Money For Nothing

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In the last ten days realtors have moaned loud and long about the death two months ago of the 30-year mortgage. Every major real estate board’s bitched. Homebuilders have had several cows. CREA’s whacked. And I’m hearing of furious lobbying efforts in Ottawa as industry dudes try to corral the federal peckerettes and bring them to their senses.

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The rallying cry’s unanimous: you used a sledge to kill a flea. This single change, reducing the maximum amortization period that CMHC will insure to 25 years, will kill housing, construction,  economic activity and jobs, they say. It’s a game changer. F had no idea how widespread the collateral damage would be. So, change it.

Of course, he won’t. Bad enough that he was the guy who brought in 40-year ams and 0% downs, igniting a housing frenzy which became a gaseous Hindenburg, then had to backtrack in disgrace. Reversing policy again would diminish his stature. In which case he might be mistaken for a garden gnome. Nope. Not on.

What the real estate lobby should be asking itself is how such a relatively minor change could so crash sales and idle agents. Are there actually that many people in Canada who have no money? Do most buyers really need the lowest mortgage rates ever, plus thirty years to spread out payments?

You bet. If it weren’t for extreme leverage, houses might cost a third less than they do.

Consider what most people cough up to buy real estate lately. I’ve often told you the average down payment these days is 7%, meaning average buyers have to finance 93%. New numbers from the chief economist of the mortgage broker’s association back me up. According to Wilf Dunning, 61% of all purchasers in the last two years were high-ratio borrowers. In other words, in order to buy they had to mortgage at least 80% of the value of their homes.

Scarier, 41% had less than 10% down (many of those had 0%), with another 21% closing the deal with less than 20%. And this wasn’t a survey of just property virgins – it included every move-up buyer who was cashing out of an existing property and using their equity to help purchase a new one.

This tells us something. Canadians have being buying houses they would not afford if (a) rates were at normal levels, (b) the feds weren’t willing to assume the risk for high-ratio loans and (c) the pay-back period was the traditional 25 years. Change one of those conditions, and the buying stops. Soon after, prices correct.

This is exactly what’s happened. After a massive run-up in values and a galloping public appetite for both risk and debt, any meaningful drop in real estate values will seriously screw up personal finances. And yet this is inevitable. Ottawa’s mortgage tweak just advanced things.

Given how little money most families have saved or invested, we should never have achieved a 70% home ownership rate. And I doubt we will get there again in at least two generations. As house values fade everywhere, the debt overhang will be shocking. After all, if the average down payment in the last two years has been less than 10%, and real estate loses 15% of its value in the next two, then 61% of all buyers since 2010 will be under water – according to the industry’s own numbers.

Now imagine a 30% or 40% drop in parts of Vancouver, Richmond, Victoria, Brampton or Montreal, plus a condo implosion in downtown Toronto.

No, the problem is not that the elfin deity killed long mortgages. It’s that policymakers treated real estate as a special asset, getting Canadians hooked on the crack cocaine of cheap, endless money and convinced houses were riskless. So many will discover otherwise.

Blessed are the liquid.

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avatarGarth Turner - The Greater Fool posted Friday, October 12th, 2012.

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