Creative Writing

I want to begin with a bit of an apology. I haven’t been blogging the way I used to. The thing about running an American based business is that when an American President puts in place a Buy American policy – business picks up – A LOT. Tariffs may be good, they may be bad, but I can confidently say that the policy to bring spending back to America is working – at least in my little piece of the world. I can already imagine the ‘ elbows up’ crowd clutching their pearls and wringing their hands at this first paragraph. I think we have things dealt with and have staffed up, so hopefully that gives me more time to write.

Alright, lets get to it then, shall we? It used to be in Canada that the only time creative writing was mentioned in our business is when you were talking about a Brampton mortgage. You know the ones!! However, creative writing is going to become a lot more popular across the country as we move through the next 12 to 18 months, and it isn’t what you think.

Almost every way you look at financial data right now – it is bad. Very bad. Unemployment up, inflation up, listing up, sales down, bond yields up, job openings down – it is like everything is headed in exactly the wrong direction. Even though all the dancing idiots on TikTok told you it wouldn’t be so. Remember ” Wait till the next rate cut”, ” the Spring market is gonna rip”, and let’s not forget the classic ” When interest rates drop, the mad rush to buy will price you out of the market”. Well, it appears none of that has really happened. Everything is going exactly the opposite way, and people are struggling to figure out why. Every day, the newspapers are running yet another story of yet another person who bought at the peak, and is now getting their sold sold out from under them. The losses are piling up – and fast. It is not uncommon to see people loosing hundreds of thousands of dollars from price paid, to current list price – and that is just the house price and doesn’t include the land transfer taxes, real estate commissions, closing costs, lawyers fees and on and on and on. Canadian real estate is in trouble. Canadian real estate is no longer the safe bastion of wealth accumulation we were told it was by all those social media influencers. Canadian real estate has become the noose around the neck for far too many Canadians, and it is becoming a ticking time bomb. How much longer can people hold out? How much longer until we see a 2008 style collapse in Canadian real estate? No one knows the answer, but if something doesn’t change – and fast, the timeline may not be that long.

But, and there is always a but, I am going to tell you why I don’t think any of this will matter as much as we think. I am going to tell you how creative writing will solve the problems of Canadian real estate. I am also goin to tell you how everything you know about lending is about to change, and how you need to prepare for what I think will become one of the weirdest times in mortgage lending for a very long time.

Now, we know that shit has gone off the rails. We know this. Just take a look around. However, we all knew this was coming right? If you were in this business for the last 3 or 4 years, and didn’t think that the totally bat shit crazy pricing back in 2021 and early 2022 had to reverse itself, then give your head a shake. Of course, plenty of people thought it was a new paradigm, whereby the price of a house can just go up 20% a year – every year – forever and ever, but most of us, I would like to think were a little more realistic, and knew a reversal was in order. Interest rates going up were a good start in the right direction. Prices stopped going up, and then started coming back down, but now we are seeing prices continue to drop. Not necessarily because of pricing or rates ( rates are still low historically speaking ) but because we are finding out what was driving all of those crazy sales and price increases – INVESTORS.

Every damn day I see another story of another ‘investor’ ( i use the term loosely ) that bought 3 pre cons in Toronto in 2021, and now can’t close, have watched the current market value plummet as compared to the price paid, and will now have to face bankruptcy. Of course the deposit was always paid for with a refinance or HELOC on their personal property, so now they loose their house as well. These stories, which are everywhere prove that real estate was becoming a shell game. It wasn’t the properties selling because people needed to live there, it was investors thinking they could make a quick buck. So, they levered the fuck up, and went about their business. Now those proverbial chickens are coming home to roost. Nobody wants to buy a 400 square foot dog crate condo ( thanks to Ron Butler for the terminology ).

So, the segment in Ontario and B.C. that is hit hardest is the dog crate condo market, which as they lose value, it starts to drag down other market segments, and all of a sudden prices drop just as fast as they went up in 2020 and 2021. It is the old ” What goes up, must come down ” theory in real life.

Okay, so we have investors losing all their money, no one wants to step in and buy a home for fear it could be down another 10%, and construction has almost stopped in a lot of major centers. Good times. We all know pricing is still too high for the average Canadian to qualify for a mortgage ( unless you apply for the Brampton mortgage special ). Housing has lost its luster, and is now seen as a money pit. Further prices decreases are quite likely, and I would prognosticate that another 10% – 12% nationally still needs to come off the prices before we have a serious conversation about there being any sort of a bottom.

However, we know have a new PM. We have a new PM that was probably amongst the most craft Central Bankers in the world. We have a new PM that understands the inner workings of markets, banking, bonds, and global finance better than almost anyone. For the record, I don’t like Carney, but he is fucking smart. Mr. Carney was the guy at the helm during the 2008 GFC that helped get Canada through those years relatively unscathed. Sure, we came into the crisis in a hell of a lot better shape than our American friends, but the steady hand, deep knowledge, and calm demeanor of Mr. Carney allowed Canada to do some fast foot work, and really capitalize on the time. How many of Canada’s banks used the 2008 GFC to acquire US banks at steep discounts? A lot, and a lot of this was possible because of the way Mr. Carney handled the GFC and the resulting economic forces out of it.

