Canadian bankers fret over mortgage amortization lengths; China moves to quell inflation…will it squash the commodity rally in the process?

Bankers seeing the light

Apparently bankers of all stripes seem to prefer talking about problems rather than actually taking steps well within their power to fix them.  Mark Carney has been actively trying to talk down the growing household debt problem in Canada, to no avail.  It goes to show that when you point the cliff out to the lemmings, you only hasten their demise.  This leaves Marky boy in a tough spot.  Raise the overnight rate and you also hurt business credit and risk a rapid cooling in credit creation, which we all know would choke off consumer spending and the economy by extension.  He sees what’s coming for households.

Evidently so too do some of the big boys at the big banks.  Over the past couple of weeks some of the top execs have been musing about consumer debt loads and current mortgage regulations.   Obviously they have the power to control how much credit they extend to consumers.  While they all may openly fret about current debt loads, none will act alone as the extension of credit is how the banks earn their profits.  No sense unduly wounding your own profits while competitors steal market share.

And so they do this and hope that governments listen:

“(TD CEO Ed) Clark said Canada should eventually move back to allowing maximum 25-year mortgage amortizations from 35 years now because longer debt repayment leaves Canadians more exposed should the economy tank.”

Of course I would argue that the inevitable debt repayment is what will CAUSE the economy to tank, but I digress.  It’s interesting what a hissy fit this comment caused some mortgage brokers to have.  The return to the 25 year am would crush demand for mortgages for a period of time.  They get this.  Check out the heated discussion over at Canadian Mortgage Trends.

BMO also recently joined the ‘shorten the amortization’ parade:

“BMO encourages Canadians to consider choosing a mortgage with a 25-year maximum amortization to help them save interest costs and pay down their mortgage faster. A BMO survey showed that 69 per cent of Canadians are open to the idea of a shorter amortization.”

“While the purchase of a home represents an important investment for many Canadians, those looking to get into the housing market now or in the near future should be considering financially responsible options, such as a 25 year amortization, to ensure they can pay down debt faster and begin saving more for their long term goals,” said Martin Nel, Vice President, Lending and Investment Products, BMO Bank of Montreal.”

“Canadians should be realistic in measuring what they are able to afford when it comes to the purchase of a home. Taking on a larger mortgage with a longer amortization in order to afford a ‘faux chateau’ will mean carrying the debt load longer and ultimately paying more in interest over the full term.”

To make it easier for Canadians to be mortgage-free faster, BMO offers an industry-leading five-year fixed low rate mortgage with a maximum 25-year amortization at 3.54 per cent.

Yesterday the Financial Post ran a nifty story highlighting Ed Clark’s and BMO CEO Bill Downe’s suggestions that CMHC be limited to insuring 25 year am mortgages.  Who am I to argue with that suggestion?

“Mr. Clark said TD has already acted to slow lending but it’s now up to the federal government to take steps such as reducing maximum amortization periods on home loans to 25 years from 35 years or lowering loan-to-value ratios.

“These are exactly the things that government should be doing and there’s been a lot of discussion,” he said.

Bank of Montreal CEO Bill Downe said his organization is also doing what it can to rein in customer borrowing, but fixing the problem without hurting the economy is “the challenge for Canada.”

Is it ever!

“I think [tighter mortgage rules] is consistent with maintaining healthy consumer debt levels,” he said, suggesting the changes could be included in the next federal budget.”

“Originally, we said moving from 25 years to 40 years was a mistake,” Mr. Clark said. “We didn’t think it was a good idea. [When the crisis hit] the government moved back from 40 to 35 and I think from a public policy view, over the long run, it would better to get back to 25.”

Nice to see a bit of honesty.  Let’s face it, our consumer debt problem is the elephant in the room when it comes to future economic growth prospects.  It needs to be dealt with.  It would be nice if it was the government who took the initiative, but of course they have bigger things to worry about….like getting a majority government by not presiding over the inevitable correction.

“Moving to shorter amortizations would likely have a significant impact on the market. Statistics Canada finds 42% of all new mortgages are for amortization periods of more than 25 years.”

How likely is it that the banks will get what they’re now asking for?  Well, last time they raised similar concerns, Flaherty did tighten mortgage rules.  But that was aimed primarily at speculators.  A sweeping change to amortization rules would affect the 42% of new mortgages that are long-term amortizations.  The economic impacts of such a rule change would be massive.  It would put some serious pressure on new mortgage demand.

With the economic fallout being fairly obvious, I would say that it’s highly unlikely that it would happen without a majority government in place.  Opposition would be too strong.  But one can hope that they’d have the courage and integrity to at least try! 

