National Bank Senior Economist Wants You in Debt up to Your Eyeballs

Matthieu Arseneau, a senior economist with the National Bank, likes mortgage payments as the best yardstick. That's because the evidence tells him that the rise of interest rates from today's bargain-basement levels will be moderate. Based on this, he thinks it's silly to foresee a housing crash, since monthly payments won't get into distress territory even by the time rates peak in about three years.

That's why Arseneau dismisses apocalyptic talk about a housing crash in Canada. As a cautious analyst, he doesn't rule out any scenario absolutely, but Arseneau said Monday that this one is awfully unlikely: "I think there will be no collapse unless there's a worldwide recession and credit crisis."

Banks have already completed several rounds of scraping the margins of qualified buyers to push ownership to 70%. Where is the next buyer at these inflated prices supposed to come from? This is the inconvenient part of beanie baby trading; your holdings only have value if that next buyer is ready and waiting to buy, with approved financing, at a price at least tracking inflation, just in order for the house of cards to stand as is. For the current owners to continue to hold, overextended as they are, rather than exit, properties must at least track inflation on their already inflated values. So not just gaining 3.25% on the true economic value of the property as measured by what it would produce in rent, but on the extra $150,000-$400,000 above that.

In order for that to happen, the banks must find yet another round of even more marginal buyers to get into the market. This has nothing to do with interest rates beyond the inability to drop them further as part of helping qualify this next round. See how that works. If total debt load has been tossed out the window as part of qualifying buyers you can keep a bubble going a long time on eroding rates. That's why ignoring total debt load is such a terrible idea.

The other thing roundly ignored by the "interest rates must rise to cause a crash" crowd, is that housing is unique in that buyers are also sellers. Say you live in Toronto, in a house now valued at 800k, and some buyer out there currently in a 400k condo would like to buy it. And you also want to move up. Where are you going to move up to? You don't qualify for a 1.2 million mortgage at any interest rate. So you are stuck. At the extremes of the market that mythical property ladder stretches out and the rungs become too far apart to climb. This is why new buyers (and the symptomatic rise in ownership rates) are essential to keeping the house of cards from collapsing.

Even without interest rates moving, there are limits on the market: Running out of even the dodgiest of marginally qualified buyers and the inability to assemble a chain of buyers and sellers to make transactions happen.