Bounce, Bucks, and Bullshit

Today was the day we all finally saw once and for all. Today is the day that we all should have realized what exactly is going on. Today is the day that we now know why housing is sooo screwed up in Canada.

After today, we need the largest box of Bounce dryer sheets you can find. We need them because it seems that the governing party in Canada is trying to cling to power. The political party is trying anything it can to try to stick in peoples minds, like static to a polyester shirt. It has become apparent that the current government will stop at nothing, and spend all that it can to remain in power.

Today, as we all know, a journalist turned Finance Minister decided to unveil the Liberal proposals for housing. Proposals that just a few short months ago OFSI determined were not needed, or a good idea. Proposals that will only help Canadians stay in debt longer. Proposals that are really just a stop gap measure to get us through 12 or so months. Yes, I know that a lot of the mortgage community has been calling for longer amortizations, and an increase in the insurable limit, but was it really a good idea? Do we really need 30 year amortizations on purchases? Didn’t we try that once before? How did that end? I don’t have to break the math down here for y’all – we know how much more interest a homeowner will pay on a 30 year mortgage vs. a 25 year mortgage. We know this. Bankers know this. Politicians know this. It isn’t exactly rocket science, but rather simple, basic mathematics.

Taking a 30 year mortgage will help lower your payments, but as we all know it drives up the total cost of ownership. However, those lower payments will allow some people to get into the housing market. Okay, fine, but it is a band aid solution. The problem remains that housing is too fucking expensive!!!! Increasing the amortization does not lower the cost of housing. Extending the payments out longer does nothing to fix the root cause of the issue – it simply masks the symptoms. 30 year amortizations to fix housing affordability is akin to you breaking your leg, and instead of fixing the leg, you get hopped up on Oxycontin – the pain may go away, but we have not fixed the problem. Of course I have yet to see a government ever really roll out an actual solution to any problem, so why would we expect anything different this time?

It wasn’t so many years ago that the same government who is now proposing all these magical ‘ fixes ‘ rolled out a stress test. At the time it was fantastic foresight into a potential problem – when interest rates were at generational lows. Well, news flash – rates are not there any more. Why not simply remove the stress test rates for first time buyers? Why not allow first time buyers who take a fixed rate mortgage to qualify at the ACTUAL interest rate, instead of some fantasy made up unicorn rate? Of course that might be an actual fix to an actual problem, and god forbid we can’t have a solution like that. Even removing the stress test under certain conditions would not fix housing, it would simply make qualifying easier. Housing would still be too expensive.

Ironically enough, the reason housing is the way it is, is because the government got involved and played politics with housing. Housing in Canada has become a religion of sorts. Any politician who runs a campaign that could allow housing to go down will lose. Think housing isn’t political? Think again. Everything about housing centers and circles around politics these days. Unfortunately for the average Canadian that means that your home is at the will of a politician, or a political party. If you are smart enough to pass the mortgage exams, then you are smart enough to know that politicians make dumb decisions on a regular basis to save their own skin. Why have we allowed our largest asset, the place where we hang our hat and raise a family to be influenced by political will? Well, because for so long it worked in our favour. For decades now, house prices have been the best tailwind to a society that has leftover month at the end of the money. For years and years we were able to stop gap our budget by accessing the magical mystical home equity ATM. It was a great ride for homeowners, realtors and mortgage brokers alike.

Interestingly enough, the insurable limit is also being raised from a cool 1 million, to a nice round 1.5 million. Now, just a couple of months ago OFSI refused to raise the limit on insurable mortgages. The bank regulator who is responsible for checks and balances and the soundness of the entire financial system said it didn’t need to happen, but somehow now we need to? Interestingly enough, since the OFSI decision NOT to raise the insurable limit, the average house price in Canada has actually decreased by around 2%. Market forces themselves were at work bringing more and more house prices down to the insurable limit all on their own, so why the sudden intervention? Why? Like why did we need a 50% increase to the insurable limit overnight? 50 fucking percent? Are you serious? I would have understood if it went to 1.1 million, and then was indexed to inflation every year, or something that was based on actual real estate math. But, unfortunately the only math it was based on is the math that gets used on election day at the ballot box. Ironically enough, over 80% of the homes this change will affect are in large areas like Toronto, Vancouver, Montreal, etc. You know, the same areas that a certain government is counting on to win the next election. The same areas that, based on a couple of recent by-elections, the incumbent is seeming to lose popularity and votes.

