On-demand seminar: Canadian mortgage arrears and economic fundamentals: Evidence and outlook

Gregory: So invariably when I travel I forget something and this time I forgot my speaking notes. So, what I did is I had my wife photograph the cue cards. I travel with a 1970s era iPad, otherwise known as postcards, the 4 x 6's, and I write little shorthand gibberish on them. It makes no sense to anyone but myself and that's what I forgot at home. She took pictures of it and I have it on my device here. So, I'll be doing virtual cue cards. Anyways, going to be talking about something that I've never talked about before which is arrears. I thought it would be interesting to do the research so I accepted the invitation.

So that's what I'm going to be talking about. I'm going to be organizing along the following lines. First I'm going to look at the evidence about those factors commonly thought to give rise to an increase in arrears. I'm going to pivot to looking ahead at what's ahead for mortgage debt servicing ratios. That's just the percentage of a household budget goes to pay that mortgage. That's the thing that the Bank of Canada, and indeed the office of the Superintendent of Financial Institution, and Finance Canada are really gripped with. What happens when interest rates rise? Are people going to be able to pay their mortgage? I'm going to get into a little bit of the metrics of the Bank of Canada's put out there in the last little while on that. I'm going to bat cleanup with talking about arrears trends in the greater golden horseshoe region, you're stomping ground, and in the context of expectations for interest rates and employment and price growth and what that means for arrears next year and the year after.

Tangent – when I gave a presentation years ago to our board of directors, afterward, one of the directors came up to me and said, "Greg. Nobody likes charts. Nobody understands charts." The good news is well, I'm an economist and I came with charts, but I'm going to make fun of some of them and generally I don't put charts up anymore because the whole point of a chart is to reinforce your point. If everyone is looking at the chart trying to make sense of the chart they're not listening to you. If I hit the blank screen button, if I remember to do that, that's why. It's to deny the fun of trying to make sense of my charts. You'll be forced to listen to my mellifluous words. Anyways, I'm a real fan of the bottom line up front first and that's as follows.

What's next for arrears? Nobody knows. It's unlikely to go down anymore, but is it going to go sideways? Is it going to rise? And if it's going to rise, or go sideways, how long is that going to go on? And if it's going to rise by how much and over what duration? Nobody really knows. That's why those who are paid to worry about mortgage defaults have been tightening regulations over a number of years now, as you know. That's the bottom line up front. What's next? That's always the most interesting question in life and nobody really knows. So you're wondering why am I here. I'm supposed to have all the answers. Well, I don't. But I'm going to walk through why nobody knows. Without further ado, let's get into it.

I'm going to be talking about the factors, first of all, about the factors why they thought to cause arrears to increase. That's either over tightening of a policy or a decline in prices where people are underwater in their mortgage, interest rate increases, so they can't pay their mortgage when it resets, and lastly, employment changes. Talking about the correlation in these things and what we're seeing in arrears. Let's start with policy first. The data for Vancouver and Toronto that's probably available only goes back to the third quarter 2013. I can't go back any farther than that. The policy changes that have been put on the table will actually predate this chart. A bunch of stress tests. The most recent one being the B20 that took effect, it was announced in October of last year, and it took effect on New Year's Day of this year. That was not, by any stretch of the imagination, the first stress that was introduced. There was one in 2010 that was introduced for high-ratio mortgages. Whenever I say high-ratio mortgages I just mean those people that have to take a mortgage to follow insurance. They have less than a 20%25 down payment. Those are high-ratio mortgages. Low-ratio mortgages are the ones that have the more than a 20%25 down payment. In 2010 they put a stress test in for high-ratio borrowers. Then again in 2012 and then the fourth quarter of 2016, which I'll get to in a minute. In the first quarter of 2016 that's when they put in place, CMHC announced the policy where you had to have a 10%25 down payment on every $100,000.00 for your mortgage over $500,000.00 up to a limit of a million, at which point you no longer qualify for mortgage default insurance. In the third quarter that's when Vancouver put in the foreign buyers tax in Metro Van. Which you'll notice on this chart, whether you're looking at Vancouver or Toronto, the arrears rate has declined so this suggests, of course, the tightening of policy all along the way hasn't done anything to cause an increase in the arrears rates. So there's been over tightening of policy by this metric. Again, the stress test in the fourth quarter 2016 that was put in place for high-ratio borrowers. So they had to do a stress test for those people less than a 20%25 down payment. Then the so-called Ontario Fair Housing Plan on April 20, 4/20 of 2017, so called. Then a stress test was announced in the fourth quarter, it was in October of 2017, that took effect January this year. And last, I have happily colour coded them to correspond to the political party and notice they are all Liberal, and in the last the one, the NDP government, the orange, which they announced a host of measures aimed at cooling the housing market. It included an increase in the foreign buyers tax, and a so-called speculation tax, which I'll just call vacancy tax. All along the way arrears rates haven't gone up. It hasn't been an over tightening policy, at least from the standpoint from the arrears rate.

