Canadian borrowers losing ability

Home sales in Canada’s largest city–Toronto–fell 37% year over year in June. Long overdue buyer exhaustion has finally been triggered after the Feds tightened mortgage insurance requirements last November and Ontario imposed a 15% tax on foreign purchasers in April.  Now regulators are considering new rules requiring lenders to stress test uninsured mortgages (prompted by oversized loss risk in the sector).

In addition, on Wednesday, the Bank of Canada is expected to raise its benchmark overnight rate to .75% from .50%. In anticipation, Canada’s biggest banks are also tightening. Royal Bank of Canada raised its fixed rates for 2-,3-, and 5-year term mortgages by .20%. See:  Canadian home buyers losing steam, and cash.

With some 90%+ of Canada’s economic growth coming from realty transactions and services the past 2 years, we doubt the BOC and banks will raise rates far before declining property prices and a weakening economy cause them to pause once more.  But at this point, holding rates lower for longer is not going to repair or even meaningfully patch the financial leak.  This is Canada’s payback period due after a decade of reckless credit abuse.

Next up will be a necessary cleansing cycle resulting in lower shelter prices to help restore affordability once more and reset many over-leveraged participants–households and businesses–through bankruptcy, credit restructuring and write downs for lenders.  It will also mean lower tax revenues for governments that have become unduly dependent on what has been the one firing economic cylinder since oil prices collapsed last in 2015.  This is the downside of too little diversification and unproductive spending.

Here is a direct video link.

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