Seriously?

Gas. Fire. Kaboom.

So, first the central bank chopped interest rates before any other CB in the western world. Then the banks crashed five-year mortgages into the 4% range – down two full percentage points from months ago. Then (on Sunday) the Bank of Canada governor let it be known in an interview that rates may be cascading even more aggressively than The Street expects.

Meanwhile every major economist is forecasting two cuts – in October and December – atop the three we’ve already got under the belt. And CIBC’s prescient eggheads now say those could both be halfers, taking the BoC marker low enough that we’ll have 3% home loans by Christmas and maybe 2%ers by the rutting season.

This is enough stimulus to get furniture aroused. Combined with pent-up demand after two years of crappy house sales and gently falling prices it just about promises FOMO is coming back to real estate – soon.

But wait. We need more hormones, cries the finance minister. Bring on the endorphins, echoes the PM. Let’s dope up the kids, says the housing czar, and get them mortgaged!

And, lo, here we are.

Twelve years after Canada tanked 30-year mortgages and brought in a $1 million house-price cap for CMHC insurance, we’re going backwards in a hurry. Without warning, the federal Liberals today announced long amortizations would be available for all first-time buyers – not just those getting new-builds – in order to lower monthly payments. They also raised the million-dollar cap to $1.5 million, a massive increase.

“This does not help housing affordability,” warns Toronto broker John Pasalis (who still hates me). “It’s a policy that will drive home prices higher. These mortgage changes feel like a last ditch desperate attempt to buy some votes ahead of an election. Buying votes from first-time buyers and every homeowner/investor who will profit as a result of this policy change.”

You bet it’s political. Look at the latest Abacus polling: Cons 43%, Libs 22%, Dippers 18%.

“In the end, a government desperate to stay in power,” says crusty mortgage dude Ron Butler, “will sell their soul for votes. Government-insured 30-year amortization for up to $1.5M mortgages with tiny down payments. Approaching a recession. What could go wrong?”

To be clear… the longer the amortization, the more years it takes to retire a loan and the greater the interest that accumulates. Monthly payments are lower, but a smaller hunk of those payments goes to principal and more to interest. Borrowers and homeowners may have slightly better cash flow, but a nasty shock upon renewal when they see how little the debt has been repaid.

Moreover, upping the CMHC ceiling cap to $1.5 million is a market bomb.

In the olden days (now) people buying a place for more than a million had to come up with a downpayment of 20%. This rule was also brought in pre-Trudeau (2012) in order to try and lid romping house prices. But in the future (which begins December 15th) the ceiling jumps to $1.5 million, meaning a newbie buyer can snap a $1.49 million house with just 5% down ($75,000) and get a $1.4 million mortgage with a 30-year amortization. The lender will be protected with taxpayer-backed CMHC insurance.

It’s the biggest mortgage reform since the Harper years. In a stroke, the federal, government has eliminated the real estate disincentives represented by new bans, levies, taxes and charges on non-residents, flippers, speculators and assignment-sellers. It’s more evidence that those in power would rather feed our societal real estate frenzy than solve the problem of affordability – for votes.

Combined with the demand-hiking changes already in place – like the enhanced RRSP home buyer’s plan, the tax-crashing FHSA, new-buyer tax credits and $7 billion dispersed to subsidize home-building – we’re baking in even-higher prices. On top of this is the secret sauce of cheaper mortgages and the feds’ warning to bankers that they must go light on renewers.

The conclusion is crystal. Nobody in power wants properties to fall in value. They crave the opposite. “We are now making the boldest mortgage reforms in decades to unlock homeownership for younger Canadians,” says Chrystia Freeland.

So, there you go kids. Higher prices, but cheaper financing and far more debt. The yoke tightens.

Like crazy Ron says, what could go wrong?

About the picture: “Cats and dogs often fight like politicians,” writes Serge in New Brunswick, “but here it’s all harmony. Keep up the good work with the blog. Merci.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/09/16/seriously-12/