I'm going to walk through, they were worried about the loan to income ratio, the zone where the governor of the Bank of Canada gets worried is when you take out a loan that's four and half times, or more, of your income. That is what drove a lot of the tightening in policy, from the standpoint of the mortgage stress test, introducing them again and again. This is just the GTA. This is the year, that's the vintage of originations, that year. The way to interpret this chart is the darker red it gets the more worries. The darkest of dark red, that's your 450, and more, 450%25 from your loan to income. Let's just walk through the vintages here. 2013 and 2014, you've got some. The less darkest, darker of red is the 400 to 450. He likes to worry about that too. That's four times and more. Here we are in 2015, as you can see, the loan to income is getting more worrisome from the standpoint of originations and here we are in 2016, there's an awful of dark red. So, yeah, this is what captivated their imaginations about tightening policy when it comes to the standpoint of mortgage stress tests. Here we are in 2017. A little less but the thing of it is, that's just the growth. Now you have to look at also the stock. The other thing too, when you take a look at 2017, let's just rewind it all the way back to 2013, compare that with that and it's not like the 400 plus has disappeared. The thing of it is that there's still a lot of high ratio borrowing going out there from the standpoint of the loan to income and that's just the growth in it. But it's cooled down compared to 2016. But that's just the flow. The bank is worried about the stock of those loans going south. That's what we're looking at here. The share of new mortgages with a loan to income ratio. 450%25 and you're looking at insured and uninsured mortgages and you'll notice that in the fourth quarter of 2016 the rules were tightened for mortgage default insured mortgages and the share went down. But not so for the uninsured mortgages and only after the introduction of B20, the most recent tightening of the mortgage stress test for uninsured borrowers, has that gone down too. From the bank's standpoint they are very happy with the way that's played out. The whole reason behind this is as interest rates rise they want to make sure that people can pay their mortgages.

Let's pivot now and talk about the factors. Home prices versus arrears. I'm going to walk through how to interpret this thing. We always talk about correlation. It's not cause effect but it is a correlation. The association of changes in home prices with arrears. I'm looking here at a correlation from a big correlation to no correlation. No correlation is the zero. And, indeed, from a minus .5 to a plus .5 that's sort of the zone of weak sauce, it's a very weak correlation. Once you get past the minus .5 and up to 1 or minus 1, perfect negatively correlated, or perfectly positively correlated. The closer you get to 1, the more strong it is. You also have to test for whether there's a statistical significance in that relationship and so I've done all the homework there and, wouldn't you know, for home prices it's kind of, it's not even kind of, it's like meh, kind of zone of weak sauce, the change in prices. The thing of it is, is that if you're underwater in your mortgage, if you owe more than the house is worth, people don't sell their home like it's a stock. They stay in it and it's really, a decline in home prices too, is associated with a host of other things that's going on. But people don't just, "Oh, I owe more on the house than it's worth now because the market's gone down." They don't just pack up and move. I've always impressed on my guys back at work know what your data looks like, and brace yourself, here comes the first chart. It's not pretty, but it will be brief. Here's what the data looks like on the change in home prices versus arrears. It's pretty hard to make a good correlation. They're not moving in mirror image to one another or in tandem to one another. As they say, it's in zone of weak sauce. The way these things are going to be organized is, better yet, this is a dual access chart which I hate to foist on anyone, but here you go. On the right is your year-over-year change in Ontario home prices and the arrears rate is on the left. In the early 90s that's when we had a housing recession, if you remember interest rates went through the roof and that's likely reflected in your arrears. Not so much the change in home prices. Anyway, let's move on to the next one. Let's talk about interest rates versus arrears. The idea is if interest rates rise people aren't going to be able to pay their mortgage and arrears rate goes up. They'll be positively correlated, one would think. Higher interest rates, higher arrears. Sure enough, it's still in the weak sauce zone of kind of. Here's the chart. The 5-year benchmark mortgage interest rate on the right and the arrears rate on the left. You can see it's a pretty decent correlation there, and it's statistically significant as well, but what's worrisome to me when I was looking at this is that, to me, the 5-year benchmark rate isn't so important as the reset. I was looking at a 5-year differencing on the benchmark mortgage interest rate, as compared to arrears, and there was not a good statistical relationship and, indeed, the sign was the wrong sign. As interest rates reset lower arrears went up. To me, that's like, uh, I'll take that with a grain of salt in terms of home prices and arrears, the correlation in them. Nonetheless, it's the kind of thing that keeps the bank up at night and, indeed, the finance minister. That's why they tighten mortgage regulations.