So we will have a longer amortization, and a higher insurable limit, and that is about as far as most people will think about it. But lets look closer at a couple of consequences – intended or not, and see what else we will get:

By increasing the insurable limit, this will mean that thousands and thousands of mortgages will now qualify for bulk insurance through CMHC. As if overnight, all of a sudden millions of dollars in premiums will now go to CMHC that didn’t before. Whereas before CMHC could not charge a premium on any purchase over 1 Million, now magically they can. Yes, it is bulk insurance rates, but that still translates into millions, tens of millions, maybe hundreds of millions in premium dollars to CMHC. Remind me again who CMHC pays billions in dividends to every year……

With all these new insurable mortgages that now qualify to go into the CMB pool, that means we could see a massive increase in CMB offerings. What does that do to prices for CMB’s? Who knows. What normally happens when you crank up supply of something? You generally drop the price of something. If you drop the price of CMB bonds due to oversupply, what effect does this have on rates? An announcement of this size, increasing from 1M to 1.5M will play some havoc on the CMB pool.

With the increase to amortizations you are really performing a type of real estate QE. So while Tiff and Co. are still performing QT in the bond market, we have the government effectively promoting QE. Good luck getting inflation down in Canada to a level that the BOC is happy with. So you now have the Monetary policy doing exactly the opposite as the fiscal policy. Great work politicians. Again, the people who should be running the check book ( BOC ) is being outdone by the governing political party.

All this comes at the same time that Canada has decided to get tough on immigration. It is no secret that immigration has been driving GDP for the last few years. Since Canada is getting tough on immigration, GDP would be exposed for what it truly is – absolute shit!! So, in order to fill this GDP shortfall you need something. Something that will get people buying houses ( housing was about 60% of Canada’s GDP leading up to 2022 ). Enter announcements like today. I fully expect other announcements like today to be made over the next 6 to 12 months to ensure that the government gets maximum political uptake from it. Today was certainly not the last policy change we will see.

I really wish the government would keep their hands out of housing, and stop screwing around with Canadians biggest asset. I really wish that politicians could simply earn Canadians trust, earn the vote, but it is hard to do that but just so damn easy to change a policy. Today was proof that desperate times can truly call for desperate measures when political futures are on the line. Rest assured though, the same politicians who make announcements like this to save their political future do not give a rats ass about you or your family’s well being. Announcements like we witnessed today are actually going to hurt anyone who needs to use them. If we didn’t have a government intervene in the market, the housing market would have continued to drift lower and lower, bit by bit, and maybe we had a chance that housing would be affordable. But, now housing doesn’t really need to drop because people can now handle the payments. It will strip hundreds of thousands of dollars more from Canadians pockets in interest charges, enrich the Big 5 banks profits, and ensure that CMHC takes in a lot more money that it can use pay a nice juicy dividend back to the same politicians who made this change. The average Canadian homeowner got screwed today. The average Canadian homeowner thinks they have won the battle, but ultimately they lost the war.

We can do better, and we need to do better for the next generation of would be homeowners. We need to insist that politicians keep their ‘hands off housing’ ( kinda sounds like a catchy jingle or slogan ) and we need to ensure that policies are well thought out, well implemented and not simply a plan that was drawn up on a cocktail napkin at a political fundraiser. Canadians deserve better, and homeowners deserve better. If we refuse to demand better we have nothing but more bullshit to look forward to.