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Banks ask Ottawa to limit mortgage terms (again)

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The big banks are asking Ottawa to cut back on the terms of mortgages they insure for a second time.

Gordon Nixon, chief executive officer of the Royal Bank of Canada, the country’s largest bank, said he’s not hitting the panic button yet over concerns that some consumers may not be able to repay their loans.

But “we are clearly at the limit,” he said in an interview. “You do not want significant growth in consumer debt.”

Low interest rates have enticed Canadians to borrow more than they could afford to otherwise, and many are now stretched. The average debt per household, including mortgage and credit card debt, hit a high this year of $96,100, as the debt-to-income ratio climbed to a record 146 per cent. Job losses or higher interest rates down the line could push consumers past their limit, resulting in bankruptcies and damage to the economy.

“We’re not in dangerous territory right now,” Mr. Nixon said. “But taking steps to ensure that we don’t have a problem is a prudent thing to do.”

Bankers shared similar fears with Ottawa in the fall of 2009. In February, 2010, Finance Minister Jim Flaherty announced measures designed to make it harder for mortgage borrowers to get in over their head.

Banks asking government to cut back on the cash cow that is no-risk taxpayer insured mortgages? Why would they do that?

Fairfax Financial CEO Prem Watsa is among the influential voices pointing to the impact of soaring debt on the broader economy. Not only are Canadians overleveraged, primarily with mortgage debt, low interest rates have prompted speculative buying that is artificially inflating housing prices, he said.

According to the latest statistics from the Bank of Canada, the banks were holding $497-billion in residential mortgage loans to consumers in September, up from $468-billion in January.

The good news is that those “Artificially inflated housing prices” are happening in Canada instead of in Vancouver.

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VHB

December Projections for month totals

Days elapsed so far 10

Days remaining 11

Average Sales this month 99

Average Listings this month 107

Projected sell/list 92.7%

SALES

Projected month end total 2081 +/- 155

95% Conf Interval lower bound 1926

95% Conf Interval upper bound 2236

NEW LISTINGS

Projected month end total 2245 +/- 193

95% Conf Interval lower bound 2052

95% Conf Interval upper bound 2437

MONTHS OF INVENTORY

Inventory as of November 30th 12384

MoI at this sales pace 5.95

Note: This is a simple linear projection of month end totals.

This provides the answer to the question

"What will month end totals be, if things continue

on the same pace we've seen so far this month?"

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paulb.

New Listings 105

Price Changes 38

Sold Listings 111

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patriotz

@Devore:

On mixed messages (rates low, but don’t borrow):

But open market rates for consumer and corporate debt aren't unduly low – because they price in default risk, which the lenders know is high.

It's just mortgage rates that are low because the government is guaranteeing that the lenders will get their money back. And naturally banks are pushing mortgage lending because of this – they'd be stupid not to.

That's the reason for the excessive borrowing – not the low BoC rate but the removal of risk to the lender by the GoC.

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Devore

Carney takes the show on the road, spends half hour on BNN (http://watch.bnn.ca/#clip389237) 3 parts, won't post all links, post will get banned. Talks about all manner of issues, those dear to us, as well as comments on US economy and policy (QE1/2/3), Euro problems, world economy, too big too fail, the financial crisis. Some key points I heard: – On mixed messages (rates low, but don't borrow): we're targeting inflation. Period. F has regulatory and legislative tools available to restrict borrowing. – On tightening of lending rules: changes earlier in the year slowed consumer borrowing, but borrowing still growing faster than incomes, further tightening almost certain, 25 years amorts within realm of possibility. – On asset-based lending: while debt is up, so are assets. But you cannot lend solely based on assets, ability to service is very important. Asset… Read more »

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Anonymous

@Anonymouse: BMO obviously forgot to read Carney's statement. When house prices drop, the mortgage amount will still be there.

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patriotz

@Anonymouse:

overshadowing other encouraging personal finance data, a prominent economist says. ‘The continued laser-like focus on debt overshadows the other half of the balance sheet,’ BMO chief economist Doug Porter said Monday.”

You mean those inflated house prices? Well they have a way of going back to normal while the debt lingers on, as Mr. Carney pointed out.

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Anonymouse

http://www.cbc.ca/money/story/2010/12/14/f-debt-a…

"The cacophony of concern over rising Canadian debt levels is overshadowing other encouraging personal finance data, a prominent economist says. 'The continued laser-like focus on debt overshadows the other half of the balance sheet,' BMO chief economist Doug Porter said Monday."

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Anonymouse

http://www.montrealgazette.com/Montreal+Ritziest+…

"MONTREAL — The penthouse at Montreal's Ritz-Carlton Residences has sold for a whopping $13 million — taxes included — The Montreal Gazette has learned. The 8,000 square foot unit — which includes a terrace the size of a large three-bedroom apartment — is the most expensive condo ever sold in Montreal."

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bums up2

Useful advice from Mark Carney Says:

December 14th, 2010 at 1:18 pm

“The debt endures, the asset prices go up and down,” he said. “People in Ireland, people in Iceland, people in the United States that took out big mortgages on assets that were worth a lot more for a long period of time, found out that the asset’s not worth very much but the debt’s worth exactly what it was when I took it out.”

Wow, I can't believe he said that! He's basically spelling out that Canadians are overpaying for houses by loading up on debt they can't pay back.

Carney's all over the news these days, there must be some really scary numbers going on behind the scenes to prompt this media blitz..

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vreaa

Freak out!

Look at these closing numbers [14 Dec 2010 16:00]:

Light Crude $88.88

BP $44.44

Co-incidence? I think not!

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oneangryslav2

@Useful advice from Mark Carney: From that article:

The ratio tops the 147.2-per-cent ratio in the United States and comes as incomes fell 1.5 per cent during the same three-month period.