Let's take a look at employment. Now we're into the zone of strong sauce. Go figure. If you lose your job you're going to have trouble paying your mortgage, particularly as it comes due. If it comes due, especially now with B20, they're going to be testing on income, right. This is the year-over-year change in Ontario employment versus the year-over-year change in arrears rates. There is a strong correlation, a statistically significant one as well. Now, the chart itself, this is the ugliest one, I promise you. The one on the right, that's the level change on a year-over-year basis, sorry, per cent change on the year-over-year basis. No, it doesn't. It says perc ent change but it's actually level change. Nevermind the label. Then you've got the black line which is your Ontario arrears rate on a year-over-year change basis. In a really fine line, just to make it easier to kind of follow what's going on because not everyone's used to thinking of if it's just slightly above then the arrears rate is rising. If it's slightly below then the arrears rate is shrinking. That's basically this whole thing here, that whole thing there, it corresponds to the arrears rate declining, which corresponds to employment rising. There's a decent relationship there. But it's ugly.

Let's pivot a little here and switch gears to some of the Bank of Canada's research. They did a little thought experiment a little while ago about what happens when interest rates rise by, the 5-year mortgage rate rises by a percentage point compared to when they took the mortgage out. In 2019 those folks are going to review a 5-year mortgage that was originated in 2014. If they're facing a 1%25 increase, and that's a reasonable assumption, what percentage of those mortgages in 2014 that were originated, what percentage of those are going to have an increase in the mortgage debt servicing ratio of less than 3%25, between 3 and 5%25, and more than 5%25? While the vast majority in 2019, 94%25 of them are going to have an increase of 3%25 or less. None of them are going to be facing an increase in the mortgage debt servicing ratio of more than 5%25. The remainder is between 3 and 5%25. But the vast majority of them, that's no problem, really. Because the idea, of course, is that over this time incomes have risen as well. Which the Bank of Canada estimates, you know, looking at history, it works out to 2.1%25 a year. Sounds reasonable. But in 2020 things change a little bit because a greater percentage of those mortgages that were taken out in 2015, they're looking at a mortgage debt servicing ratio that increases by 5%25 or more. A little less than half only are looking at an increase in the mortgage debt servicing ratio, that's 46%25, of 3%25 or less. The remainder in between the two. It was one of these thought experiments where, "Oh look. If you're highly indebted higher interest rates are going to hurt you more." Well, duh. That's again, the flow. This is the stalk of a mortgage from origination in 2014 to 2019 and from 2015 to 2020 in the first and second panels. It's tough to see but the reason I love this thing it's such an optical illusion and I recently met with the Bank of Canada's, the governor and his staff, and afterwards I applauded them on this wonderful optical illusion. It's like they don't publish the numbers behind this other than the numbers that are there. The point of it is that those mortgages that are originated in 2014, this is all bracketed by loan to income ratios, like 18%25 of those mortgages that were taken out in 2014 were loan to income ratios of 450 or more and loan to income ratios between 350 and 450, 18%25 of them and so on and so on. The point of it is that for those folks in 2019, regardless of your loan to income, when it resets what happens here is, what you're looking at is your mortgage debt servicing ratio and then what happens when it resets at the 1%25 interest rate increase in 2019 and likewise from 2015 to 2020. And again, it's one of these, "Oh look. If you're highly indebted it's going to hurt you more." That's the top line there. The 450 plus loan to income guys. This is just taking out the 2020 one. Because there's not really much to see in 2019, but Carolyn Wilkins, the deputy governor, just recently gave a talk and this is the one that she pulled out. What it looks like, because when you see this dotted line go up, it looks like it's so much higher in all these cases. But it's not. It's because you're coming from a lower level up and so I applaud them on the optical illusion. Because I have no life, I took out a ruler and I sort of went across the thing and I worked out, basically eyeballed the numbers, and what you see here is there's really not much to see here. Because it's only in the vintage 2015 mortgages that in 2020 when they reset, the mortgage debt servicing ratio goes from 31 and a half to 34%25. It's a pretty small increase and there's really not much to see as far as the rest of them go. It makes it look like it's a lot worse problem than it is. Again, it's a communications vehicle. So it's like this is why we're captivated with it but if they actually published the numbers it's like, meh.

