This week the Minister of Finance announced some changes explicitly designed to slow the Canadian housing market.
In response to a slowing economy brought about by the new regulations, and the onerous capital requirements of the regulations themselves, Banks will overreact in order to please the financial markets, tightening credit just as we saw with the credit crunch post-Great Recession. As the Banks retreat from secured lending an even greater opportunity to deploy private capital toward excellent risk weighted returns will open up.
Here are the 3 steps to us creating wealth over the next 5 years:
- Be Prepared.
Access the equity in your home now. This equity is only valuable if it’s being used. If you have no immediate intentions of selling your home, a reduction in property values only negatively impacts your ability to use your home as a source of low cost investment capital. Access that capital now and watch the value of that capital increase, while those around you see their ability to borrow limited by declining property values and increased regulation. - Be Disciplined.
Begin investing in low risk mortgages with low Loan-To-Value weightings. This requires discipline. While others look to make higher returns, foregoing diligent risk management in the blind pursuit of yield, you must look for low risk mortgages that provide safe and stable returns before looking at yield. Those who are rushing to reap massive returns on second mortgages now will be the first to panic sell those second mortgages at a discount in the future, wiping out their extra yield and likely a large chunk of their initial investment. - Be Patient.
As the Banks retreat from lending there will be some downward pressure on property values. Yet property values will not be as impacted as capital availability, particularly considering the government’s failure to address the supply side constraints that are a significant contributing factor to the strength of the major metro markets. When the mortgage market is affected by a lack of common sense lending and rates artificially increase, investors will see much higher risk weighted returns.
It is our belief that we must access the equity available to us in our homes to make investments now. Very soon our access to that equity will be extremely limited by the new regulations and their knock-on effects (reduction in values, and retreat of conventional lenders from the marketplace).
Interest rates are at all-time lows and will continue to be for the foreseeable future. We are in uncharted territory. Typical sources of investment income for banks, insurance companies, and Pension Funds are being assaulted. Soon mortgage rates will be artificially inflated by the new regulations being imposed. In fact we’re seeing this already, as lenders price in the new policy framework.
This is precisely the government’s goal – to artificially raise interest rates within the housing market, without raising the rates which effect the broader economy. It’s hard to know the full extent of unintended consequences this action will produce, but one thing we can be sure of is this: increased profits for Banks. Unfortunately, it could also result in a drop in the value of our real estate, which is one of the only bright spots in our tepid economy.
By limiting access that Canadians have to low cost institutional funds and then placing restrictions on who can lend money and who can borrow money the federal government is devaluing the wealth Canadians have in their real estate assets. This is a dangerous game. If the measures being imposed are too severe they could create a more serious recession that will likely result in further interest rates drops and a reversal of some of the policies now being implemented.
In the short to medium term we expect prices to see some minor downward pressure as the market adjusts to the new rules imposed by the Canadian Government (have a look at our recent MorCan Direct newsletter explaining those rules here). In the longer term we believe that amazing opportunities will emerge, as long as you have access to the equity in your home to take advantage of them.
If you or someone you know has equity available to them they should seriously consider using it before these new barriers put that equity out of reach. Our roadmap for the future is clear. Our commitment, as always, is to provide our clients with sound, unbiased mortgage advice.
As the guidelines for refinancing begin to make it impossible for Canadians to access their equity and home price growth normalizes, those of us who have accessed the equity in our homes will be in an incredible position to fill a policy-induced market gap with an extremely compelling risk-reward profile.
If the Canadian Government and our Banks are successful in limiting our access to capital and therefore our ability to lend to one another we will be forced to rely solely on the Banks. This will slow down peer to peer lending platforms, and reduce the funds available for investment in assets like private mortgages. It will ensure that Banks can return to making greater profits on lending out our own money back to us at higher returns. Or, you can be the bank and capture a share of that profit for yourself.