According to some of our resident bulls incomes have been rising. I wonder who is correct. Of course, incomes could still be rising in Vancouver while falling in the rest of the country which wouldn't surprise me given the vast economic powerhouse Vancouver is. (That last sentence was sarcasm, of course.)

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Best place on meth

@Useful advice from Mark Carney:

Everthing Carney says about Canada goes triple for Vancouver.

Especially with our pathetic -3.6% savings rate.

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Useful advice from M

"The debt endures, the asset prices go up and down," he said. "People in Ireland, people in Iceland, people in the United States that took out big mortgages on assets that were worth a lot more for a long period of time, found out that the asset’s not worth very much but the debt’s worth exactly what it was when I took it out."

http://www.theglobeandmail.com/report-on-business…

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jesse

@space889: "Not saying it will happen but just saying it can be done."

Actually I'd be surprised if it could be done even in theory. Inflation/valuation risk would cause yields to increase due to what would be seen as erratic monetary/fiscal policy decisions.

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fixie guy

122 Troll Says: " I don’t think we’ll see much more than token changes though, because of the political ramifications."

I never understood this rationalization. Are other countries populated by idiots? If it was just a matter of policy, a signature on a piece of paper, don't you think the US, Ireland and others would be keeping Joe 6 Pack happy too? Economies are not infinitely malleable to short term policy, governments can distort them for a while but eventually the bill gets paid.

In the last federal election Harper denied the recession until shortly after he was re-elected. My money is on the Cons doing everything possible, at whatever cost, to keep the party rolling until the next one. The fact they say any discouraging words at all should be raising the hair on the back of your neck.

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Junius

#116 Devore,

You said, "Someone on GF brought up an interesting point… if 70% of Canadian households already own, and we have 8% official unemployment, how many could actually own?"

I saw that. It is a very interesting question. One thing for sure is that a lot of demand was pulled forward over the past number of years. If rules tighten, affordability erodes generally along with interest rates rising you know what happens next.

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VHB

@jesse: "We also haven’t forgotten how far yields have fallen from the middle of last decade. "

Yes, and debt has skyrocketed. The point Carney and others are making is that if we begin to retrace the yields of the past, the current debtload will be very heavy to carry.

The world didn't collapse with the yields faced in 2007. But there was a lot less debt in 2007. The problem is 2010 debtloads with 2007 yields.

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space889

@jesse: Most bonds in Canada are issued in Canadian dollars. Worst come to worst the central bank can wrestle the long bond yield done by purchasing bonds from the market, eseentially becoming the bond market. Granted that would wreck havec with the currency and probably cause lots of other problems but depending on what the government's main concern is, long bond yields can be forced down.

Not saying it will happen but just saying it can be done.

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jesse

@Troll: "People are forgetting that we are coming off very low bond yields which fell significantly"

I don't think anyone here is forgetting. We also haven't forgotten how far yields have fallen from the middle of last decade. A relative of mine got 5 year fixed at 3.1% earlier this fall. He plans on paying off the principal in full in 5 years.

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jesse

@Troll: "Joe6P wouldn’t understand the Cons are making houses ‘less’ affordable for him by going 25 years." I agree with you. Moving to 25 years from 35 would have a significant impact on affordability and demand, more than a 1% rise in rates. I was reading through CBC.ca reader comments on the article summarizing Carney's recent speech. The comments that were getting the most thumbs ups were the ones outlining how the government is screwing the middle class for the benefit of their rich banker buddies by raising rates. That small sampling of opinions tells me there will be significant political pressure to keep things going as-is but it also tells me debt isn't just the realm of J6P but extends into the upper tiers of society who read CBC 😉 I'm not so certain the government will have much… Read more »

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Troll

@jesse: I agree that changes to the mortgage rules going from 35 to 25 year ams would be much more significant. I don't think we'll see much more than token changes though, because of the political ramifications. Joe6P wouldn't understand the Cons are making houses 'less' affordable for him by going 25 years.

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YLTNboomerang

The games realtors play…. Check out these two townhouses next door to each other: v858893 v860521 The first one listed at $948K which is $769/sqft. The second listed 18 days later at $959K or $760/sqft (it's 30sqft bigger). It only took a couple days for the higher priced unit to figure that $936K would price them at the same $/sqft as the neighbor so lowered their price, but not to $936K but $938K 'cause you gotta get that "8" in your price somewhere! Regardless, both these guys are dreaming as their other neighbor got lucky (1420 Strathmore Mews) and sold for $709/sqft. BTW, these yaletown townhouses just off beach crescent all look onto an empty lot that Concord has been using for storage. The future plan for this lot is non-market housing so these "alley" townhouses will get upgraded from… Read more »

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Troll

Here's the mortgage rates if you don't believe me:

http://www.ingdirect.ca/en/accounts-rates/histori…

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Troll

@jesse: Well, we'll see. I'm looking at 5 year mortgage rates from April to July and they were around 4.5-4.6% with prices slightly higher. Prices at that time were pretty flat. Would that situation be bullish for prices? No. But it sure wouldn't be a catastrophe, all other things being equal. People are forgetting that we are coming off very low bond yields which fell significantly over the summer/fall. Affordability improved but prices stayed flat. Now we are simply retracing those steps. People are making way too much of this recent rise in yields, take a look at 3 year graph and you'll understand why.

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jesse

@Troll: "That’s higher, but not catastrophic"

If you say so. A change from 3.5% to 4.5% reduces total mortgage qualification by 10% for the same amortization. If the government goes ahead and reduces amortizations to 25 years from 35 years as well, that would be 25%.

That's all off the top. I'll take 10% in a year because I like to extrapolate.

Pray to God that doesn't happen Troll.

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