- Jim Flaherty – Anti Robin Hood
Ottawa’s hand in your pocket…sort of.
This somewhat odd tale begins in early March with the non-event of BMO announcing a ‘no-frills’ 2.99% 5 year fixed mortgage rate. I suggest this was a non-event as in the world of the mortgage broker we have had full-featured mainstream 2.99% five year fixed mortgage rates since July of 2012. Arguably we have had this rate available since November of 2011 with only a few months of exceptions here and there.
Yet somehow our Finance Minister seemed unaware of this and deemed it appropriate to apply pressure to both Bank of Montréal and subsequently Manulife Financial (they had the audacity to offer a 2.89% rate) and push their rates up with rhetoric, rather than allowing the free market to do its thing. Mr. Flaherty threw around catch phrases like ‘race to the bottom’, ‘mortgage rate wars’, and saw fit to blend into the conversation a reference to the mortgage crisis in the United States. ( For clarity on how radically different the US system was and is from the CDN system I urge you to pick up a copy of Michael Lewis’ The Big Short – comparisons between the CDN and US mortgage markets are simply not realistic or logical)
Somehow Mr Flaherty seems to be overlooking the fact that Canada has some of the most stringent mortgage qualification criteria in the world. Low interest rates are not about to trigger any sort of crisis, loose qualification guidelines and imprudent underwriting practices were the issues in the US and have arguably not been an issue within Canada ever, let alone after the 4 rounds of guideline tightening since 2008. Compounding those changes we now have to wrestle with the OFSI’s B20 guidelines imposed on the chartered Banks late last year. The fact is that things could not be much tighter than they are. One need not look further than the timing of the drop in overall sales volume (right in line with the last round of restrictions) to see the impact that the current lending guidelines are having.
But back to the main point;
Everybody enjoys the story of Robin Hood, especially here in Canada; land of socialists that think like capitalists, or is it capitalists that think like socialists. In any event our socialist nature is something that has always made me especially proud to be Canadian – with every fiber of my capitalist being.
What we seem to have currently is an individual in government casting themselves as something of an ‘anti-Robin Hood’. Our Finance Minister, Jim Flaherty, has decided that it somehow makes sense to urge lending institutions whose cost of funds has dropped to record lows to charge Canadians higher rates than they might otherwise do. Rather than make their standard margin of profit, Mr. Flaherty is instead encouraging financial institutions to keep rates artificially high, and thus their profit margins also artificially high, at the expense of Joe and Mary Sixpack.
This is all being done ostensibly to protect us from ourselves.
In other words stealing .10% from the masses to feed the chartered banks. (This actually starts to remind me of the plot line from a great little indie film, The Office)
Let’s look at a few hard numbers. The average Canadian mortgage is $165,000 and a difference of 1/10 of a percent equals a savings of approximately $13.75 per month, not exactly life changing economics for the typical Canadian family, but hey we will keep every hard earned nickel that we can in our own pockets. Over a period of 60 months this is $825 in savings, which is not nothing.
Here in British Columbia the average mortgage is closer to $275,000 or that difference of 1/10 of a percent equals a savings of approximately $22.91 per month. ($1374.60 over a five-year period)
How do these numbers add up for the typical financial institution renewing and originating Billions of dollars worth of mortgages this month?
For each $1 billion worth of mortgage money that a financial institution charges 1/10 of a percent more than they otherwise would an additional $83,315.98 worth of interest,(translation net profit), is generated. Spread that out over a five year term and Mr. Flaherty’s comments stand to generate the Banks an additional $4,998,958.80. over five years for every $1 billion worth of mortgages that are written at the .10% artificially higher rate than they otherwise would have been were the market left alone to operate on its own terms.
Some back of the napkin math, simply because I do not have time to Google the exact figures, would indicate in excess of $10 billion worth of mortgages renewing and originating per month in the province of British Columbia alone. It is likely that 70% of these will be in the five-year fixed rate mortgages (whether this is a good thing is another story altogether) and will thus generate an additional $35 million in profit over the term for each 1/10 of one percent that lenders increase their rates by. (Potentially 70M for Manulife)
How does this even make any sense to a rational person?
It is a rare day that I find myself in agreement with the statement made by an NDP member, even at the federal level. However NDP leader Tom Mulcair hit the nail on the head when he referred to this as ‘Banana Republic Behavior’.
In any event it is my humble opinion that low interest rates are going to be with us for some time, and this is neither a bad thing for the average Canadian nor a harbinger of doom.
In closing let me lay out another set of numbers that you might find more interesting, and arguably Mr. Flaherty might want to tune into with his regulatory magic wand…assuming ‘consumer debt’ is truly his target of concern.
If there were in fact genuine concern about Canadian household debt than I daresay the focus would be on increasing regulation around consumer debt; credit cards, unsecured lines of credit, car loans, boat loans, personal loans, etc. The standards for qualification absolutely pale in comparison to those for mortgage financing.
The hard numbers; A $27,000 credit card debt at 19% yields $411.50 per month in interest for the lender. If the borrower makes only the minimum required payment the total amortization of this $27,000 loan is effectively 127 years. Yes, One Hundred & twenty seven years.
From the Banks perspective, at a paltry 2.99% they have to loan out $166,175 to generate that same yield of $411.50 per month in interest. Not quite as lucrative.
I offer the following example of how flawed things have become; The federal government dictates that I must pay off my home completely within 25 years, this is an appreciating asset in which I live of which there are several examples still standing around me which are well over 100 years old. It is also the lowest interest debt I am able to have at any point in time.
However I can head out to a discount furniture store and spend $27,000 filling my home with particleboard, pleather, and flatscreens. Items which are depreciating in nature and unlikely to have a useful life of greater than 10 years, and somehow it is okay for me to take 127 years to pay this debt off.
I am seriously concerned about the priorities of our Finance Minister. Certainly the conspiracy theorists must absolutely be having a field day with this stuff.
Thanks for your time.