Mortgage Rule Changes – “Wealthy people can borrow whatever they want from banks, and they can work that out from banks. That is not my concern.”

The mortgage changes are all over the news today:

‘Ottawa caps insured mortgages at 25 years’
CBC, 21 Jun 2012

‘Flaherty clamps down on mortgage rules to cool overheating market’
G&M, 21 Jun 2012

‘How Jim Flaherty’s new mortgage rules will sink house prices’
G&M, 21 Jun 2012

‘Canada toughens borrowing rules to cool housing market’
Reuters, 21 Jun 2012

‘Finance Minister Jim Flaherty tightens mortgage rules’
Vancouver Sun, 21 Jun 2012

‘Canada Tightens Mortgage-Financing Rules’
Wall Street Journal, 21 Jun 2012
[“Canadian Finance Minister Jim Flaherty dramatically tightened the country’s mortgage-financing rules—the fourth time in four years—as officials here struggle with what they have increasingly worried is an overwrought housing market.”]

‘Canada’s Flaherty Tightens Mortgage Rules to Avert Bubble’
Bloomberg, 21 Jun 2012

‘Ottawa’s new mortgage rules will lead to ‘long-term stability’: Carney’
G&M, 21 Jun 2012

‘Shrinking CMHC, the beast at the centre of housing market’
G&M 21 Jun 2012

“Flaherty also moved to cap the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent in order to get CMHC insurance. Those two ratios are technical limits on how much debt a borrower is allowed to take on as a percentage of their overall income. This move, too, is aimed at making sure a borrower can’t bite off more than he or she can chew.
The final change was to limit CMHC insurance to homes priced under $1 million. In addition to not being able to access CMHC insurance, Flaherty said the new rule will be that a buyer of a home priced higher than $1 million must have 20 per cent or at least $200,000 down.
“Wealthy people can borrow whatever they want from banks, and they can work that out from banks,” Flaherty said. “That is not my concern.”

CBC news, 21 Jun 2012

Some find the moves surprising, but we don’t. This is an attempt at using the ‘scalpel’ that many have called for. The BoC is unable to raise headline interest rates to curb RE borrowing, so the mortgage tools have to be used. Canadians were not listening to the calls for prudence, and RE continued to run up in fashion that we know those in Ottawa know is a speculative mania. They are trying to rein this in, and, perhaps as important, they are wanting to be able to say they acted. When Flaherty says “Our government has encouraged Canadians to borrow responsibly; most Canadians have done so”, he wants to now be seen as having stepped in to curb those who were incapable of curbing themselves.

Overall we agree with the moves, they are in the right direction, they will make it harder for people to overextend themselves into mortgage debt, and there will be downward pressure on prices. Any moves that bring housing prices more in line with fundamental values are to be encouraged.

We also see the irony (pointed out by the majority of commenters at sites like the CBC!) of Flaherty now wanting to look prudent when he is in actual fact simply reversing his own prior imprudent moves. It was he who increased amortization length to 40 years in the belly of the mania. He got his timing wrong, as Governments almost always do during manias, and we suspect history will prove this to be true.

The $1M cap is of interest to those watching the SFH markets in Vancouver.
Of course, the average SFH price here has yet to drop below $1M.
Even prior to the introduction of this rule, most SFH buyers over $1M in Vancouver have had >20% downpayment, but a minority haven’t. (We don’t know the exact break-down and we’re not sure if they’ve ever been published anywhere).
But, despite this, we expect this new rule to now spook both the ‘low-ratio’ buyers (those with over 20% to put down), and, more important, the banks. We suspect they realize the market is vulnerable, and they’ll get stricter with everybody, even the person trying to buy a $2.4M west-side Vancouver home with $800K or $1.2M down. Perhaps especially that kind of buyer. So it’ll be of interest to watch the effect of this change on the high-end areas.
We’d also expect the rule to offer some temporary support for Vancouver SFHs in the $800K-$1M range, as one will assume there will be buyers at those levels who previously could have stretched to >$1M but now can’t. We have previously predicted that the most likely trajectory for Vancouver prices would be a drop to 2009 lows, a bounce, and then a plunge through to a trough target of 50%-66%-off the highs. These new rules may speed the drop to below $1M, offer some transitory support just below $1M, but not make a big difference to the ultimate price targets.

These mortgage changes will likely speed the demise of the Vancouver RE bubble, and we suspect they will give some folks something to blame on the way down. Prices were set to collapse of their own accord, regardless, but most people like to be able to point to a cause.
– vreaa

102 responses to “Mortgage Rule Changes – “Wealthy people can borrow whatever they want from banks, and they can work that out from banks. That is not my concern.”

  1. Renters Revenge

    All effective July 9th?

    • Yes, apparently so.

      • Renters Revenge

        That is a big deal. A little over two weeks to lock in under existing rules. That really surprises me and conveys significant urgency.

      • @ Renters Revenge
        My sentiments exactly. Perhaps those newly relaxed guidelines coming from the OSFI will be far more stringent than expected in light of the current global market turmoil? It sounded to me like Bernanke and co have opted to sit on the sidelines for the balance of the year as the European house of cards continues to cave in on itself. What’s the point of pissing into a hurricane, right? Flaherty, Carney and Harper were probably warned in recent days that it is time to batten down the hatches and hope for the best in the new year.

