Canada's Bank Boss Sees Stress

Thanks for clicking. Canada's regulator

is warning about more stress coming to

Canadians renewing their mortgage over

the next few years. This as mortgage

rears are already starting to pop up to

near 15-year highs. And yeah, with home

prices continuing to decline and Peter

Rudelage saying that it could be a tough

couple of years and that the regulator

is worried about this cohort. The

warning is definitely not great for

Canada's real estate outlook.

>> You are in so much trouble.

>> So, what I want to do today is look at

the warning coming from Canada's banking

regulator. take a look at some of the

data and why declining home values are a

self-reinforcing loop and then discuss

what to look for next. It is the

beginning of a new month and with that

we are eagerly awaiting the release of

April's real estate data coming out from

the local boards any day now and we'll

obviously have an update out on that

data on this channel. Make sure you

click like and subscribe if you want to

get those updates. But for now, let's

get into the banking regulator.

Onto the warning coming from OIE. As

mentioned, Canada's banking regulator is

warning about potential stresses coming

to the between 30,000 and 150,000

borrowers who are renewing their

mortgages over the next few years. The

regulator says that due to higher

interest rates and declining home

values, borrowers could have a problem

refinancing their mortgage as this

renewal wave drags on. Now, I just want

to be very clear about what exactly

we're talking about here. as I think it

was about 6 months ago a rumor went

around that banks were refusing to renew

borrowers mortgages and that had

absolutely zero basis in reality. I'm

not exactly sure where that rumor came

from but just patently untrue.

>> Love to have you on the show. Any chance

you could fly out tonight?

>> No. What Oie is talking about is

declining home values because home

values are much much less than they were

before. Borrowers could have a problem a

switching lenders at renewal and b

refinancing their mortgage. taking money

out of their home. So, just as a brief

example, let's say you bought Canada's

benchmark price home in January of 2022

for $827,000

and you put 20% down. You had a mortgage

of 661K.

You did a 30-year amortization at 2.81%.

At the end of that 5 years, you owe

$585,000.

But the problem is over the past four

years, that benchmark price home has

dropped to 661,000.

meaning your loan to value, your loan

amount compared to how much your house

is worth is now sitting at about 88%.

And that means that you could have a

problem switching lenders at renewal. As

in order for any lender to take on a new

mortgage, that mortgage has to either a

have mortgage default insurance, which

that mortgage wouldn't, as there was the

20% down payment, or b have 20% in

equity. And as we just saw, those

borrowers would not. Meaning upon

renewal, those borrowers are essentially

trapped. I own you now. And if you

refuse,

>> yeah, those borrowers will be offered a

renewal rate coming from the bank, but

those banks very well know that those

borrowers can't leave. So, they don't

really need to be overly competitive.

Remember that the next time one of our

news networks features a bank giving us

advice, presenting it as though the

bank's interest and the interest of

homeowners are aligned.

>> He's very smart man.

>> But these declining home values also

mean that homeowners won't be able to

refinance their homes either. they won't

be able to take out any equity to pay

off debts, etc. As again, you can only

refinance up to 80% of your home's

value. So, not only are a lot of

homeowners stuck at renewal time and

that they won't be able to switch their

mortgage, they also won't be able to

refinance to pay off debt, something

that Canadians have very much relied on

over the past few years. And as to

exactly who this is going to affect,

let's take a look at the data. I

gathered up all of the benchmark price

data from the CRA as well as the 5-year

fixed interest rates from Stats Canada.

Found out how much would be owed as of

today's date, subtracted it from 80% of

the current benchmark price, and we can

see that anyone who bought after October

of 2021 is going to have a problem if

they want to refinance. And that's just

for all of those borrowers that took

fixed rates with 20% down. For those who

put less than 20% down, it's going to be

even worse. and even worse, further for

those who took variable rates and didn't

pay down much equity, of which there

were plenty at the beginning of 2022 and

beyond. Fun fact, while on this data,

here is your remaining equity if you

listen to the CBC in March of last year.

Here's your remaining equity if you

listen to TD in February of last year.

Here it is. If you listen to CBC in the

summer of last year, well, you get the

idea.

>> I had little formal education, no real

skills,

>> and it's not just Canadawide either. In

Toronto, it's even worse with anything

purchased after August of 2021. Also

unable to refinance, also having a hard

time switching lenders at renewal. Now,

obviously, these are all averages. It's

going to differ and be dependent upon

how much down payment was put down, the

amortization, etc. But you get the idea.

Now, as to how many people this is going

to actually affect, well, between 21 and

22, there was an awful lot of newly

advanced mortgage funding as people

tried to get into the market before they

were priced out forever. So, yeah, the

data supports that. Of definitely isn't

wrong. There's an awful lot of people

that are a going to have a problem

switching their mortgage and b have an

even bigger problem refinancing their

mortgage or taking money out of their

home. and that inability to pay off debt

is showing up in the mortgage arars

data. Those mortgages, they're behind

three months or more on their payments.

Now, Canada's aren't as bad as Ontarios,

now back to 201516 levels, but

Ontario's. Ontario's a rears rate is now

back to where it was in 2020. And

obviously, it makes sense why. And it's

not just the weak economy. Canada had a

weak economy back in 2016 as well. It's

because house prices are falling. We now

have about 5 years worth of people that

cannot refinance their home, cannot pull

out equity to pay off their

everinccreasing debt loads now sitting

around $3.2 trillion. And not being able

to refinance, not being able to rely on

that option is fairly new for Canada.

Let's go back and get Toronto's data

back to 2014. We'll plug that into our

previous calculator, get the mortgage

balance and house price after 3 years,

add the accessible equity, and scroll.

And we can see that between 2014 and

2021, if you bought a home in Toronto,

three years later, you could pull out

equity and pay off your debt. It was a

cycle that worked great. Buy a house,

put 20% down, you can spend over the

next 3 years. The house prices always go

up, refinance after 3 or 4 years, pay

off all of that debt, rinse and repeat.

It was a cycle that worked great so long

as we had continual new entrance

willing/able

to bid up the prices of houses. It's

called a Ponzi scheme.

>> But when the music stops, when house

prices stop growing at infinitum, like

they were always going to do that, well,

that's when you can no longer hide all

of that consumer debt in the home. And

then you get the resulting negative

implications thereafter. A decrease in