Someone in Ottawa is Getting Nervous

OttawaWe all read the news, including a certain someone who happens to have influence on Canadian mortgage regulations. Here’s what he might have been reading the past few days:

The Department of Finance has been trying to manage a “soft landing” in housing, but realty soothsayer Phil Soper sums up the market like this: “We expect no landing, no slowdown, and no correction in the near-term.” (Post article)

Do you get the sense that four rounds of mortgage rules are not moderating home values like mortgage deity, Jim Flaherty, expected?

And now he’s got another thing to worry about: potentially lower interest rates, which fuel debt accumulation.

In no uncertain terms, Bank of Canada boss Stephen Poloz is telling Canadians he’s “worried” about inflation falling too low. When the BoC says that in public, bet on rates not rising for several months. In fact, trader types are now pricing a reasonable chance of a rate cut.


(Click to enlarge)

This Bloomberg data shows a 48% implied probability of a rate cut by October, based on overnight index swap (OIS) prices. We haven’t seen the odds this high in a while.

This all comes as Canada just laid an egg in employment, losing an unforeseen 46,000 jobs in December. In the last six months, the country has created just 3,400 jobs a month on average, for a population of 35 million!

The key U.S. jobs report also disappointed today.

(Note: If you had to choose just one indicator to divine rates, employment would be it—albeit it’s very volatile.)

So this brings us back to the man behind the big desk at Finance. Knowing that housing is firing on most cylinders, knowing that the BoC has an easing bias, knowing that rates can’t be expected to moderate consumer debt levels, what does he do?

jim_flahertyIn recent months Flaherty has affirmed that:

“…We have no plans for further (mortgage rule) action at this time…”

But he’s also been reiterating this statement more often, as he did on CTV this weekend:

“We’ve tightened the rules four times on mortgage insurance and if we have to tighten them again, we will.”

If housing stays hot and the BoC starts telegraphing lower rates, you can probably translate this statement as: “We will.”

Sidebar: Quebec has been one of the more vocal provinces speaking out against further mortgage rule tightening, at least on a national basis. In November, its Finance Minister Nicolas Marceau issued this warning to Ottawa: “I suggest that Mr. Flaherty avoid implementing pan-Canadian policies that could negatively affect certain markets…Further tightening of mortgage rules could have adverse consequences on the market and on Québec’s economy.”

Rob McLister, CMT

  1. Any one out there to help me with my question ?
    I am looking at buying a house for 650 K and i have 20% (130) for down payment but i am thinking that
    the house price is not going to rise any further so instead of putting down 20% can i put down 5% and
    get CMHC and invest the 15% in bond until housing market collapse and buy using that 15% ???

  2. Hi tick tick,
    Im not a finance expert, but i think if u only 15% down uhave to pay cmhc insurance premium And when u buy bods from that 15 % interst rates are not very high. Also u have to pay tax on interst earned. So do the math of if it is you are able to earn/save more after tax.

  3. He had to get OSFI more proactive, it was becoming a retirement home for senior CA partners whose former responsibilities included signing off on bank’s audits. Can we spell “conflict of interest”?
    He had to get CMHC back on track because they were insuring to lower standards.
    Now he has to keep a lid on housing prices, well unemployment levels rise, knowing that construction has one of the highest economic multiplier effects of any industry.Every new home built is roughly the equivalent of two man-years of full-time employment.(Cdn Federation of Municipalities) & the money earned benefits 10 to 15 other entities.
    I don’t lose too many tears for politicians of any stripe, but I really don’t envy Flaherty’s position.

  4. The only thing that can come from further tightening now is the thing the Conservatives fear most – a hard landing. That will directly affect its major demographic – seniors and wealthier Canadians – and once they start losing money, they’ll turn on the Harper government like rabid wolves.
    Once the tightening is in place, it will take a long time for the necessary loosening of the rules to take effect due to bureaucratic delays – causing the damage to last longer and go deeper. Look at how look it has taken him to try and slow the market.
    What is it about this Ministry of Finance? He understands the laws of supply and demand for oil but can’t apply the same laws to real estate which is an even more finite resource.
    A better option now – if the true goal is to limit the taxpayer’s exposure to the housing market through CMHC – is to immediately cancel all the bulk insurance policies the banks have been using to securitize the risk on their investment products, putting them soley responsible for the risks they are taking. That would be unpopular and likely cost the party from financial support, but at least the taxpayers are off the hook for most of the damage.