      • I wouldn’t call it urgency. The urgency train left about 4 years ago. I’d call it avoidance of causing a temporary boost to the market.

  2. Let’s look at the verbs in the headlines:
    caps, clamps, sink, toughens and tightens x 3.

    Not one said ‘Flaherty restores mortgage rules to historical norms.’

  3. I’m smiling like a Cheshire cat this morning… Some like the smell of napalm in the morning… I like the sound of Mortgage Brokers and Real Estate agents screaming bloody murder…

    • “I’m smiling like a Cheshire cat this morning… Some like the smell of napalm in the morning… I like the sound of Mortgage Brokers and Real Estate agents screaming bloody murder…”

      pass me the beer and popcorn LOL

    • “No wonder (Flaherty) put a weed up Command’s ass. The (economy) was being run by a bunch of four star clowns who were gonna end up giving the whole circus away.”

  4. “Robert Kavcic of BMO Nesbitt Burns says the reduction in the maximum amortization period is equivalent to an increase in mortgage rates of about 0.9 of a percentage point.” – G&M article

  5. The Poster Formerly Known As Anonymous

    I will print this comment here again in case it gets lost – I think a lot of people have difficulty understanding why this makes it easier for them to afford a home instead of more difficult. Please correct this if there is a mistake in the reasoning.

    Hi Vanschool,
    All of those “poor or young couples” can pay around 1800 a month, let’s say. They can either pay 1800 a month for 30 years (roughly 650,000 including interest). So they can buy a 420,000 house, OR, they can pay roughly 1800 a month for 25 years and pay roughly 540,000 for a 320,000 house. Which would you rather pay for the same home?

    Here is the secret that you are not told: when you are shopping for a home, you are competing against only other poor and young couples. Not against the rich and old. There are only a few of them. Most homes are bought by the poor or young who can buy only with whatever mortgage comes from 1800 a month, together with whatever downpayment they can get from savings or family. So, the seller MUST lower their prices after this change, or they will not find a buyer. soon, all the 420,000 houses will become 320,000 houses.

    So you, and other poor or young couples, will soon get to pay less for your home!!

    That is why this is great news.

    And I should explain – when I said there are very few wealthy buyers, I mean there are very few wealthy buyers interested in the same home that the poor or young are interested in. They are interested in the 700,000 – 900,000 homes, let’s say. But for the same reasons, all the 700,000 – 900,000 homes will become 600,000 – 800,000 homes. So even the wealthier buyers will pay less over the mortgage period.

    Pretty good news for everyone except those that bought the home thinking they could sell it for more than they paid.

    • Your reasoning seems sound.

    • anonymous,
      Bad example. The last time a house was 420K in Vancouver was more than a decade ago.
      Buyers who will be effected are first timers, and they are not active in the detached market. These rules changes only effect the bottom end of the market. If you want to effect the detached segment you’ll have to cast a bigger net. Why not have mortgage insurance rules kick in at <30% instead of current <25%.
      All you're really doing here is cutting out the bottom end…the condo market. Yawn!

      • The Poster Formerly Known As Anonymous

        Funny troll!

        Condos are the future of family housing. You said so yourself. All SFHs will disappear in time. The condo market tanking is great news for all first time homebuyers and eventually all homebuyers. There will be lots more money left over to spend on toys and retirements.

        How are your property investments feeling today? When you sell them to developers who will put condos in their place, will you get more money or less money after today’s news?

      • 4SlicesofCheese

        formula1 | 21 June 2012 at 11:47 am | Reply

        the miracle of the property ladder. It allows meagre peasants the opportunities that property ladder non-participants marvel at.
        “and the meek shall inherit the earth”

        The bottom rungs are missing from your property ladder.

  6. Exchange in the comments section at the Globe and Mail:

    “Thanks Flaherty, you’ve just put millions of Canadians ‘underwater’. Thanks for making my home worth less than what i paid for it 6 months ago.” – Jasonn

    “You’re kidding right? I mean, we haven’t even touched the interest rates yet and you’re already complaining that your house isn’t worth what it was six months ago? What are you going say when interest rates rise and your home value drops significantly? That we shouldn’t raise interest rates either?” – JC50

    “Funny !….. you ask for the money and it’s Flaherty’s fault. YOU (not the nanny state) are responsible for the consequences of your acts, you decided to buy, you agreed to the price, you asked for the money, you signed the mortgage. ” – Carl1

    • 4SlicesofCheese

      Who knew our countries financials were so fragile?
      I’ll bet Jason wasn’t complaining when they raised the amortizations or object to experts who said our lending practices are prudent.

    • Idiots like [Jason] deserve to drown…his “whining” sounds familiar…like those dim-wits from down south just after “their” crash…

  7. Question: why should the state have anything to with mortgage rules in the first place? Interference in markets does not temper booms and busts, it exacerbates them. All the tinkering and backtracking on mortgage rules goes to show that they were arbitrary in the first place. Let private citizens and lenders work out whatever terms make sense for them.

    • Agree. The mispricing of lending risk has been a major contributor to the Canadian RE bubble. Borrowing money has been too easy; the cost too cheap.

    • I agree that mispricing lending/cheap credit has been a big factor in the RE bubbles around the world but don’t agree that governments shouldn’t have anything to do with mortgage rules. In fact, lack of regulation of financial institutions caused a lot of the mess because banks opted for short-term profits over prudent risk management.

