The BOC has released a report [Financial System Review Dec 2011] that warns of the ‘growing vulnerability‘ resulting from ‘the rising indebtedness of Canadian households‘. Jesse has posted excerpts and commentary at Housing Analysis [Bank of Canada Blows the Alarm on Housing Again, 8 Dec 2011 (must read, all)].
Here’s jesse’s summary of the key points:
* Household balance sheets are likely to deteriorate further in coming months, and potentially years, with current controls in place.
* The Bank of Canada sees high house prices relative to incomes as unsustainable in the long run.
* OSFI is concerned about a disconnect between bank lending practices and long-term economic stability.
* Curbs on lending in terms of implementing risk management measures and countercyclical buffers on mortage loans are likely in the works.
* Usually announcements of further tightening of mortgage credit are announced in the first two months of the year to allow for proper implementation before the brunt of the peak of Canada’s spring selling season.
“If the Bank of Canada feels the need to lower interest rates in early 2012, this paper suggests that they are seriously considering additional curbs on mortgage lending to offset any additional monetary stimulus. This may mean, in particular overheated regional markets (like Vancouver’s), that OSFI will start enforcing measures more closely tied to regional price-income metrics. This means Vancouver homeowners may find credit availability tougher than other regions of the country.”
“This is an important report. I have been surmising that further curbs in mortgage lending are coming, but am still unsure what form they will take. It is still possible that curbs going forward will start delving into the low-ratio mortgage market — if prices do start falling banks who are lending on terms incompatible with government-backed mortgage insurance will create a significant liability for Her Majesty’s Government.”
The Vancouver RE speculative mania has been dependent on easy funding being available to locals, and we can’t see the market here tolerating any tightening very well. In fact, we’d anticipated that the bubble here would burst without any change in interest rates or mortgage rules, but simply out of a normal Ponzi-scheme stall. Any substantial tightening will precipitate and speed that outcome.
While BOC warns, here in Vancouver, lending remains as loose as ever.
Remember this CTV piece from just last week?:
Linda Steele: At a combined income of $92K, Derek Atkinson and his wife could qualify for a $500K mortgage. [But Derek calculated it'd take them 5-6 years to save the necessary $25K down-payment.] This mortgage broker says the couple has several options:
Pauline Tonkin, Mortgage Broker: You have to have a minimum of 5% down to purchase a place. But you can borrow that… from an unsecured line of credit,.. you can have that gifted from a family member,.. you can take that from your RRSPs.
Male announcer: There are other options, but, of course, a lot of people really have their hearts set on owning their home..
Steele: Oh, I know… it’s like it’s a rite of passage.. that you’ve seen your parents do.. for sure. Here’s the deal, talk your options over with a mortgage broker, you might be surprised by what you can actually afford.
[The announcers' gesticulations demonstrate the welcome 'tangibility' of RE. -ed.]
- from video newscast, ctvbc.ca, 1 Dec 2011.