China moves to quell inflation

The Chinese government fears one thing above all else:  Civil strife and social unrest.  They find themselves backed into a bit of a corner.  With inflation gaining steam (unofficial reports claim that food prices have risen 20% per MONTH) the People’s Bank is taking more steps to curb inflation before people start to realize that their hard-earned money is rapidly losing its purchasing power.

This quote may well capture the PBoC’s concerns:

“It is worth recalling that the Tiananmen Square disturbances of May 1989 were in part caused by industrial worker unrest over erosion of living standards by inflation.”

With that in mind, we find out today that the China has ordered their banks to hike their reserves.  This will essentially limit the amount of new credit that can be generated off deposits and should in theory slow inflationary pressures.

“The central bank’s order Friday was the third reserve increase in five weeks and came as Beijing tries to rein in a flood of money flowing through the economy from stimulus spending and bank lending that helped China rebound from the global crisis.”

As noted earlier, analysts are also increasingly expecting that the PBoC will raise interest rates as early as this weekend.  Today we get this piece from the Post:

China data points to rate hike

“…With Chinese inflation running at its fastest clip in more than two years, analysts are now looking for the world’s second-largest economy to unleash a more aggressive mix of rate rises, currency appreciation, lending restrictions and higher reserve requirements for banks.”

“From every angle, the case for further liquidity and credit tightening, as well as rate hikes and appreciation are pretty strong,” said Tao Wang, economist with UBS in Beijing.”

If true, it remains to be seen just how commodity markets will price in the rate hike.  Given that a great deal of demand for industrial commodities has come out of China, it begs the question of whether this demand can be maintained if the PBoC is set on quelling inflationary pressures.  How this will play out for the commodity-heavy TSX is a big question.



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12 Responses to Canadian bankers fret over mortgage amortization lengths; China moves to quell inflation…will it squash the commodity rally in the process?

  1. John in Ottawa says:

    Amortization terms should never have been extended to 40 years in the first place. There is something very “subprime” about that.

    If Harper were to do “the right thing” and move mortgages back to 25 years, when existing 35 and 40 year mortgages refinance in a couple of years the bubble will pop. Too many people simply wouldn’t qualify.

  2. LRM says:

    In yesterdays Breakfast with Dave he highlighted the correction in the Shanghai Index from the Nov 8 high of 402.47 down to 358.14 for an 11% haircut.
    Also a dshort chart shows this decline to Dec 3
    If we consider China as a leading indicator for the Canadian economy and China moves to further monetary tightening, this will further stress the “fragile” Canadian economy.
    At the present time, is there a source that provides a chart showing the $ value over time of Canada’s exports to China and a breakdown on what is exported there in some sort of table ? How current and useful would this information be to aid in investment decisions.

    • John in Ottawa says:

      Stats Canada has a data base which will allow you to save monthly, quarterly, or annual import/export data to an Excel spreadsheet and make your own charts.

      Check it out here.

      • John in Ottawa says:

        Sorry, messed up that link. Try this and click on Canadian International Merchandise Trade Database.

      • LRM says:

        Thanks J in O.
        Lots of data there. A quick look comparing YoY 2009 and 2010 (annual to Sept) looks like a decline of 10% in Canadian exports to China for 2010. I am not sure if using sept to sept gets me accurate data for 2010 but I assume it should. Both mineral products and base metals seem to be down with mineral products declining the greater amount (refering to the Chinos speculation on what would be hurt with slow down.)

  3. SuperPL says:

    Mortgage dept is causing Canada to start breaking at the seams. With such stiff warnings coming from major banks (that would love for you to spend more) it almost seem like we ran past the tipping point and now they are just bracing for the worst, by trying to deflect blame elsewhere.

  4. jesse says:

    Remember when the banks were loudly voicing their opinion in the media on tightening CMHC requirements early in the year and then the government didn’t say anything at first and then they tightened the requirements and then people scrambled to get in under the old guidelines before the April deadline? That was awesome.

  5. Sam says:

    Again, the banks don’t care about the performance of the mtg. They have bought insurance from the government. Please Ben, why don’t you run a poll of who rents, owns, looking to buy, etc to gather data of what people are wishing for and what is actually happening.

    Ben if you were given the torch from Carney, what would you do?

  6. Nick Johnson says:


    Thanks for the great blog, I enjoy it tremendously. I’ve never followed a blog before but I anxiously await your daily commentary. Keep up the good work!


  7. jack says:

    “Mr. Clark said TD has already acted to slow lending…”

    Wasn’t it TD that switched all their mortgage products to behave like lines of credit? Look at the fine print on those agreements. They are terrible for the consumer.

  8. Pingback: Banks pressure Ottawa to rein in consumer debt; Peter Mansbridge interviews Ed Clark | Financial Insights

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