      However, I think we can all agree that making the banks carry ALL the risk associated with lending (no securitization, no CHMC, loans stay on the books etc.) would cause them to adopt appropriate risk-management measures.

      • Agree with this completely. Homes and Mortgages have too much potential impact on the economy for the govnmt to not be involved in the equation but they should be creating rules and regulations not being involved by using tax payers to guarantee bank profits.

    • Sorry, but if the state provides the insurance on the money lent by the banks, they can instate whatever rules they desire. It is not a currently free market system, it is backed by the state and thus they have the right to change the rules to their benefit.

      I do agree that the insurance ratio should be changed and furthermore the government should get out of that business entirely, but until then this is what we have to deal with.

  8. Even gloomier news: Financing the Global Transition by Mark Carny http://www.bankofcanada.ca/2012/06/speeches/financing-the-global-transition/?utm_medium=twitter&utm_source=twitterfeed

    “Austerity is a necessary condition for rebalancing, but it is seldom sufficient. There are really only three options to reduce debt: restructuring, inflation and growth.

    Whether we like it or not, debt restructuring may happen. If it is to be done, it is best done quickly, and on a sufficient scale to restore sustainability. Policy-makers need to be careful about delaying the inevitable and merely funding the private exit.”

    • Thanks for posting that link, Watchdog. That speech was remarkable in so many ways and quite candid I thought. It has also reafirmed my comments from two days ago where I was discussing the impacts of wage arbitrage on Western economies and why globalization and the current harmonization of international financial markets will have a flattening effect on wage growth over time. This will simultaneously lead to higher incomes in developing nations. I thought this one remark was very candid where the poorer Eastern European states were concerned as they were to be absorbed in the Union….

      “A sustained process of relative wage adjustment will be necessary, implying large declines in living standards in one-third of the euro area”.

      It does not get more blunt than that. We in this country are not immune to these same forces only the scale is global in nature rather than localized to regional trading blocks. It is important to appreciate that one of the real outcomes of a truly globalized economy is that incomes are shared more equitably across larger areas. All the goodies don’t just land in the laps of North americans anymore and the point Mr Carney made while discussing how Chinese incomes versus US ones have gone from 30 to 1 in the past to the current 6 to 1 ratio is dramatic proof of how the rebalancing has taken shape in the past two decades.

      More is coming.

    • Renters Revenge

      Last gasps from the central planners as they try to maintain the appearance of being relevant.

    • Hmm. I thought there were 2 options to reduce debt; pay it back or default.

  9. As I see it one of the most important moves was capping the debt service ratios at 39% and gross debt limits at 44%. I wonder how many recent home buyers in the Lower Mainland fit in that category? (if anybody knows by the way, I would love to hear it. We need to look at the math of these direct changes) It seems to me this is a guarantee of killing off much of the first time buyers market.

    It means almost everyone who listened to the realtor come-ons and bought in the last two years with small downpayments is going to be underwater fast too. And even those who packed the big bucks into the bank on sale day will see real wealth evaporate as home prices are forced back down to earth. This is pretty exceptional stuff. Gutsy too when you think about it.

    Have any of the other G20 Finance Ministers taken such dramatic moves?

    This surely targets Vancouver and Toronto debt hotspots and means that most vendors will have no choice whatsoever but to drop asking prices if they want to make a sale. Right? So list prices are coming down and now it WILL make a difference as there are always some who MUST sell.

    I don’t think we can underestimate the combination of these two forces on the impact it will almost immediately have on comparables. This is a significant move and it will chill what euphoria still remains while putting buyers back in the drivers seat.

    So it is sellers who will be pressured more than buyers to meet the restrictions where debt servicing is concerned. You can ask the sun and the moon for your place but if nobody qualifies well then, guess what….you have to drop your price and get more realistic or resign yourself to no deal. These changes are designed to force home prices back down to conservative valuations of the past and bring them back in line with historical price/income norms.

    Lets just hope the market reaction is not too sharp. We want to come down slowly.

    • “I don’t think we can underestimate the combination of these two forces on the impact it will almost immediately have on comparables.” – Agrarian

      Which, for some ‘unfathomable’ reason, reminds me of my two favourite ‘noughties’ cliches… “Perfect Storm” and “Lethal Cocktail”…

      • For the non-literati, it’s about being ‘under water’.

      • Thanks Nem. I loved that movie. By the way I may have misunderstood the intention behind caps on mortgage lending at 39% of gross income. Still looking for more detail. My understanding initially was this signalled a rather profound change with regards to fixing total mortgage debt to an absolute number…..thus implying no more liar loans, no more self employed claims etcetera.

        My knee jerk conclusion was for bank enforcement of debt/income ratios in order to approve any new mortgages and thus a very significant change in the relationship between borrowers and lenders. But now I have some doubts and am not sure I made that call quite right.

        It has been quite a day though. Mindblowing to say the least.

  10. “The final change was to limit CMHC insurance to homes priced under $1 million. “Wealthy people can borrow whatever they want from banks, and they can work that out from banks,” Flaherty said. “That is not my concern.”
    So under any circumstance, any new borrower wanting to buy a home of $1 million or more is going to have to have $200,000 down at a minimum. That’s also likely to have a major impact on a comparatively small segment of the market.”

