Serendipity

Do you believe in coincidences?

Nah. Me, neither. Somebody, somewhere, planned everything.

Lok at this mortgage mess, for example. Fully 70% of all outstanding home loans in Canada (which total over $2 trillion) come up for renewal in the next 24 months. It’s yuge. And given the fact almost all of these folks will be renewing at a higher rate, potentially scary.

So isn’t it a big coincidence these things are happening?

• Mortgage rates have plunged. What was 6.2% is now 4% and change. Shop hard and you might find 3.9%.
• The Bank of Canada has chopped its key policy rate four times, leading central banks around the planet. This is dramatically deeper and faster cutting than in the US, where the Fed may soon cease reductions. Our guys are set to nip rates again by mid-December.
• Starting December 15th newbie buyers can opt for 30-year amortizations. “By offering lower monthly mortgage payments to all first-time buyers and buyers of new builds, more Canadians, especially younger generations, will be able to buy a home,” says the government. Of course, the kids will pay for it through higher interest costs.
• Also starting the same day, the price cap for insured mortgages bolts higher. People can soon get CHMC coverage – with lower downpayments – on properties worth up to $1.5 million. That’s a massive increase of $500,000, and it means the amount of cash required drops by almost 60%.
• On January 15th mortgage rules change to allow financing of secondary suites, basement rentals, laneway houses or MIL dungeons. Homeowners will be able to leverage up to 90% of their equity to a limit of $2 million, to add up to four units.
• And as of last Thursday, those renewing mortgages no longer must face a stress test to prove they can afford payments. If the home loan is ‘straight’ (being transferred from one lander to another without being increased) and uninsured (no CMHC coverage – more than 20% equity), then the test is kaput.

It’s a significant change. For the past five years borrowers have had to prove – if they wanted to shop around for a  better rate – they possessed the financial means to service the loan. That protected them from dumb borrowing. It protected the bank from dumb lending. But now, poof, we can all be as dumb as we wish.

So long as the amortization period is not increased and the loan amount not boosted, the stress test is gone for all those renewers. Sweet, since (on average) payments for these folks will probably rise by about 40%.

Isn’t serendipity cool?

The federal Libs also point out buyers can now access $60,000 sitting in RRSPs (that’s $120,000 for a couple) for downpayments. No repayment is required for two years, then the taxless loan must be dribbled back into the retirement plan over 15 years.

in addition, we now have that weird FHSA – the giftiest tax shelter of all. Potential buyers (or anyone who has not recently owned a house) can chunk in $8,000 a year, write it off tax owing (like an RRSP), grow it without tax and make withdrawals which are tax-free (like a TFSA). The funds can be used for a downpayment, or just to add extra space to your RRSP. If you do buy a house, profits made on that property are also tax-free thanks to the principal residence capital gains tax exemption.

Wow. See what I mean?

And there’s more. Like $8 billion extra being spent by Ottawa bribing municipalities to trash traditional zoning regs, bypass approval processes, stomp on dissenters and build, baby, build.

All of this has not reduced the cost of residential real estate in any meaningful way. Meanwhile the inventory of unsold new and resale homes has risen fast – in some cases to historic levels. The supply of new units is massively behind schedule (Ontario starts have dropped 17%) and the price of new-builds hasn’t been reduced. To date there is zero evidence an increased supply of residential units translates into cheaper values. They cost the same to build, and to buy.

Now, what’s coming?

A vibrant spring market with 4% loans available, relaxed mortgage rules, no stress test, enhanced financing, lower downpayments, higher-priced insured homes, eager lenders and longer amortizations. Plus an election soon.

Coincidence? Yeah. Sure.

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Source: https://www.greaterfool.ca/2024/11/25/serendipity/