depends on inflation, employment and GDP data along with the actions of the US Fed, the Ukraine war and a brewing global energy crisis.

By the way, these are the dates in 2023 our CB will be announcing any rate changes:

* Wednesday, January 25*
* Wednesday, March 8
* Wednesday, April 12*
* Wednesday, June 7
* Wednesday, July 12*
* Wednesday, September 6
* Wednesday, October 25*
* Wednesday, December 6

The obvious question: will swelling VRMs, trigger points and household financial stress lead to real estate chaos as more are forced to sell and listings augment? Or (as house floggers like Re/Max are speculating) will property cravings kick in come the Spring with buyers leaving the sidelines to jump in again?

Logic tells us a historic increase in the central bank rate cannot happen after an unprecedented increase in house prices without consequence. Common sense screams that too many people – Wendy and Tom included – fell victim to FOMO, made bad choices, borrowed excessively, showing unbridled financial illiteracy and played a big role in driving up the very prices, valuations, inflation and interest rates that now eat at them like malevolent microbes.

There is no easy solution here. Certainly not what politicians have been suggesting – spending $4 billion in federal funds to build more houses, none of which will be affordable, or handing out $2.5 billion in cash as Alberta’s new premier suggested last night. That fiscal stimulus only insures the CB will have to tighten further – since the goal is more pain, less spending and a realignment of housing costs.

Sigh.

Now listen to this story, from the CEO of a BC-based company, which happens to be a global leader in its field. Leonard is a blog dog, and tells us why he’s losing his key guy:

My number 2 just handed in his notice after 10 years with me in the only job he’s ever had.  He loves the job.  He currently owns a town home with a 30-min commute each way, too small (third child).  Wife is currently a stay-at-home mom (quit her job to be with the kids; between child care, PD days, and travel, she apparently only brought home a few hundered dollars more than not working).  Of note, he just re-financed with a variable pushing his monthly $800/month more – and scared witless with the 75 or 100 BP increase coming up.

They are VERY house horny. He wants a 4 br single detached – I get he wants his forever home at 33 and that he can no longer see the forest for the trees.

A large US company has snared him (salary only slightly more than he makes now – which I offered to exceed) – but here is the kicker – he can live anywhere in North America (with access to an airport) and travel 2-3wks/month to client sites.  Short of buying him a house, I have offered every reasonable inducement that’s practical.

The only thing he (they) see is their inability to ever purchase a detached in YVR; their only answer is to leave for somewhere else.  It’s all about the house. I have talked to him about everything financial and practical, including what it’s like to live in airplanes and hotels for most of the year – and the toll that takes on families – he’s between a rock and a hard place.

Sadly, places like 416, and 604 are only going to be suitable for the rich and the homeless. I have to admit, I thought everyone was happy and content, they are well paid, with bonuses, and opportunity for ownership – I, naively, didn’t see it coming or happening to me.

Could it be any clearer what we’re doing to the country? Pandering to the real estate sector, subsidizing owners at the expense of renters, encouraging home ownership as the goal of life and using the tax code to persuade people to buy real estate rather than invest in a balanced, responsible, debt-free way has consequences.

Families get ground up when rates rise. Talented people move to cheaper nations. Massive amounts of income flows to pay interest rather than be invested in the economy.

Either the central bankers keep the hammer down, and people like Wendy are blown up, or they relent to political pressure and we craft a bigger bomb for later. Choose.

About the picture: “I’ve been following your daily posts from far way for a couple of years now,” writes Pete. “Not all Canada-specific content is relevant for Europeans but always good to read sound advice and solid reasoning wherever you are. I am hoping you may one day publish the photo of our amazing Gaspy, a rescue dog that found a safe haven with us and the neighbours. Always ready for long random walks down the street and into the trails. Thank you for the free service.”