    The words “wealthy people” and “small segment of the market” really %@#$%@#% bother me as I’m in Vancouver.

    • Our draft headline on this post was something along the lines of ‘Flaherty Abandons Buyers Of The Average Vancouver SFH’.

    • A million dollar house is expensive- location doesn’t matter.

      • We agree, but there has been much counter-argument, and examples of such, in recent years.
        Perhaps we’ll return to a time when a “million dollar house” is again considered “expensive”.

      • You can’t buy a livable SFH in Vancouver for less than $1 million so the CMHC limit effectively forces private lenders to self-insure purchases of all SFHs in Vancouver. As Canada falls into the grip of the Great Financial Crisis – part deux, the banks will simply not offer mortgages for SFH’s in Vancouver. At this point, there will be no doubt what percentage of SFH purchases are HAM (ie. 100%) – although I would expect far fewer HAM purchases based on what is going on in China right now. Now begins the stage of a coordinated global housing price deflation despite long bond rates which will grind toward zero over the next 10 years. I’m interested to see what the BC provincial government will come up with to again attempt to postpone the collapse of their economy which is now nearly 40% dependent on the housing bubble.

      • “I’m interested to see what the BC provincial government will come up with to again attempt to postpone the collapse of their economy which is now nearly 40%”

        Re: ‘their economy’. They like to think so. It is the market’s economy. The government will tax other areas and call it’s own cuts ‘cost savings’.

        Limited glee on Premier’s blue flame hopes. Utilities, blackjack, and user fees may be bread and butter for a while. And a half billion a year from our northern pollution pipeline deal.

        “Now begins the stage of a coordinated global housing price deflation despite long bond rates which will grind toward zero over the next 10 years.”
        Concise. Watching that, and now that the consumption class is nervous about the game, where new bargain markets may open.

  11. These changes are huge. The $1 million price limit for CMHC mortgages alone would be enough to bring down the already falling Vancouver market. The average home in Vancouver proper is over that limit. That means to buy the average home in Vancouver you need $200,000. Are you kidding me?

    If I owned a house currently worth 1.2mill I would be furious. The only people who would have $200,000 for a down payment are people who just did very well on a condo over the last 10 or so years and are looking to move into a house. However, the 25 year maximum mortgage rule coming in will probably eat away any significant gains made in condos too!

    Even though this house of cards was already on it’s way down, the blame for this will get placed on big F’s head, even though he finally did the right thing and put the rules back to where they were in the first place.

    • Not much of a name...

      The way I understand the new rules is that the CMHC limit of $1m is based on the property value not the mortgage amount. The $200k down payment is irrelevant.

      Mind you, should someone with only $100,000 be purchasing a property worth $1.2M, but I digress?

      • I would think the banks will be applying the new rules where the 39% debt ratios are concerned. They must now have verifiable income to process a loan when meeting the new rules. This is a huge chill for Vancouver.

      • “This is a huge chill for Vancouver.”

        That pretty much summarizes the package of changes.

    • The Poster Formerly Known As Anonymous

      Well, he will deserve the blame either way. He set it up to inflate in the first place.

      However, they will try to spin it so that Flaherty looks like the hero who had to make the tough and unpopular move for the good of the people blah blah. I will expect them to start calling what happened an actual bubble, blame it on the consumer-speculator, and say it was for our own good that they curbed our excesses. Will anyone buy it come election time?

      Or he could man up and admit it was a mistake, and say he is fixing it before we go Full Ireland. He would get more respect that way but maybe not Conservative votes.

  12. This is going to kill the RE market. I think this move is going to send the economy into recession but maybe that’s what the Gov wants…better to pull the band aid off.

    What’s going to happen to those people with 40 year Amortizations when they their term comes up for renewal? Will they be forced to take out 25 year amms or do they get grandfathered?

    • Not only are they grandfathered, they may very well be renewing on better terms (assuming they are not so far underwater that walking away and declaring bankruptcy winds up being the more appealing option). The govt might be in damage control mode now. They know they’re going to have to pickup the massive bar tab at some point, so they’re closing the joint early and giving any remaining latecomers just a few minutes to get their final orders in.

      • Those who are able & willing to renew their mortgages are not going to affect the RE ‘market’ much because the market is made by buyers and sellers. It is only through lack of inventory that non-sellers have an effect.

  13. this mortgage amortization adjustment thread, posted by Vreaa, and the BoC austerity article posted by CanWatchdog;

    my comment:
    It’s all about managing the perverse population explosion during the 1960’s. Fertility rates peaked in 1966 in Western Canada, when Pluto and Uranus were conjunct in Virgo. Now, 45/46 years later -depending if you clock the boom from the shock event, or when the baby pipeline empties 9 months later- we see Pluto and Uranus in EXACT square on June 24, 2012

    The housing bubble was totally managed on the up, and will be managed on the down. THere are no surprises to those that pull the strings.

  14. The mortgage rule tightening story is ‘trending’ very strongly all over the media and blogosphere, perhaps more violently than any other we can recall. The G&M appears to have a small army of writers producing articles, and we’ll add some of them to the original post.
    Here’s an example:
    ‘Shrinking CMHC, the beast at the centre of housing market’
    G&M 21 Jun 2012

    • True enough, VREAA.