We're going to pivot now and look at transiting around the GTI. I said that the previous chart was the ugliest one but maybe I lied because this one is not so hot. It's what I call a plate of spaghetti. The point of this plate of spaghetti is the trend of them is all downward. Again, the data start in the third quarter of 2013 and the most recent data it the second quarter of 2018; the point of it is that they're all trending lower. It doesn't matter where in the greater Golden Horseshoe you are. The other thing to notice out of this is that Toronto is the red line and Ontario, overall, is the black line. They track pretty darn closely. Although I don't have historical data on Toronto, if this relationship holds going back in time, and there's no reason to think that it won't, we can go back to 1990 and that's my very last slide. That's the point is that it's been trending lower, but it looks like it's kind of started to stabilize or bottom out in the second half of last year. And, indeed, in a couple of markets it's risen just a little bit. Brantford, I'm looking at you. But generally it's stabilized around where it is now for the last little bit at the tail end. So here's the trends in Toronto. Back to mortgage origination, what's kind of unintuitive about this is that the smaller the mortgage, the more recently it's pinged higher on the arrears rate. That's because of CMHC stuff. They explained that those people who are taking out those small mortgages are generally lower income, less job secure folks, so in all likelihood their tenuous employment relationship is evidenced in the recent uptake in those mortgages that origination recently that ticked higher. But you don't know the vintages of all these things as well. That's the thing. It's a mish mash of all of them so I would like to get the data, but of course, CMHC doesn't like to release data that doesn't fit their communications message. Here's the breakdown of average monthly obligations in Toronto. What you'll notice is the mortgage, of course, is basically half of their entire monthly obligation and, indeed, it's increased by more than the others as well. Oh look. We've got a table on that. Between the second quarter of 2018 compared to a year prior the increase has gone up by 100. This is your monthly obligation. The total's gone up by 200. You're basically looking at about half of it. But they've all gone up. As interest rates rise, of course, that monthly obligation is going to increase particularly on those things that are flexi like HELOC's and if you're on a variable rate mortgage, well, yeah, that too, right. That's generally thought by economists, it's like, "Yeah. Canadians are really serious about paying their mortgages until they just can't." There's not a whole lot of strategic defaults. If you're underwater you walk away. I remember when the depth of the recession in 2008 and 2009 I did a radio show with then president of Korea and Ann Bosley, and took a call saying that somebody wanted to buy a foreclosed property. It's like you're going to have to go the States because in Toronto, at that time, there was no foreclosures, really, going on. Anyways, the mortgage obligation and the HELOC's, HELOC's is your big growth too by the way and that's why they're, OFSI recently published a little thing saying, "Yeah. You want to take into account HELOC's when you're doing mortgages." It's not just equity. Increased scrutiny on income and indeed a hypothetical look, never mind how much you actually owe on your HELOC, let's say you maxed it out. Then what? That's what they're doing. They're qualifying mortgages. TD was the first to cross the line, and you probably saw that in the news, anyway, others are going to be following suit, count on that. Because OFSI says so.

My last slide in the bunch. Here's your arrears rate for Ontario. Remember when I said that Ontario and Toronto, they track pretty darn close, let's expect that they do going all the way back in time here as well. This is from the Canadian Bankers Association so this is basically all the charter banks. Here's your arrears rate going back to January of 1990 and it ends in June of this year. That's the latest available. And the long term, that's your red line. The black line, that's where we are and where we were. You'll see just how far below the long terms arrears rate we are. If anyone thinks it's going to go lower in an era of higher interest rates, I'll smoke what you're smoking. The point of it is that we are actually farther below the long term average now then we were just before we went into recession. There's only one way to go and that's up but you can also slide sideways. I just don't think that sideways is as probable as it going up. Here's the thing. I can't tell you how many mortgages are out there in Toronto, I can for Ontario, but Toronto I can't. I'd have to make some herculean assumptions to do some mental math gymnastics to get you how many mortgages are outstanding in Toronto. I can tell you the arrears rate but I can't tell you how many mortgages are out there so if you're talking about hypothetical increase in arrears rates, how many mortgages that means you'll be writing a business on foreclosure, I can't do that. I hope to do that next year. I'm going to approach Equifax who would have the data, their data ain't cheap, but they'll have the data on that that'll allow me to actually calculate those sorts of things. Maybe I'll see you in a years' time with some news on that? What's next, as I said, it's always the most interesting question. Nobody knows but I'm guessing it's not going to go sideways for very long. It's going to go up as interest rates rise but the key question is, how much are interest rates going to rise? The overnight lending rate right now is at 1.75 and the neutral zone is between 2.5 and 3.5. That's why economists on Bay Street, and others, and Poloz is taking great pains to say, "Yeah, interest rates are going higher but it's going to be paced by the data." and they're sensitive of the fact that they know highly indebted Canadians are highly sensitive to just little interest rate increases so they're going to let the data guide them as to how fast they raise interest rates. But make no mistake. Interest rates are going up, particularly, they have to raise them so they have something to cut, should we, God forbid, get dragged into a recession because there's very few made in Canada recessions that you can point to. Generally what happens is Canada is dragged into a recession by factors outside its border. Such as the 2008/2009 one. It came through first. It came through both channels. The investment and the trade channel. It was unprecedented, unprecedented job losses. It bounced back pretty quickly because it's not how far you fall, it's how far you bounce. Going back to the correlation on employment, the big concern always has been, among policy makers, what if we're dragged into a recession and people lose their jobs. What does that mean for the financial system, writ large, because there's so much debt that we're awash in and when the Bank of Canada recognize that they're going to be a glacially slow increase to 2.5%25. Nobody's talking about a cyclical peak that ends in the neutral zone but I can tell you from having that Poloz just the other day, that he doesn't seem particularly, his imagination isn't captivated beyond getting it to neutral. Because inflation is still pretty darn well behaved. We're like right in the center of their 1 to 3%25 target rate. That's how they set interest rates is trying to keep inflation between 1 and 3%25 and the bullseye on that is 2%25 and we're right at 2%25 now. Again, to keep overall inflation at that target zone, that's why he's going to be raising rates, but nobody's talking about, himself included, about going on beyond neutral. Between now and a year's time from now, sure, maybe 3/4 of a percentage increase in the 5-year mortgage rate. The vast majority of Canadians, which they take out that and about a fifth of those every year renew, we can see the arrears rate maybe going up but it's not going to be one of these things where it reverts to long-term mean overnight. Unless of course it does because we're dragged into a recession and there's massive job losses. With that I'll leave it there.

Amanda: Thank you very much. We might have some questions.

Gregory: Oh sure.

Amanda: If anybody has any questions after that very comprehensive and colourful look at mortgage arrears, Shannon should be around with a microphone. I think we have one over here. Shannon.

Speaker3: Thank you Shannon. Those statistics from the CBA are from the major banks. There's increasing exposure and a lot of people taking mortgages out are no longer able to do so from the major financial institutions and they're heading off into private lending. Do you have any comment about the impact of that part of the lending market on this whole what might be a house of cards environment that we're living in?

Gregory: I sure do. Every year Veritas, they're a buyside research firm, they don't sell stocks they sell research. They have no skin and they are a sell side research firm. They just buy side. They do a housing summit every year and the last few years they've had private lenders as a panel on there. And, yes indeed, prospective home buyers who don't qualify for a mortgage at the mere chartered banks, private lenders are seeing a lot more of those folks. They love it because they're high credit quality and so the credit quality of their book has gone up. It used to be bank customers now they're private lender customers and they love it. So of course it's at a higher rate. Nothing's for nothing. I can tell you one of the bottom lines in this very last one, and it was within the last couple of months, one of the key questions is as interest rates rise are these people going to be able to pay their debts? They're curious about that themselves. Certainly the increase in private lending as interest rates rise, that's one of the things that we're going to have to keep an eye on. Now, to the extent that they're taking out longer term fixed mortgages versus variable mortgages, that's going to play into it because it doesn't matter how much the 5-year rate rises if you're sheltered under a nice fixed rate. It's when it resets. That's the key question. As interest rates, with those private lenders particularly, are they going to be able to pay their debts? I'm guessing they're not in the business to lose money so I don't think they're going to lose a whole lot. I'm thinking, if they're thinking it's open question, they're thinking that some of them are going to go into foreclosure.

Audience: Just following up on this gentleman's question. Does anyone have a chart that shows the proportional growth in that market? And also, question of the term because I'm familiar with one of them, generally shorter term lenders sometimes, is there statistics I can find easily?

Gregory: No. That's one of the, I guess it was not the last budget, the budget before where the Federal budget they threw all sorts of money at Statistics Canada and CMHC to come up with more housing data. Because there's a lot more housing data in the US then there is in Canada. I get a daily email on arrears rates in the states and statistics on applications that are turned down, all sorts of metrics that exist in the States but not here in Canada. It's been recognized that the Bank of Canada has increased but not to the point where it's super worrisome, but that's another thing that I'd like to get through my contacts, is to put together a time series on that to see their market share. Because that's not readily available. Again, may be in a years' time we'll watch for that because I've got money in the budget to approach data sources who would be helpful with that. Again, the contacts that I've made at these summits with private lenders themselves. The bottom line is there is no readily available statistics on their market share nor on the financials behind that. The qualitative. Nevermind the quantitative.

You had a question.

Audience: Yes. Same issue. I just wondered if that trend you're showing may just be a reflection that the monies gone private lending and the arrears rate may be quite different now that it's a long-term rate. Might be higher.

Gregory: At this point it's too earlier to tell. If you go back to as far as the interest rate resets goes, the pain hasn't really started yet but that's not to say that it won't, particularly for those high loan to income folk. Again, if they lose their job then what? Right?

Audience: Just on the question about the data on private lenders. Actually Bank of Canada put something out very recently. If people want to give me their card I'd be happy to send that link to them. They can take a look at it. It shows that in the year over year in Toronto that there's been a significant increase for their private lenders. The market itself has declined but the private lenders their share has risen, if I recall correctly, say 5%25 to 8%25 and I expect it's only going to continue. In one of your charts you showed that, there was the Bank of Canada one that you said they didn't show you the numbers behind it, when they do those calculations of what the debt servicing is going to be at origination and in 5 years' time, do you know what they assumed as far as an increase in interests rates, number one, and number two, did they take into account that the mortgage balance would have decreased over the 5 years that the mortgage was outstanding and calculate the debt service on the new reduced balance?

Gregory: Excellent question. Yeah, the one with the reset for 2014 and then 2015 resets, that was part of the hypothetical thought exercise of percentage increase for those who were renewing in 2019 and 2%25 increase in 2020. That was the assumption underlying that. You're looking at an increase of 2%25 versus where we are now.

Audience: The mortgage would have gone from say, $500,000.00 down to $450,000.00.

Gregory: Right.

Audience: Did they calculate it on $450,000.00 instead of $500,000.00?

Gregory: Yes, they did and, indeed, they also assumed that their incomes over that time, that's why the debt servicing ratio over that path, on a lower glide path, is because their incomes were also increasing so that's why the ratio is declining. Then on a reset, particularly for those high loan to income borrowers, it resets and it wipes out all of that improvement and in fact makes it worse. So they're mindful of that. They're all calculating in on the declined balance.

