The cartel

The Big Guys start reporting tomorrow. Quarterly earnings for the six banks that run our lives (and the economy, and the real estate market) are expected to be lower. Nothing serious, and no surprise. After eight interest rates hikes, a European war, US regional banking scare, sketchy capital markets and a consumer retrenchment, the bankers are feelin’ less love.

And let’s not forget about the mortgage thing.

Six months ago bank mortgage portfolios were behaving normally. Now a third of all borrowings have extended amortizations, and a growing hunk are being pushed out to 40 years and beyond. This comes after the Code of Mortgage Conduct was published in Chrystia’s March budget basically telling the banks (which are federally regulated) to play nice with homeowners who pickled themselves in low-interest mortgage debt.

The banks complied. Rather than enforcing contracts often calling for borrowers to cough up more in payments once their trigger had been pulled (not enough each month to cover the interest on variable-rate loans), mortgage ams have been elongated. Sometimes to extremes – seventy or even 90 years.

So the bankers may be giving out 4% or 5% interest on new billions in GICs, but are effectively collecting 2% on other billions in home loans. Not ideal. Of course, they’ll eventually collect their many pounds of flesh, since Canadians would rather eat drywall than default on a mortgage, but cash flow is impacted. And, yes, those borrowings are supposed to reset to 25-year amortizations when they renew in 2025 and 2026. Unless She says differently.

So don’t weep for CIBC, BeeMo, RBC, TDCT, the Bluenose or Quebec guys. They’ll be fine. No wobbling in Canada, and a dividend stream which is ever-growing and has never been disrupted. But there may be some share price slippage ahead.

Now speaking of mortgages, last week we told you about those who worry that 2025/6 will bring a massive real estate retrenchment as all those people who bought in 2020/1 at crazy prices with low downpayments face renewal. At least one bank is saying those bears are making it all up, and  homeowners in general are doing fine. Sort of.

Derek Holt is an economist I have followed, debated and interviewed many times over the years. These days he is one of the most prescient and knowledgeable guys on The Street. (By the way, he’s calling for the Bank of Canada to hike its rate in two weeks.) He just made these 5 points about our debt reality:

• 60% of households don’t even have a mortgage. 27% own their homes outright without a mortgage. 33% rent and while they have seen increases in rents, on average across the country CPI shows more modest increases than the payments shock coming to some mortgages.
• Of the 40% of households who own their homes with a mortgage, the most pressured are those who took out new mortgages or refinanced at the peak for house prices and the trough in borrowing costs over 2020–21. Affected households will have a few years of income growth and the opportunity to make adjustments.
• First-time homebuyers have had the opportunity to amass larger down payments as they have been sidelined and waiting to pounce upon cheaper prices.
• Higher immigration is flooding into a market at a pace that is driving the fastest population growth among major economies as immigration targets rise.
• This infusion of demand into a market with basically no supply and where the supply side adjusts with long lags will persistently pressure house prices. Housing strengths in an economy that remains in excess demand with very tight labour markets could be among the factors that I think will foment another round of pressures on core inflation.

Hmm. Is Holt blowing smoke up our butts? Or is the Houseageddon scenario done? Would a shock like an American debt default (next Thursday, maybe…) spike rates and crash everything? Or in a country with low supply, a growing population and eternal real estate lust is a home in a major urban regional market a no-risk asset?

All we know is that a correction happened. In many places prices fell by a third. Nationally CREA’s average plunked 23%. Then a recovery. Now we have price escalation, and yet economic uncertainty. The buyers may be greater fools. They may be opportunists. After all, the country has never known a housing price decline of greater than 30%.

By the way, for context, the typical real estate sale price in Canada is currently $716,000. The average in Ontario is $911,000. In BC it is $995,500. And down in America, where ten times the number of  people live, the median is $450,000 ($607,000 beaver dollars).

Now why do you think that is?

Current US house prices – nearing 2022 high

About the picture: “Hi, Garth!  Here’s our boy, Chumlee,” writes Leslie, “after he put up with a home-made haircut from his mom.  He’s Havanese, Maltese & Poodle, one hairy fella.  He loves his car rides and your blog.  :>)  Thanks for sharing everyone’s pet pictures, so nice to see!”

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