      A little more than a year ago Cam Good’s chopper fleet was airborne over White Rock and the media couldn’t lap it up fast enough. Richmond was sold right out, TV announcers were repeatedly proclaiming Vancouver RE “HOT,” bidding wars were the norm, and BPOE RE was god.

      My how the pendulum has swung. It won’t happen overnight by any means, but judging by the abruptness of the new regulations and the media/public reaction thus far, this is a watershed moment – even if just in the perception.

      • A watershed moment. That is exactly right, Gord. There is something we don’t know about that was discussed at the G20 and has precipitated this action. There is always more the the picture than meets the eye but something big is going on. Have the leaders chosen another course suddenly or is this merely an acknowledgement of the serious structural changes we are about to embark on?

      • Based on the sell off in global financial markets, perhaps we could call this a “waterfall” moment as well.

      • Ralph Cramdown

        Discussed at the G20? Maybe Merkel made a private crack that Harper should solve his housing bubble before he gives Germany economic advice? That might’ve stung.

    • Here’s a revealing quote from a Canadian Mortgage Trends commenter:

      D said…
      Flathead just f’d up my whole families future. Was expecting to sell our house next spring for 1.3 million. Now this f#$#%rs law upon me and my buyers will make me probably loose 300 f’n thousand dollars that we need to take care of my mother with the rest of her life as she is disabled.

      mf flatheadery bs

      I always get stuck in the middle of $#\+ whenever it comes down, ALWAYS ME, no one else, such pure mf bs. After 20+ mf years in a place, about to sell and this bs drops on me. Flatheadery you….

      It sounds almost more like a spoof on a self-entitled homeowner than a real person, and possibly it is. The part about cashing in on his home equity to look after his disabled mother sounds almost too tragic. Like saying, “My grandmother was just going to have that life-saving operation! Her bags were packed!” The “ALWAYS ME, no one else!” denotes either a narcissist, or perhaps a mischievious housing bear trying to paint whining homeowers as such. Who knows?

      If it is genuine, he’s betraying a mindset that says, “I’m counting on – and therefore entitled to – perennial home equity gains for eternity”. If this guy has owned the house for 20 years (in Vancouver no less), even a $300,000 hit leaves him sitting pretty. Unless of course he’s borrowed against the “equity” all the way up – perhaps to provide care for his ailing mother?

      Apparently the government has no right whatsoever to make any decision that might negatively affect home prices, regardless of what the larger economy or the collective good of Canada requires. Just shut up and keep guaranteeing those mortgages, my mother needs her medications. Likely it never occurred to him that his “buyers” (they’re his buyers you understand – did I mention that he’s a narcissist?) might also have disabled mothers some day, and will likely appreciate having $300,000 less in mortgage debt.

  15. We await response from the RE and mortgage industry.
    Canadian Mortgage Trends is a good site for mortgage info and discussion thereof.

    • CREA had a brief, stern press release asking that the minister “consider carefully any further tightening”:

      We believe today’s announcement is a measured response to the government’s often stated concern about household debt levels and the housing market. That being said, we would remind the government that the re-sale housing market makes a significant contribution to the economy, adding an estimated $20 billion in spin-off spending and over 165,000 jobs in 2012.

      Recent statistics from The Canadian Real Estate Association indicate that the national housing market remains balanced. The impact of measures like those announced today must be closely monitored to ensure they have the anticipated impact and don’t create a spillover effect and slow the economy.

      For these reasons, going forward, we would urge the government to consider the impact of further interventions in the market carefully.

      REALTORS® and the government share a common interest in the value of homeownership and its contribution to the economy and the well-being of Canadians and our communities.

      Property buyers and sellers should contact a REALTOR® if they are considering entering the housing or commercial real estate markets to better understand the impact of these changes in their communities.

      • 4SlicesofCheese

        CREA® Master of subtle threats and guilt trips.

      • Thanks Zerodown. Suddenly the repetitve refrain from CREA that the market is “balanced” just sounds so lame in light of the dramatic changes we just witnessed.

      • Ralph Cramdown

        I recommend everyone contact a realtor, say you want to buy a place before July 9th, have him chauffeur you to about ten places, then stop returning his calls.

  16. Alternatively it might also mean that people need to sacrifice more to buy the coveted Vancouver SFH, I mean when you are competing with 6 billion other people on Earth trying to buy your own place in the best place on Earth, sacrifice is called for. It could mean taking on that 2nd or 3rd job, delaying having kids, rent out more of your house, grow your own veggies in the back yard, bake your own bread, eat cheaper cuts of meat/fish or cut them out all together, ditch any drink/smoking, knit your own sweater, repair rather than throw out worn/torn clothing, cut out cable and expensive phone & cellphone plans, share Internet with neighbors, reduce electricity use – put on that sweater at night, use a hand cranked flashlight, dial down the hot water tank temperature – maybe convert to an on-demand unit or timer to switch off at night, etc. Last but least, lobby your MP ot reverse all these evil arbitrary changes!! I mean a house is a basic necessity, government should not make it harder to buy it! Instead government should help prospective buyers with tax breaks, grants, etc. After all, we just had the head of homebuilder association telling us how important housing is to the economy!!!

