Loans for life?

The median sold price for a house in upper NY state is $310,000 (Cad $417,000) A few hundred feet across the Niagara River, in Ontario, recent sales average $1,050,000.

The same story in Detroit (average $74,882 US) and Windsor ($572,000). Some cities (Vancouver and Seattle) are roughly similar in price, but in almost all cases there’s a big premium for living north of the line. The average house in Canada goes for $718,700. In the States it’s $412,700, or $556,300 in loonies. The difference is about 23%.

Why the discrepancy?

Many reasons. For example, it costs more to build here because of climate. A smaller population with a high standard of living means greater taxes and higher input costs.

But Americans also treat residential real estate a little differently. They don’t worship it. Just as most American retirement plans (401k, for example) are full of stocks and we like GICs, real estate is seen more as a housing than an entire financial plan. Two reasons the market is more stable are the tax treatment of property profits and long-term mortgage financing.

In Canada, as we all know, you can make an obscene pile of profit on residential real estate and pay zip in taxes. This has helped fuel decades of speculation, excess leverage and romping prices. To date no political party has had the stones to ask why we impose taxes on capital gains in every single asset class than this one – and yet everyone bemoans the outcome.

In the US a couple can reap $500,000 in capital gains on real estate, then tax clicks in (half that amount for individuals). But if you sell a home within a year, all gains are taxed as income (Canada started doing similar only last year with the temporary ‘flip’ tax.)

And while Americans can deduct a portion of mortgage interest, the real advantage to borrowers is having a rate that does not change for 30 years. Moreover, US mortgages are open to refinance if interest rates decline, but do not reflect increases. This has removed an element of volatility from the marketplace. And while American lending standards have traditionally been more lax than here (we have boringly great banks) homeowners south of the border worry a helluva lot less about monetary policy.

Lately 30-year rates have been in the 6% range, but were available for little more than 2.5% during Covid. Families who financed then had three long decades of stable and historically-cheap payments ahead of them.

Apparently the feds are working on allowing decades-long loans in Canada (not the same as thirty-year amortizations). In a mad dash, they hope to have an announcement read for Chrystia’s pre-election budget set for April.

“In theory, there’s no reason why we can’t have a long-duration fixed-rate instrument in Canada,” the former head of CHMC (Robert Kelly) let slip during a media interview a few days ago. He also made clear that Canadians have mortgage portability, which Americans lack, and rates here have generally been lower since they have to be renegotiated every half-decade. “The reason why a 30-year didn’t exist in Canada is because banks hold them on their balance sheet. Most of their liabilities go out to five years, they don’t go out to 25 or 30 years. As a result, they don’t love long-dated mortgages because it creates the mismatch between the loans and the deposits that can be unbelievably risky.”

Opening up 30-year mortgages would require regulatory changes, reforms by CMHC, a new framework for lenders and structure for long-term lenders (now mortgages are internally funded by the banks). But it’s possible. And far more doable than pie-in-the-sky promises to build four million new homes in the next seven years. Super-long loans might not make houses more immediate affordable, but they’d inject a desperately-needed shot of stability. The psychological effect on buyers could be enormous.

An issue to be addressed, of course, is the cost of breaking a mortgage. The Bank Act sets out specific penalties, which have tended to lock Canadians into shorter-term loans (an interest rate differential, or a three-month interest charge, depending on circumstances). Because there’s a lot more interest rate risk with a 30-year mortgage, it has to be funded with a long-term instrument. And allowing refinancing when rates fall adds more risk, while it tends to keep Americans from moving as much as Canadians do. (Some people argue that restricts the supply of resales and keeps prices higher than they should be.)

Also worth remembering is that Canada’s current system and bank dominance of mortgages has kept ‘exotic’ loans, like those with teaser rates or interest-only payments, mostly out of our marketplace. So the default rate on home loans is incredibly low in Canada – even when interest rates spike.

Nonetheless, the odds are shifting. Thirty-year mortgages appear closer on our horizon. After all, a desperate government, underwater in the polls, will do anything.

And if we had them? What would change?

You’d stop obsessing about the next central bank rate change. You wouldn’t have a clue who the current Governor of the Bank of Canada was. Politicians would stop harping about monetary policy. You could arrange a mortgage once in your lifetime instead of every five years. Families would have more certainty and financial stability. They would also have a far greater incentive to stay put, not to sell, with a positive impact on communities. Financial anxiety would be lessened. The need for continual income gains muted. No renewal terror.

It’s not everything. But it’s something. And it is achievable.

Is it coming?

About the picture: “Not sure why Tobi was preening in this photo… although I was BBQing some hot dogs so he likely knew he’d be getting some,” writes Bob. “Love the blog and thank you for the work you and your team put into it. The Dr. Garth (and of course Nurse Jiggles) bits are absolute gold!  They are hilarious and always give great advice.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/08/29/loans-for-life/