It’s been a whirlwind of a week and we aren’t even finished yet. I want to offer a few thoughts here, as there is a lot happening behind the scenes, a lot of which most people don’t understand. Heck, even the Real Estate industry doesn’t quite understand. Many of the Realtors i’m speaking with think this is just a virus problem and it will clear in a month, and then its back to normal. What I think they are failing to understand is the economic ramifications, and the underlying disfunction in the financial system.
First, lets read between the lines. Policy makers are throwing the kitchen sink at this, trying to support the financial system. In the past week, in Canada alone, here’s a brief summary of the liquidity operations.
- OSFI lowers capital buffers from 2.25% to 1% of risk-weighted assets.
- Bank of Canada to begin purchasing Canada Mortgage Bonds in the secondary market. As a starting point, the Bank will target purchases of up to $500 million per week.
- Insured Mortgage Purchase Program. This is a return of a program the government used during the 2008-2009 financial crisis, with plans now to acquire up to C$50 billion in government insured mortgages through the nation’s housing agency.
I understand many won’t know what these things are, and policy makers would probably prefer it that way. In simple terms, these are emergency programs designed to prevent the financial system from freezing up. The goal is to keep the banking system functioning. Without these programs mortgage rates skyrocket and banks stop lending.
So yea, definitely a lot more going on here than a contagious virus. The virus merely help set these events in motion.
The Government and the banks know we have a more serious problem. And while they recently announced that mortgage payments can be deferred for up to six months on a case-by-case basis, this won’t be enough to ease the pain. Remember, these are payment deferrals, the debt still must be repaid. Further, most banks already provided mortgage payment work-arounds. Generally speaking, most banks would already work with delinquent borrowers, usually on a 90 day basis, to help them get back on track. The only difference here is that you’ll get 6 months before banks take action and either ask to be paid or start the foreclosure process.
I have no doubt more stimulus is coming, even on top of the $82B announced today. That is certainly encouraging news, but it still won’t prevent job losses. You need a job to buy a house.
This is not a one month, or even two, or three month slowdown. This is much bigger. This post is not designed to scare people, but rather enlighten people to be proactive with their finances.
Real Estate is the majority of Canadians household wealth, and while nobody knows the eventual outcome here, we need to be extremely cautious. There is a lot happening behind the curtains, some of which is deeply worrying. I hope I am wrong. I will update you as things evolve.