So, everything you know about how housing should work is about to the thrown out the window. I will give you a couple of examples below. Not to say that these examples are what happens, but it will give you some idea into how a super smart, well connected, person can manipulate things to make them seem better. Yes, I said manipulate. That is all central banks do at the end of the day – they manipulate things. They manipulate rates to fit the economy. They manipulate the money supply to grow it or contract it, and they manipulate bond markets with their words. A central banker can drive the yield on a 10 year note up or down by 25 basis points with just a few sentences, and now we have the Master Manipulator Mark running the country. I like the name 3M for him.

Dog Crate Condos:

Alright, no one wants to buy 400 square foot shit boxes in the sky. We got that. There are literally tens of thousands of them for sale at completely ridiculous prices though – and more coming on line out of the construction pipe every month. Builders and developers will probably face bankruptcy coming out of a lot of these projects. It is every which way of screwed up no matter how you look at it. No demand, too much supply, over inflated prices, interest rates going up.

The Fix:

3M knows how to craft solutions – he has been doing it his entire professional life. So, the quick fix to the condo problem would be the blue print that helped the US get out of the subprime mortgage mess. 3M will get the government of Canada to issue a lot of bonds to a newly formed entity. It will be called something fancy and special, but it will be nothing more than a holding company. The government will issue, say 2 Billion of bonds to the holding company. The holding company will then purchase all the dog crate condos slightly below the cost to build. Thus ensuring the builders lose a bit of money, but not so much they claim bankruptcy. This way the government can ensure Canadians that they didn’t ” bail out the wealthy”. These condos will now be converted for a short time to rental units. The rents will be affordable. Then, after a few years, maybe 5 or 10, once the market has rebounded, the government will sell off the condos from the holding company back to the market at a controlled price so as not to devalue their entire holdings. . Probably as a tenant moves out, the property would then be sold into the open market and the proceeds of the sale will be used to pay back the bonds issued to finance the whole thing. The government report once it is all over in 15 or 20 years will claim the government actually turned a profit on the venture – even though we will never be allowed to seethe books.

Doing this will reduce the supply on the market, lower prices ( once the government buys a good chunk of them it will devalue the remaining units on the market ) and will also help instill confidence in the market. If the government is willing to buy housing, why shouldn’t the average Canadian? Of course the average Canadian can’t simply issue 2B of debt to do it, but don’t ask questions – just go with the narrative.

This is the exact process followed for all the subprime mortgage debt in the US in 2009. The Federal Reserve basically bought all the worthless home loans off of the banks balance sheets to stabilize the economy. The paper was bought under the TARP program ( Troubles Asset Relief Program ) and then sold off around 2014 and 2015 if memory serves correctly. By the time they sold it off the GFR was well behind us, and people were willing to buy the crap loan paper once again.

Qualification:

A lot of people don’t qualify for housing because of the stress test. A very simple wave of a magic wand could eliminate the the stress test, or dramatically change it so that it isn’t really an impediment to getting a mortgage. This could be done by 3M directing OFSI to simply tweak their mandate, or perhaps ensure they are looking out the Canadians. Reducing or eliminating the stress test would cost the government zero dollars, but win them a lot of points. Cheap Win.

2 weeks ago, the new Canadian Housing Minister, Gregor Robertson was quoted as saying that home prices didn’t have to drop, but that more supply was needed. Every single economist laughed at that one. Every single home industry analyst laughed at that one, but he may actually be correct. Housing prices may not need to go down, but the hurdle to qualify for a mortgage needs to go down. Can both exist in harmony?

If the stress test was eliminated tomorrow, how many more people could purchase a home? If land transfer tax was “paused” for 180 days to allow middle class Canadian the ability to buy a home, how many more could afford to? If there was a change to the CMHC guidelines to allow first time homeowners to enter the housing market with only a 2% or 3% down payment, instead of the traditional 5%, how many more could afford to buy tomorrow? If lender policies were changed to be more realistic to todays world, what would change? For example, if you pay spousal support, take it off of the income instead of adding it to liabilities. How about using the actual payment on a credit card or line of credit, rather than a magical made up 3% figure? What if we used subject property rents as an offset rather than an add to income? When you rent out a portion of your home, it is truly an offset of your housing expenses. Imagine if all of these were implemented? Holy shit!!!

I am not saying any of these will be implemented, but I am also preparing for something to give. 3M knows what he is doing, knows how to manipulate things, and has the power to be able to do it. During the election housing affordability was a key concern, well, except for the boomers who somehow thought a foreign President was the largest concern to their well being. At the end of the day, something will have to give with housing. The governing party got elected by a bunch of boomers with a lot of home equity – so they cannot afford to drop prices and have all the old folks pissed off. On the other hand, simply changing qualifications, or some creative writing skills will allow the middle class, first time homebuyer to realize the dream of buying a home. It is really a win win scenario.

Will Carney have the balls to push the right people to do the right thing? Time will tell. Will we be able to free our housing market of dogma and take a fresh approach to lending in 2025? Maybe. The only thing I know for certain is that I know nothing about what the future holds for real estate. We are at that point where the next couple or few months will be critical, and the decisions and choices our politicians make now will determine the next decade of housing prices and policy in Canada. That doesn’t give me a lot of faith as most of the politicians I would trust about as much as I trust gas station sushi, but maybe with a new leader – and a smart one at that, we can finally see some changes.