Mortgage growth has slowed… so why are BANKS winning & CONSUMERS losing?

I reviewed some recent stats that explain how overall mortgage growth has fallen to its lowest level in the past 17 years!

Overall, mortgages outstanding across Canada total more than $1.5 trillion. And, while this total continues to increase year over year, the rate of growth has decreased. We should pay attention to this!

Typically, when we experience lower mortgage growth or no growth at all, house prices will follow suit and come down.

But, why aren’t the banks up in arms over this given that they make huge profits by lending money? (More on this below.)

MAYBE IT STARTS OUT WEST?

Vancouver could be the first major casualty. January 2019 sales were down 39% over January 2018, while listings were up 55% in January 2019 vs January 2018.

Sale prices are down more than 7% in the past six months.

The Canadian Real Estate Association (CREA) is putting some of the blame (I’ll say a lot!) on the Trudeau government’s infamous ‘stress test’. Next at fault are the interest rate hikes of around 1.3% over the past 18 months. And now you have a qualifying interest rate that jumped 3.3% higher than it was just a few years ago – artificially inflated by the stress test.

We can also add in the incredibly strict new rules that govern non-bank lenders. The Trudeau government brought down the hammer when it came to getting a mortgage. It was like they didn’t want anyone to get a mortgage for any purpose other than when buying an average – or perhaps even a below-average priced home… What do you think?

TORONTO SEEMS TO BE DOING OK

Interestingly, Toronto has fared pretty well. Prices, number of sales and amount of listings are all showing a healthy market… for now.

BEFORE 2016 TRUDEAU GOV’T MORTGAGE RULE CHANGES…

Prior to 2016, there was true competition in the market. You could buy a home for more than a million dollars and negotiate the best rate at any bank, trust company, credit union and other non-bank lenders. Today, most lenders can’t offer competitive rates on mortgages where homes are worth more than a million dollars… even if you borrowed as little as $200,000 (read on to understand more).

Before 2016, you could refinance your home, use some of the equity to finance a business, or purchase another property, or invest… AND, you could shop around through your mortgage broker at more than 50 competing lenders for the best rate.

You could finance the purchase of a single-family dwelling for the purpose of renting it out as an investment (maybe buying for your future, or perhaps to house a child going to university)… AGAIN, shopping among more than 50 competing lenders.

In 2016 and 2017, things really changed for all Canadians seeking or already in a mortgage.

You would think that having a bigger down payment would get you the best rate, right? And if you had little to no mortgage on your property, you would think this would entitle you to the best rate, right? Unfortunately, not anymore!

If, for example, I had a home worth $700,000 with a $100,000 mortgage but I wanted to borrow another $200,000 to invest in a business, mutual funds or vacation property, that I would have no problem getting the best mortgage rate and I could shop around at the more than 50 available competing lenders in Canada, right?

Guess again! The new mortgage rules don’t provide certain lenders with the ability to compete like this other than for the purpose of buying a home that costs less than a million dollar. This is the new reality: Less competition for the Canadian consumer.  How is this a good thing? It’s not! Not for the consumer, anyway… but there is a winner here… read on.

In 2017, while claiming to want to support low- and middle-income earners, we saw Canada Mortgage and Housing Corporation (CMHC) mortgage insurance premiums go up by 12% to 15%. Why? No inflationary reasons… leading some to assume a cash grab, perhaps?

I won’t get into all the mortgage rule changes here. There are more than 60 of them! But these are just some of the more obvious ones that cause me and many others to shake our heads in wonder!

AND THE WINNER IS… THE BIG SIX BANKS

Now, let’s get back to the winner of all the rule changes. Yup, the big six banks. So, while overall mortgage volumes have slowed, the mortgage volumes for the big six banks have skyrocketed over the past three years. The mortgage rule changes that were supposed to “benefit and protect Canadians” have benefited the BIG SIX BANKS and protected them from competition.

The consumer has less mortgage competitors from which to choose, meaning fewer products are available. Prior to 2016, there was a healthy balance of competition and profit. The end result is that consumers are now paying higher rates.

And we’re now seeing a growing secondary lender community emerging (this means higher interest rates). When you  need money, you’ll do whatever it takes… to finance your family, business, a loved one’s healthcare or other numerous reasons for needing a mortgage. You won’t just go away quietly – you’ll find that money. Even if it costs you more, you still need that money!

But how is it that our mortgage industry was so strong… record low defaults, performing loans and profitable mortgage lending companies for decades prior to any rule changes? What makes their business practices bad all of a sudden?

This is where so many experts have tried to reason and speak out against this madness. We’ve had so many industry associations visit Ottawa in a desperate attempt to halt and reverse the federal government’s course of action – including mortgage broker and real estate professionals – but it has all fallen on deaf ears. They don’t want to hear from the experts!!

THE GOOD NEWS…

Here are some positives takeaways. As this is an election year, we’ve seen some posturing by the current federal government hinting that they may modify the stress test.

I’ve been saying for a few years now that if housing slows too much or the government realizes that the pendulum has swung way too far towards safe lending, that you’ll finally see some back-tracking on the changes.

As someone who has held senior management positions at Canada’s biggest banks and trust companies, and as an industry insider, I’ll share one of the golden rules of lending: If you have no arrears (defaults) then your underwriting guidelines are far too tight. There is no such thing as having no arrears. Perhaps the government is aiming for perfection?

Let’s get back to common-sense lending. Leave the lending and underwriting to the experts!

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca