Peering into the murk ahead, hoping to find the right path

Special to the VOICE

Predictions are easy to make. Many predictions are based on forecasts of future events from present trends. Predictions can disappoint, however, if they don’t come true or if you planned your present based on your future.

I was reading an article on predictions that the Ontario government earlier insisted that municipalities across the province were to have in place for growth ten years ago. This “Places to Grow” plan was for the following 35 years. We’re now ten years into the plan. So how are are these predictions going?

Waterloo Region seems to have missed the mark, by quite a bit. The Region planned for 136,000 more residents than they seem to be getting, if present trends persist. They were planning for schools, light rail, and services to meet the needs of this growth but, as it stands, these predictions were too optimistic. Ten years in and they are already 24,000 short of the expected number, and this with a major housing bubble and construction boom.

Niagara Region doesn’t fare any better. According to the predictions, our region was forecast to grow to over 600,000 by 2041. That number is actually trending to just over 500,000 by 2041. Even here in Pelham growth forecasts are lagging. In a May 2016 report concerning development charges to pay for the new arenas, the firm contracted for the report used a forecast for a population of 18,011 in 2016, while the 2016 census reported a population of 17,100—5% less than expected.

Growth plans can be useful, but are ultimately flawed. They’re usually far too optimistic because they are designed for best-case scenarios. Politicians always plan for best-case scenarios; to do otherwise would not be moving forward, as they say. Individuals also like to make predictions about the future. People plan and spend on the assumption that growth is a straight line up. I bought my house for X and now it’s worth Y. I’ll borrow lots of money and my house will pay for it. There is no thought given to the possibility that it could go back to being worth X, or less. That’s why we, as a nation, are in so much debt.

The levels of debt Canadians hold today are truly frightening. Since 2006 private debt—not government debt, which is equally disturbing—has ballooned by a further $1 trillion, to over $2 trillion dollars. Canada stands alone as having the highest personal debt per capita in the developed world. Credit card debt is the most expensive type, because the bank insists you pay a high premium interest rate to cover possible defaults by the entire credit card debt pool. The money borrowed from a bank for credit cards is all their money, and it is not secured by anything but trust and your credit rating. If you carry a balance of $6,000 and pay the monthly minimum, you will be paying for that $6,000 for 40 years. At the end of March, 20.4 million of us were carrying a balance. Long term car loans with low monthly payments allow people to buy cars they can’t afford. The car is usually replaced before the loan is paid and so you just roll the old loan into a new loan, and drive off. Canadians hold an average of $20,000 each in car loans. However, the most popular and largest type of loan people have is Home Equity Lines of Credit or HELOC. These loans are demand loans secured by the value of your property. You can borrow up to 80% of the value of your home, but only 65% can be a demand-type loan. The other 15% is like a second mortgage. What does a HELOC have to do with predictions?

When the housing market is hot and your home is growing in value, you can borrow a lot of money based on this new-found asset appreciation. This wealth-effect tricks people into believing that they’re worth more than they think. Eighty percent of Canadians with HELOCs link their mortgage payments to this line of credit so that, as the mortgage goes down, the HELOC goes up. You can take all of this new wealth and spend it on whatever your heart desires. A new kitchen or backyard Shangri-La or some new toys, maybe a quad or boat, or even summer cottage. It’s all possible and heavily encouraged. So much so that the average Canadian owes $30,000 in HELOC loans. As mentioned, these loans are demand loans. There is no fixed payback date and the interest rate is variable. The bank, at any time, can “demand” repayment of this loan. Would they do that?

This quote from the federal agency charged with these matters sums it up best: “Falling housing prices may constrain HELOC borrowers’ access to credit, forcing them to curtail spending which could in turn negatively affect the economy. Furthermore, during a severe and prolonged market correction, lenders may revise HELOC limits downward or call in loans.”

If property values continue to fall, as they seem to be doing in the GTA, loan-to-value ratios change. You could be asked (i.e., told) to reduce your limit by paying money back, hence the “demand” part of this loan. An alarming 40% of HELOC borrowers do not make regular payments. The first demands on these loans would fall upon the shirkers who have not been making regular payments. You may be thinking that house prices and land values can’t go down.

A previous column about the housing bubble mentioned the growing number of listings and falling number of sales in the GTA. Those numbers were reported to the end of May. As of June 16, sales are now off 50% year-over-year. Overall prices are down 6.4% from May, which were down from April, for a total drop of 12% in eight weeks. Prices are being reduced, depending on the level of despair the seller is experiencing. Banks are appraising purchased house values lower, forcing new buyers to pony up more cash for the down payment. Loan terms are being tightened. It wouldn’t be a stretch to see the banks re-appraise all of these HELOC debts lower as well. It seems people may owe more than they’re worth. Banks can be tricky, but you should already know that by now.

Based on present trends, here are some predictions for you to consider.

Interest rates will be going up—there is a 50% chance rates could rise in mid July and an 80% chance rates will rise later this year. A quarter point here, a quarter point there, so that before you know it, rates will return to more normal levels. The Bank of Canada said as much last week. The crisis of the last decade seems to have finally abated and deflation is not seen as the enemy, inflation is, along with the alarming level of debt Canadians have amassed over the last few years. If the housing market continues on the slide it seems to be in, a trend will form. The psychology of the masses will change and prices will begin to return to the long-term trend line. The mantra will soon be: Why would I buy a house now—if I wait a while the price will be even lower. Some areas will see rather drastic falls while other areas will fall less. The drop will depend on how much out of kilter these prices got.

Municipalities will not experience the levels of growth as predicted. They already are failing to meet the rather lofty numbers set ten years ago. Forecasts for land sales and development fees will have to be re-aligned with reality, and bills for projects like double arenas, based on forecast growth, will have to be paid for by the local tax base. That could be pretty hard on many people as they also struggle to get out from massive debts of their own making and pay higher monthly installments because interest rates rose. Anyway, it’s just a prediction and predictions are easy to make.

On a related note, it seems the Region has decided it’s time to cash- in on the housing boom in Niagara. The Region is proposing increasing development fees. Certain incentives in place could be reduced or eliminated. Pelham’s favourite, the Community Improvement Plan, may be in jeopardy. In what can only be called a visionary and bold move, these measures would help calm the bubble in the Region better than any petitioning from local citizens. I’m not sure that is the intention though.

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The Voice of Pelham
Pelham's independent news source from the heart of Niagara.