    As well, realtors here need to go on an all out offensive towards the women. I mean seriously, why would you marry a guy who doesn’t have a paid off house in the best case, or at least his own place? They have to change the mindset of the ladies here into the Chinese women’s mindset – no house = no marriage. Ideally paid off house at that. 🙂

    Seriously though, I think government should just stick to helping first time young buyers and recent immigrants and maybe given those who made financial mistakes but have now learned and changed a 2nd chance. That means mortgage insurance for the 1st home only (maybe an exception for newlyweds if they already own one place while single) at a maximum multiple of income. No insurance for anything like investment condos. However support for co-op housing, pure quality rental buildings suitable for family, seniors, young singles, disabled, and low income. That’s it. Back to CHMC’s original mission. That would have simpler and prevent this kind of excess like we had. Also no government backstop for private insurers. Government don’t backstop private life insurance or property insurance, mortgage insurance shouldn’t be any different.

    • Space, dude, I *have* a crank/solar flahslight. And a crank/solar radio too. Owned ’em both for a few months now. They’re awesome. 🙂

      • Where did you buy them? Walmart? Cdn Tire??

      • Me too, Gord. And hey, I did knit my last sweater. You know….just to prove I could do it. If you are curious it is the worst sweater I have ever owned.

      • Farmer: You knitted your own sweater? Congrats. Knitting is HARD. How long did it take you?

        space: Nah, I bought them from Amazon. I buy a lot of stuff from there. I have them ship to a delivery depot in Blaine, literally just down the road from me. The “Energizer 3 LED” flashlight and the C. Crane “CC Solar Observer” radio. The latter has AM, FM, and Weather bands, an integrated (low-power) flashlight, and a cell phone charger. They both have cranks, but I’ve powered them so far only with their solar panels. Have been very pleased.

      • How long? Way too long, man. I felt like a retard doing it too because I kept losing count on the stiches and so I got clumps (oops, not supposed to use the retard word anymore).

        Hey Gord….btw…..your article crashed housing.

  17. While late is better than never, these changes are way too late. The damage has been done.

  18. Carioca Canuck

    Why are they doing this ?

    Haven’t we been told all along, and as late as of this morning, that there was no RE bubble ?? Why such concern.

    ROTFLMAO……!!

    • prices going up = “good times”
      prices going down = “bubble”

    • Yes, very funny. No housing bubble, the economy is improving, unemployment is going down, the banks are solvent, Europe is getting it’s house in order etc…

      IMHO, this was all hot air. I think what occurred over the last few days has to be considered borderline fraudulent. The world was deliberately led down the garden path for one last time while those rats who were supposedly manning the ships quietly pulled the plug, slipped out of the back door with all the remaining life jackets and left everyone else holding the bag. It is clear now that Flaherty and co made these token changes to the mortgage rules simply to save face. Of course they know it is too little too late. IMHO, they have probably known for some time that a massive shoe could drop at any moment and have been making the necessary arrangements in advance to ensure their families, friends and associates are well taken care of. And now, it appears that moment has come.

      • I don’t think so Bullwhip. What happened is the real estate lobby in Ottawa, the brokers, the pawns and the gang that has been pushing the bull housing agenda for their personal benefit just lost the ear of government. This was their shove-off moment. Their Waterloo.

  19. I do find it particularly interesting that these changes came shortly after the G20 summit concluded.

    On top of that the markets have a massive selloff today, on no particular bad news.

    The gut feeling is, behind the scenes news of something big is spreading. Those in the know are raising capital and bailing out while the going is relatively good. When things are status quo the markets love to melt up on bad news, and typically sell off on bullish news. The fact that today was opposite is interesting at least.

    Wouldn’t be surprised if we have another debt crisis pop up somewhere soon, a Lehman moment perhaps.

    Either way makes me happy to have no consumer debt and a tiny mortgage, with a secured rate for a decade. Can’t imagine going to sleep with a million dollars hanging over my head tied up in a non productive asset (liability).

    • I agree, something’s up. Once the G20 concluded and the Fed meeting wrapped up yesterday, Flaherty went immediately into damage control mode. I suspect they have all been told that the sh*t’s about to hit the fan. I think after exhausting every possible short term fix, the powers that be must have come to the conclusion that none of them would work. The problems are simply too large. So, instead of continuing with their feeble efforts to keep things propped up, they are going to batten down the hatches, let the chips fall where they may and come to the rescue after everything has crashed and burned.

      • the question to ask is how much pain (markets > banks > govts going down) before xerox … not a lot, imo … could be wrong of course

      • I think that’s right bullwhip. Germany won’t relent on its austerity drive and now it has become the focus of frustration not just for the EU but for everyone else on the planet who is holding their breathe awaiting real growth to kick back in. Maybe, as you suggest, the conclusion is to just let the chips fall until an accomodation (Eurobonds and an unfettered ECB) is essentially the only option remaining.

        Which means we are heading into deep waters for awhile.

        The problem seems to be sourced right from the beginning of the GFC. When America, Canada, China and much of the rest of the world stimulated like hell to reactivate their economies we saw England and the EU choosing austerity measures instead.

        So they benefited from our policy initiatives over the short term but the lack of decisive cooperative actions on the part of some countries has resulted in some of those resources being wasted. We need to row together.

        Hopefully the message is finally getting through.

        We are all in this together.

      • I agree, the ball’s about to drop. By U.S. election time we will be knee deep in dung.

