The Eye of The Storm

Based on the title, and my current residence on the Florida Gulf Coast, you may think I am talking about Hurricane Idalia ( what a stupid name for a hurricane ), but no, I am referring to the storm clouds gathering over the Canadian housing market.

Anyone who has talked with me or follows me in any way shape or form knows I am pretty bearish on the Canadian housing market – and the Canadian economy in general. This isn’t because I like being negative, or a Debbie downer – it is just based on the current circumstances. I will be the first person to turn bullish when the time comes – but that time is not now.

Recessions, depressions, and economic malaises – much like hurricanes, require certain ingredients. For a hurricane it is water, low pressure, and high winds. For economic problems to occur we also require a lot of ingredients. They can vary, but usually include increasing interest rates, high inflation, a lack of confidence in the economy, and rising unemployment. Right now we have all of these ingredients. These factors add up and start an economic hurricane of sorts.

While predictions are a crap game ( both in weather and economics ) that doesn’t mean there is a shortage of people willing to try their best. Some may include me in that group. However, I think it is more important to be generally right, than precisely wrong. Knowing the hurricane is coming is more important than knowing exactly where it will make landfall. And if we look at what is going on economically – boy oh boy is a storm ever coming.

You can look at almost any set of data you want right now, it is not looking good. While housing normally follows the economy into a lull, it will most likely be housing that CAUSES the problem this time around. I know, I know, I just said predictions are a crap game, and here I am…. Much like we saw in the US in 2007/2008, it could be the housing market that leads the economic problems. Ever increasing interest rates, piled onto the most expensive housing market in the G7, on top of rising unemployment is not exactly a recipe for a cake, but rather for a liquidity event.

On top of the issue we have baking up above, in the lower oven we currently have the money supply contracting due to quantitative tightening ( QT in banks terms ) , banks reducing funds available for new loans, and government spending that is out of control. I hate to sound like an alarmist, but we ain’t gonna get anything sweet out of this.

Friday, TD Bank announced in its quarterly earnings report that 48% of the mortgages on the books are over a 25 year amortization, with 22.8% more than 35 years. RBC reported numbers that were similar although not as bad. This is the proverbial ” writing on the wall” or the “canary in the coalmine” . Borrowers are strapped, and we have, or should soon, exhaust the ” extend and pretend” game that has kept things afloat this long. As rates continue to rise more and more borrowers will hit a wall. When you start to see numbers like we saw in the earnings reports – it should scare us all. Once borrowers lose the ability to extend and keep payments static – the music stops, and someone – or a whole lot of someones will be without a chair to sit on.

Much like a hurricane, I have no idea how strong this economic problem will be, when exactly it will “hit”, nor can I tell you with any precision how much damage it will leave behind. We will only know the extent of the damage after the storm. No one can tell for sure if this will be a category 5 financial disaster, or a tropical breeze to cool things off, however, it is better to be prepared.

I hope you have prepared your mortgage business so that no matter where the storm lands – your business doesn’t take a direct hit.