Hat tip to John for this insightful comment in regards to Ottawa’s discussions about changing mortgage requirements. I have added a few graphs to support John’s position, which I fully agree with.
It doesn’t make much sense to close the barn door after the horse is gone.
The government, minority or majority, cannot kick the legs out from under the lower end of the housing market. Housing markets collapse from below.
The banks are being a bit disingenuous in their call for tighter mortgage rules. Over the past three years credit card debt on bank balance sheets has grown by 15% and line of credit debt has grown by 20%. In the past six quarters credit card debt has flat lined while line of credit debt has grown by 10%. This suggests that credit cards are maxed out and being serviced with the line of credit. There is also no way for us to know how many households are currently servicing some portion of their mortgage with their line of credit. The banks know.
In the past six months, household debt is growing at half the rate of the past several years. Delinquencies are substantially above pre-crisis levels.
The level of debt growth is unsustainable and is no longer being sustained. This is what Carney and the banks are telling us, after the horse has left the barn.
So, the banks are finding themselves in a bit of a box. Tighten up on lines of credit and credit card delinquencies take off. Continue with loose line of credit terms and uninsured liability takes off. Banks have about $500B of (mainly insured) mortgage loans on their books, but they have over $350B consumer loan exposure. That’s a significant portion of their net $2T assets and is where the real risk lies.
Note by Ben: John is absolutely right on this point. The banks understand that as people are forced to borrow higher and higher sums to purchase their homes, the percentage of their income being consumed by mortgage payments rises accordingly, and that is assuming static interest rates, which are unlikely over the longer term. When consumers become financially strapped, they default on unsecured debt first, namely credit cards and lines of credit. Hence the nervousness by the big banks.
What can the government do or what can we expect the government will do? I suggest the government will further tighten the rules for second (third and so forth) homes. This will take the froth from speculation off the top of the housing market. For the most part, amateur speculators (middle income consumers buying for the rental market) are in the best position to unwind their holdings in a reasonably ordered fashion over the next two or three years, the so-called soft landing. Wholesale tightening of rules for first homes at this point in the credit cycle will simply force the lower end of the housing market into default (over the next two or three years from failure to qualify for re-amortization) which will precipitate a market collapse from below.
Americans are guaranteed “life, liberty, and the pursuit of happiness.” We see where that got them. We are guaranteed “peace, order, and good government.” Let’s hope we get some.