      • The behaviour of QE and long duration purchases has been to kick out the expectations of ZIRP relinquishment. That there has been concerted efforts by Flaherty — and Carney too — indicates to me they are expecting some liquidity hitting the system, in the US, Europe, and China, and are concerned it will flow into Canadian housing.

        That’s my read. The 25 year change was brought out as much for psychological impact as it was to increase savings rates. BTW I’m still not sure if banks are going to follow suit with their low ratio loans. There are also more indications that the DoF doesn’t care about Vancouver, they assume it’s going to do what it does but (correctly) ascertain that whether it booms or crashes will have little impact on the Canadian economy. Toronto OTOH…

      • That is not a bad theory, Jesse. Not bad at all.

        So you are thinking that the boys KNOW there is going to be a massive intervention or stimulus of some sort and are getting proactive in choking off the curent euphoria with regulation before the wave arrives and wrecks our economy……

        Not bad at all.

        There is brilliance in that analysis. I like it because it is more comforting than the idea the boys have combined forces to squash housing due to a belief we are about to enter a seriously deflationary period. You may have just hit the nail on the head.
        ——————
        To Vreaa: Thanks for the great job on your site today and all the efforts you made in doing the early analysis and then getting all those links together. Very helpful. I hope you are getting a good nights rest.

        [Thanks; a pleasure. -v.]

      • ++ jesse, farmer … that does sound very plausible

      • Jesse / Farmer, would you mind explaining your theory in slightly more laymen’s terms? I’m trying to understand your take on things, and it’s making my head hurt. Thank you for your continued intelligent commentary on this blog, I’m learning a lot from you! cheers

      • Agree re possibility of another big rescue/liquidity injection, soonish.
        It should give the markets legs for months… then down again, in earnest, IMHO.

      • Not sure where to start, Curious. Maybe I am using too many acronyms and if so, I do apologize. Sometimes I make the assumption everyone follows the twists and turns of the policy led interventions in the economy but that is not a fair conclusion on my part.

        What Jesse was discussing that got me excited was a contention that (ZIRP) zero interest rate policies had become an expectation. He also mentioned long duration purchases which refer to bond buying by the US Federal Reserve (the Fed) that are designed to flatten the yield curve and lower interest rates over the long term.

        No country can afford to pay higher rates at this time without there being serious offsetting cuts to social programs or large tax hikes. You will note how just a small increase in Spanish bond yields has led to an overnight crisis in the Eurozone. If debt servicing charges increase then something else must decline and therefore rates (interest rates) MUST be held low for as long as possible.

        Everything possible will be done to flatten rates and keep them down.

        This policy is clearly beneficial to the Treasury and US government as well (and to every other debtor nation on the planet including Canada) who are so deep in hock from past borrowing and sales of Treasuries or bonds that it sometimes makes Greece look like a holiday camp.

        So we do need to keep rates low.

        Everybody knows this and it is built into business models on the basis that the Fed will be able to keep this magic alive for the foreseeable future. It could continue for years in fact or until real organic growth kicks in again. The debt is just so large in the US and elsewhere it is technically unrepayable if it cannot be inflated away or restructured.

        The only other option is default.

        So higher interest rates will bring on a debt crisis not just in the US but in virtually every Western nation and everyone knows it. Thus, we “row together” as a community of nations and bite our tongues when others complain they cannot earn a decent yield on their savings.

        In fact, savings are actively being discouraged by such policies. An unfortunate outcome (for places like Vancouver) is that low rates have led to the blowing a massive asset (homes) bubble.

        In a few select Canadian cities we have a similar experience as capital (easy money in this case) is misallocated to property investments. It has gone there instead of into activities that lead to sustainable jobs growth and industrial or service sector developments that build prosperity and tax revenues.

        What policy makers want and need is for consumption numbers to remain high and to grow. One of the outcomes of the economic contraction in the 1930’s depression was that families hoarded money and did not spend thus making the Great Depression far more severe than it might otherwise have been. Accomodation (easy money policy was needed) but we were still on a gold standard which inhibited the level of intervention that might have been quickly introduced to address the imbalances.

        Governments hate gold backed currencies for this reason. They have no latitude to correct inefficiencies that develop as savings rise and cash is hoarded. But don’t get me started on that too.

        So anyway, prices fell throughout the 1930’s, retailers went broke, unemployment rose to extremes and the revenues governments needed to rescue themselves were strangled off as consumption declined.

        This led the US and Canada amongst many others to take on huge debt levels as public money was urgently needed to juice the economy in the absence of private and discretionary spending. We saw massive public works programs take place as an outcome all across North America.

        And it took decades to pay it all back.

        This time, governments are already very deeply in debt and there is not yet even a depression! You must appreciate that it is simply inconceivable that we fail in the task of reactivating the global economy or we will risk a serious breakdown in expectations of what governments can do to support their citizens. I am referring to the looming threat of severe declines in spending on healthcare, education, social benefits and pensions should our collective economies begin a deflationary phase. That is a difficult cycle to break out of.

        All of these areas of spending will be casualities of a financial crisis and none will be spared deep cuts as they are drastically reduced in the wake of a failure to address the debt cliff that lies ahead.

        Believe me, this is no laughing matter.