Audience: Thank you.

Gregory: Yeah. Sure.

Audience: You commented on Bank of Canada's caution in terms of raising interest rates. Obviously this would be for rates within the bank's control. I'm thinking what about rates outside of their controls. Let's say that you have a scenario where you have large fiscal benefits in the United States that have to be financed dried savings from all around the world wouldn't that tend to push out long term rates everywhere.

Gregory: Yes and no. My favourite answer. One of the things that I do, I track on a weekly basis, the 10-year Canadian versus US bond and where we are in relation to the normal spread and then between the 5- and the 10-year bond for Canada and then the spread between the 5-year bond and the 5-year mortgage. There's a great correlation between all of these things. As the US rate rises that's invariably going to drag up the Canadian counterpart. But when you follow all those linkages along how does that translate into the 5-year? It's like there's room for the 5-year bond to move up and still not have the 5-year mortgage rate move up with it. It depends on, again, the magnitude and over what time. Your point is well taken that these are things way outside the control of the Bank of Canada but it's not a worry until it is because as you correctly pointed what if investors become quite concerned about the US deficit and then they push theirs through the roof. We'll see what happens. What's next is always interesting but it's certainly, again, that's part of the whole why it is that policy makers are so gripped with interest rate recesses, in that scenario, what then? So that's why they've been putting all these mortgage stress tests in to make sure that people can repay their mortgages with the prevailing outlook for higher interest rates. It's not impossible that interest rates spike higher but they overwhelming consensus is that things are going to be drifting higher, not spiking higher. Air slow leaking out of the tires. Not spiking the tires as it were.

Audience: You talked about strategic defaults and I know regulators tend to sometimes worry about Alberta, and what's going on, especially given what's going on with the oil prices and some of the other things in Alberta. Have we seen any experience in Canada where strategic defaults are happening and do you have any comments about Alberta and arrears there?

Gregory: Alberta is actually a very interesting case for another reason is that they have non-recourse loans. Alberta and Saskatchewan I believe are the two because it goes back to farming days. The first leg down in oil prices came in late 2014 and surprisingly prices have been quite resilient, right? That's because they got severance packages. The way the Bank of Canada models the world is the last thing to happen is that people sell their home when they lose their job. The first thing they do is they rip through their life savings, including their RRSPs and what have you. That's why it takes time and holding out for hope, right. And now those severance packages and so forth are being run out in and, indeed of late, we've seen prices start to melt down in Calgary. I think it's only the beginning particularly if we have this lasting decline in oil prices, this new leg down, just when you thought things were going to be getting better maybe, maybe not. A lot of those head office jobs in Calgary are gone and gone forever. Those severance packages are running out. The income growth in Calgary has been stagnant at best. Let's leap ahead now to when they have to renew their mortgages and they don't have a job. Are they going to be able to pay? That's a very worthwhile question. If I were a betting man, and I'm not but if I had a gun pointed to my head and was forced to choose, I would say, you're going to start to see, not so much strategic default but foreclosures. Because people can't sell their home because there's no buyer and they can't afford to service the debt. In terms of a strategic default I think when it comes due for renewal it's not so much a default as a foreclosure. They'd much rather stay in their home but what if they can't? There's always some people out there getting ahead of that curve with increasing the rental market there thinking that that's a better bet. The stock of rental units out there. But yeah, Alberta is it's only just beginning the real worry. Speaking with my counterpart over at the Calgary real estate board, there's a real, people are really grim. The economic sentiment there, it's grim. I think there's going to be some tougher times ahead. Particularly since they've got a massive over supply of homes compared to the level of demand. You're going to see price declines. I don't think it's going to be so much a matter of strategic default. I think it's going to have more to do with employment than it does with prices. 

Amanda: Thank you again, Gregory. Hopefully we can convince him to come back and give us an update this time next year. Thank you for all again for coming. My contact information, I think, is at the bottom of the invitation. Feel free if you have a thought of somebody you would like us to bring in to speak. We'd love to hear from you. Thank you all again and have a great day.

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