Revolutionary Moderation

Math

I'm becoming increasingly concerned about the changes Flaherty announced on Tuesday, so I've been crunching some numbers. I posted large swaths of this in the Edmonton Real Estate blog comments section this morning, but I thought it bore repeating here:

I'm more than a little concerned that the delay before the change will create a bubble all its own, quite aside from any debate about a current bubble. Surely there are some first-time buyers out there who are going to rush in while they can still get more money/debt based on the variable rate. And I'm also sure there are lenders who will happily give them those loans calculated at absurd variable rates while they still can.

At ING's posted variable rate of 1.95%, according to their own calculator:

On a family income of $50,000, they'll lend someone $375,000 with payments of $1233 a month. At their five year fixed rate (still a low 3.89%), payments go up to $1629. At a still historically below-average rate of 6%, this family will now be paying $2120/month, over half of their gross income, on this mortgage.

$100,000 gets me $780,000 with payments of $2567/month. 3.89% raises that to $3388. And 6% takes us to $4409 - once again, over half their gross income, so God help them if one of them goes on maternity leave or long-term disability.

The banks will do this because they have no skin in the game - they're securitising the debt the same way American banks did, and it's all guarenteed by you and I through the CMHC anyway.

So quite aside from any bubble I might currently see us in, we're going to have a hard landing when this pool of mad-rush driven buyers dries up, and another when the rates go up, as they inevitably must.