Milestone or millstone?

Today the Fed cuts itas rate for the first time in four years. Big deal. It’s the CB that runs the planet. This means the Wicked Witch of Tightening is kaput. For the next year (at least) the price of money will come down. Bonds are going up. Stock markets, too, it’s expected. Unless the US election flames outta control.

Meanwhile, lots of reaction to yesterday’s crazed mortgage-busting announcement from the desperate federal government.

To remind you, there are three salient changes that may rock the real estate world:

• All borrowers who qualify as first-time buyers will be able to get a 30-year amortized mortgage whether they purchase a new-build or resale property. Effective December 15th. By the way, here’s the definition of a first-timer: “You will be considered to be a first-time home buyer if you did not, at any time in the current calendar or at any time in the preceding four calendar years, live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that either you owned or jointly-owned, or your current spouse or common-law partner (at the time of the withdrawal) owned or jointly-owned.”
• The cap for CMHC insurance jumps from $1 million to $1.5 million. Therefore the need for a 20% downpayment is gone. To buy and get full insurance (and therefore a cheaper loan rate) purchasers need 5% of the first $500,000 and 10% of the remainder. So on a $1.5 million house, that’s $125,000, with a mortgage of $1,375,000 (plus closing costs and CMHC insurance premium).
• The requirement for renewers to pass the stress test if they want to switch lenders is gone .

Chrystia Freeland, our non-financial finance minister, said these changes will “unlock home ownership” for the kids. But not so fast. They may lower monthly payments a bit (about 8%) but increase indebtedness and goose the amount of interest to be paid.

Some people love it. “This is a huge win for Canadians,” says the head of Mortgage Professionals Canada. Those guys had been lobbying for a first-timer price cap of $1.25 million, so this exceeded their expectations.

“This milestone, achieved through our persistent advocacy, shows that housing is now truly a top priority for the government and represents a significant win for first-time buyers and the housing market as a whole,” said the brokers in a statement. “Our mission remains steadfast: to advocate for fair, transparent, and affordable housing market for everyone.”

Others are raising a big, noisy alarm at what the government’s just done. After all, the Harper crew tried the same thing – allowing super-long amortizations and reduced downpayments (right down to 0%) – and it ended up in disaster. (I know. I was there. I fought it. I lost.)

“Outside of Toronto and Vancouver $1.5M buys you a luxury home in Canada,” GTA broker John Pasalis comments, sagely. “So the solution to Canada’s housing crisis is to allow people to buy luxury homes with 10% down & have our government insure those mortgages? You can’t make this stuff up.”

Scotiabank’s plain-speaking economist/cowboy Derek Holt is blunt in his blanket condemnation. “Canada, you just never learn,” he says. Ottawa has made some changes which will guarantee real estate takes off again, and houses will get more expensive. “They will add more demand pressure into supply challenged markets and thus drive a further deterioration of housing affordability that will make it tougher for all homebuyers.”

Holt points out that, humans being humans, people borrow to their limit. So now that amortizations can be extended, folks can finance more on the same income. Typically, about a hundred grand more. “Allowing a higher ceiling for insured mortgages will put extra demand into the $1–1.5 million price category with possible spillover effects above that threshold.”

Worse, says the economist, the feds are once again going for the low-hanging fruit of consumer spending in order to grow the economy instead of directing money away from condos and bungalows into productive areas that create jobs and foster innovation. “These announcements further emphasize the government’s policy bias toward maintaining—in fact, growing—the share of the economy that is represented by here-today-gone-tomorrow short-term spending activity. Almost 86% of GDP is tied up in consumer spending, residential investment and short-term government program spending which remains around the highest levels since the late 1980s.”

Well, politically-driven stimulus – thanks to Chrystia – will likely bring a property boom, starting in January. More sales. More debt. Higher prices. Lower affordability. More parents co-signing for mortgages. More interest for the banks. More wealth disparity. Happy realtors, brokers, lenders, appraisers and reno guys. Then, more crisis.

Holt is right. Canada, you never learn.

About the picture: “Here is my fat cat Aurora,” writes a commenter who wishs to remain anon. “I got her off Facebook Marketplace and she is the best thing to happen to me!  She has lost weight since she joined my family and is regaining her mobility.  Here she is enjoying a spot of sitting-on-curtains.”

NOTE TO READERS: You may have noticed. We’re getting down to the plethora of cat pictures now. Dog owners are urgently requested to stand up, remember Springfield, and send in pictures of your valued canine companions. The address: garth@garth.ca. 

Source: https://www.greaterfool.ca/2024/09/18/milestone-or-millstone/