  5. Requiring qualification at the BoC 5 year rate for all insured mortgages would take the most marginal borrowers out of the competition for higher priced homes. It would slow house price appreciation and reduce the number of people that won’t be able to afford their payments on renewal when rates aren’t at historic lows. A rough rule of thumb used to be a mortgage 2.5 times one’s income, now 5+ times is very common.

  6. I personally think you’re reading too much into this. I took Soper’s comments to mean that there will be no landing – hard or soft – because the market is currently healthy. And I don’t know that Flaherty was trying to bring prices down. I think he was just trying to stop unqualified people from taking out mortgages, as they did in the U.S. before their collapse. As for stating that the government will intervene again if necessary – what’s he going to say? No? If the market needed it and he ignored it, that would be irresponsible wouldn’t it?

  7. Great article Rob. If indeed Minister Flaherty deems it necessary, what sort of mortgage rule tightening do you anticipate that makes sense, and isn’t just punitive to the market?

  8. At the risk of feeding the bear troll… I suggest that you should have stopped reading Garth Turner and Ben Rabidoux and purchased 4 years ago, when the house you wanted was only $520,000, then plowed as much money as possible down on the mortgage in the interim.
    If you had, you would be sitting on a $650,000 home with about 40% in equity.
    Instead, your trolling this blog, most likely paying someone else’s mortgage, and still trying to time the market.

  9. Interesting how there are so many experts with opposing views on the future of Real Estate. Its also interesting how Canada has backed itself into a corner with record debt levels and record home ownership rates. Its definitely a challenge to bridge the gap between Royal Lepage and doomer forecast.

  10. Hi Brian,
    Flaherty has a clearly stated desire to see the housing market “soften.” He calls that “a good thing.” (And perhaps it is.)
    In October he said that he wants to ensure the price rebound (post-2012 mortgage rules) is a temporary phenomenon. So far it hasn’t been temporary.
    One year ago he said “…We needed to take some of the steam out of the rapid increases in prices in the residential housing market…I don’t mind prices coming down a bit…” That is virtually as close as he can get to saying “I want prices to come down.”
    That statement was made at a time when the average home price was $352,800. The latest data shows the average Canadian home at $391,085, up 11% in 11 months. In most people’s books, that qualifies as a “rapid increase in prices in the residential housing market.”
    Now we have sustained low rates, or an even a chance of rate cuts, on the horizon. Other things equal, that would support further price gains. How that must aggravate a man who took the unprecedented step to pressure individual banks into raising their mortgage rates. How irksome that must be when you go on record stating: “Interest rates are going to go up. They have nowhere to go but up.”
    Flaherty been clearly warned that, ”It’s dangerous for people to take on large mortgage indebtedness at lower rates.” Well, large mortgage indebtedness is furthered by the fact that prices are near record highs.
    On occasions where housing headfaked us into believing that it’s slowing, Flaherty proclaimed this slowing to be “encouraging,” attributing such success largely to his own policies. And now it’s clear that his actions haven’t had as much impact as he expected.
    In January 2012 Flaherty remarked: “…We are prepared to intervene if necessary…We’re not about to intervene now.” Five months later he intervened. In this writer’s humble view, to not infer Flaherty’s concern with prices and proclivity to act would be reading too little into things.

  11. Thanks Appraiser,
    Some ideas could be stronger credit scores, net worth and/or (as William suggests) qualification rate requirements for those with higher risk profiles.
    Higher risk borrowers tend to be those who, among other things, have relatively high TDS’s, smaller equity positions and minimal or negative net worths.

  12. Make borrowers pay their mortgage default insurance as part of their closing costs as opposed to adding to their mortgage balance.

  13. I’m an anonymous self-proclaimed expert on real estate and I recommend that you keep your money, rent for a few years and buy the house at a discounted rate in the future.

