LACKIE: Lifetime mortgages becoming the new normal

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Now that the market appears to be hopping again, it seems like the natural reaction — beyond complete bewilderment that we might actually be seeing what we think we are seeing — is to wonder how on earth it is that the sky never actually fell.

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After all, we are now — maybe? — one the other side of the fastest interest rate-hiking cycle in Canadian history with rates still sitting way higher than any of the pandemic borrowers evidently ever dreamed.

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The resale market is hopping once again with record low inventory doing the heavy lifting in driving prices northwards again. And to speak with both buyers and sellers, FOMO is very much a thing again.

it’s hard to believe.

It’s almost like the market crash that was well underway and all-but-certainly lost steam.

But why?

We saw a precipitous decline in housing prices. In some areas it was absolutely brutal while in others it was a mild correction.

On the other side of this there now seems to be a widespread belief, even a reluctant admission in some cases, that real estate in Canada is simply too big and too important to fail.

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Robust immigration, insufficient housing supply, and complete and total government ineptitude is a powerful trifecta that will keep prices high and the market virtually impenetrable.

But how exactly is it that Canadians have managed to hold on the way they have?

We have surprisingly low levels of mortgage delinquencies while boasting the highest level of household indebtedness among the G7 nations.

We also now have people walking around, living their lives, carrying static payment variable rate mortgages that they will almost certainly never be able to pay off.

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As rates shot up, many borrowers carrying variable rate mortgages with fixed payments probably felt lucky. They were perfectly positioned to ride out the turbulence with their household budgets in check while poised to reap the benefits when rates came back down again. Few engaging in that sort of calculus are likely expected rates to go that high quickly, and certainly few expected them to stay there for any prolonged period of time.

Likely few knew what the trigger rate was, or that once their set payment was only covering interest and not a dime of principal an adjustment would have to be made to the length of the loan in order to make the numbers work.

Now it turns out that a sizable portion — reportedly between 25 and 30% — of Canada’s big banks’ mortgages are sitting with terms extending past 30 years.

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Anecdotally, I have heard of homeowners with 75- and 80-year amortizations.

Extend and pretend, oh my.

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Considering what makes a market crash, it’s when people can no longer carry their properties and are forced to sell. Without that resulting surge of inventory, prices may wobble but they will also likely hold.

The concern up until now has been what will happen to these borrowers when their mortgages come up for renewal. Existing policy dictates that upon renewal, the original term is to kick back in. Once that happens the payment will skyrocket leaving people absolutely unavoidably unable to hold on. That, many have predicted, is when the real market shock will take place.

And with somewhere between a quarter and a third of borrowers caught up in this, that shock could be resizable.

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Which is why perhaps we saw, quiet within the recent federal budget, a section entitled, “A Code of Conduct to Protect Canadians with Existing Mortgages.”

“The government is taking steps to protect Canadians and ensure that federally regulated financial institutions provide Canadians with fair and equitable access to relief measures that are appropriate for the circumstances they are facing, including by extending amortizations, adjusting payment schedules, or authorizing lump-sums. payments. Existing mortgage regulations may also allow lenders to provide a temporary mortgage amortization extension — even past 25 years.”

Aside from the fact that such a move will surely help to keep Canadians in their homes, what jumps out at me is the fact that, yet again, our government is using every tool at their disposal to keep this housing market elevated, alive and humming .

The housing correction that should have happened didn’t.

Housing unaffordability is outrageously sublime. And now we are faced with one of two things happening: the can be kicked down the road to be dealt with another day or, perhaps worse, astronomical shelter costs in Canada becoming so firmly entrenched that it comes at the expense of our national well-being being.

Two terrible scenarios, neither of which should be acceptable to Canadians.

@brynnlackie