        England and Japan meanwhile are seriously strung out on past borrowing and debt. Amongst the highest in the world. Higher yields demanded by bond markets could be perilous to the stability of their economies, governments and way of life while bringing a hard landing (recession..or depression) and seriously reducing the existing standard of living.

        The deficits they face though (annual shortfall in spending versus income), which amounts in part to interest on the debt is still quite manageable as it is for most countries.

        So that is why we have all chosen to pay deficits only (at a minimum)and keep rates low while discouraging savings in the hopes we will recover soon.

        Many people believe it is no longer possible to contain all this debt and that only a massive global restructuring will resolve our crisis. That is another way of saying banks will fail, savers will get wiped out and defaults will occur at the local, state, provincial and sovereign (country) level.

        It will be a disaster if it happens and NOBODY will escape unscathed.

        So Jesse pointed out that perhaps the real reason Mr Flaherty has introduced such severe regulations at a point in the cycle where housing was already slowing…….is because he (Mr Flaherty), along with the Bank of Canada, have inside knowledge into the intention of policy makers like the Fed, ECB and PBOC to flood the system with another dose of liquidity (electronically created money from Central banks that is put on the ledgers of lending instituions).

        That is code for “money printing” and the priming of banks to ease up on lending which could lead to an even greater credit bubble forming in housing markets as borrowers access even more cheap easy credit.

        If he is correct then we will be very thankful for the actions of the Minister of Finance as they will be seen to have prevented an epic housing bubble from forming in this country.

        On a more startegic level, if housing purchases do not participate in the next round of liquidity injections it is hoped that the excess reserves will find their way into the creation of new business, reinvestment in plant and equipment and thus lead to an expansion in our economy. And we do prefer the good news side of the story and say a little prayer it can be engineered.

        I truly hope this is the outcome we see.

        And I hope this answer helped even if it was just the short version…….

  20. amazing thread. Indeed we see the collapse this week, like I prognosticated 5 weeks ago, and correlated with .. cough.. the astronomic alignments. But at the same time, a vorocious negative attitude greets this information, it’s like living in the twilight zone.

  21. So CMHC changes its high LTV loans, but do banks follow suit for the remainder of their portfolio? Usually they do but I’m not sure. There’s a lot of money looking to be loaned out.

  22. There’s a great quote from a mortgage broker in one of the G&M articles. They used to always find some mortgage broker who would talk about how it’s different here, and Canadians are borrowing responsibly, but looks like G&M is finally taking a different tack:

    “‘I think that the luxury home market will be significantly impacted by it,’ said Calum Ross, a mortgage planner who works with many buyers in Toronto’s high-end market.

    He thinks that’s a good thing. ‘It’s ridiculous that these people have ever been allowed to get high-ratio mortgage insurance,’ he said. Last week, he secured a mortgage approval for more than $1.25-million for a couple that he worries can’t afford the home, a situation he sees often.

    ‘I told them they were taking on too much risk,’ he said.”

    http://www.theglobeandmail.com/report-on-business/economy/housing/tightened-lending-for-mortgages-will-cool-market-but-by-how-much/article4362005/

  23. RE: Jesse & liquidity.

    That’s a very interesting point. Maybe Europe will push the liquidity, but I don’t think we’ll see much coming out of the US Fed. Maybe another round, but the board has been increasingly reluctant to support easing. To tell the truth, I don’t think Europe will do much, although the reports today on Germany’s manufacturing might spur something.

    It’ll be interesting to see what happens. These changes should help cool the market.

  24. The last 100 billion Euros to Spain worked for about 12 hours. (Or was it 100 trillion? Can’t keep all those zeros straight, anyway it’s not working.) Spanish bonds are relentlessly marching higher.

    At some point reality must be faced, and I’m starting to think it may be now in Europe. I believe the people are generally somewhat more financially literate and they are certainly more willing to take political action than here. It is becoming increasingly obvious that either the Euro, the European banking system or both is going down in flames. Even now the Euro and the Eurozone could be truly rescued by abandoning the banks, allowing the bondholders to lose everything. To a large degree that means the other doomed banks. Who cares if you are bankrupt by 10X or 100X?
    Central banks could also be cut loose. Major upheaval and chaos, but the countries and people will come through it, new banks acting as banks and not as Greek gods will arise. The pension systems all need reform as well, under sustainable principles. Europe underneath the financial absurdity is actually fairly self-sufficient. Reset the debt problem by forcing everyone to pay up or go bankrupt right now, then allow new institutions to arise from the ashes with the explicit understanding that if you lend to deadbeats you lend your own money and don’t come crying to Momma when said deadbeats proves yet again why no-one will lend to them.
    “Standard of living” as defined by fossil fuel and other resource consumption levels will take a hit, of course. That is a good thing! Standard of living defined by leisure time in inspiring public spaces, pleasant polite people, frequent varied small local cultural events rather than the rare over-the-top mass corporate events we have here, with marvelous food and wine will remain very high.

    I believe the people will accept and support this as long as the architects and beneficiaries of the tragic farce now concluding are seen to be punished severely as they should be. Bankrupted all of them, with an enormous non-dischargable debt attached to kick in at some very modest asset level to ensure they die poor. Jail-time only for the most egregious cases, nothing is served by it in most cases, bankruptcy (bankruptcy with teeth!) and enduring social shame is more fitting.

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