  14. Best method to controlling consumer debt is to reduce the max TDS ratio. It hasn’t been touched for years yet consumers have increased debts which we fail to factor in TDS calculation. A cellular, cable and internet payment easily reaches $100-$150 / month which has become a standard payment today. Gas prices, heating costs, insurance and taxes have increased year over year, yet we’re still accepting and qualifying with a TDS at 44%.

  15. Here Here on the TDS issue, as far as I know there has not been a change to TDS (except pushing upward) since I have been involved in lending over 25 years….
    The TDS is also based on Gross incomes and when you look at what we net today after high tax rates, high health insurance deduction ect, compared to 25 years ago, we are literally not leaving any disposable income for people.
    If Flaherty wants to make changes this would be a great place to start, but so would limitation on credit card interest rates…with the BOC rate at 1% what justification is there charge people upwards to 29%, there should be regulations..if the credit card companies were not making so much money they would be a little more concerned on limiting their exposure to clients..

  16. I completely agree with the credit card point. I’ve been saying this for the last couple years. Why are we making soo many changes to the mortgage industry and zero to the credit cards? I helped a client consolidate some of her $80,000 in credit card debt. $80,000!!! Who needs access to that much credit card debt. How are we allowing this?? That’s what’s crazy. Yet, now we limit borrowers to how much they can refinance (currently 80% max LTV) to help pay this debt off?? Why not let people pay this credit off using their home so they can get a low interest rate, then take away all their credit cards? I feel like I’m missing something, but why is this not happening??

  17. I understand what the charts are showing, but it is not real life…I see it everyday. The only way that I would see disposable income able to increase would be increases in income, I know my income has not increased in many years and I know I have lots of company. If you were one of the lucky few to have an increase in income, then that would have been eaten up in higher home prices, higher gas prices, higher child care, higher health insurance, higher grocery prices. I deal with clients who have great incomes struggling to make ends meet on a more often than not basis. Your charts may say one thing, but what is real is totally different, at least in my part of the world.
    I am really not a specialist in the economic field, all I know is what I see and feel in my many years of service..all the articles I read mostly are smoke and mirrors, every now and then someone says something real. I am really a positive person, right now I just have a concerned outlook..Have a great day.

  18. Banks don’t want people to refinance high interest credit cards. Flaherty has played right into their hands by banning high ratio refinances. Now people with big credit card debt and 81% – 95% l.t.v. mortgages are screwed. Did Flaherty do this on purpose to boost bank profits?

  19. I love it when people say “I don’t care what the statistics say, here’s my annecdotal input”
    It’s one of the hilarious contructs of doomsday scenario sites…hundreds of commenters with stories but no actual facts

  20. Or perhaps he is, like us, in the lucky few living in Victoria. Where prices 4 years ago were some 10% higher than they are now, and he has already saved a bundle by waiting.

  21. Something of an odd strategy. If you are convinced that prices will come down, your strategy is to buy now, then buy even more later?
    If you think they will drop then hold off buying. If you think they will stay flat and you think you can beat your mortgage rate in the stock market, then keep back the down payment and invest it instead.

  22. >> The only thing that can come from further tightening now is the thing the Conservatives fear most – a hard landing.
    This is not logical. Given that the last 4 rounds of tightening did not cause a hard landing, what makes you think this one is guaranteed to (given you know nothing about what form it might take)?
    >> is to immediately cancel all the bulk insurance policies the banks have been using to securitize the risk on their investment products
    Bulk insurance has already been severely restricted.

  23. People refinancing to hide their overspending is kicking the can down the road. The problem is the overspending, and hiding it in your house just means you will have to face a bigger problem later. Better to limit the scale of the problem that people can get themselves into.
    Not saying additional regulation on credit card debt isn’t a good idea, but preventing people from tapping into all of their home equity to cover overspending is a good move too.

  24. Most people who refinance don’t have a “problem.”
    What does it solve to prevent a guy with great credit from rolling his 6% car debt and kid’s university expenses into his 3% mortgage? The problem people are the chronic refinancers. Go after them instead.

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