January 19, 2021 | The Impossible

Recall that poll noted here yesterday showing 65% of Canadians are unconcerned about interest rates? They don’t care because they think the cost of money cannot rise. Ever.

And the steerage section agrees. The belief that mortgages at just 1.5% (the lowest in history) will endure seems almost universal. And the arguments are consistent: (a) higher rates are impossible because everybody’s picked in debt, (b) that would trash the economy, (c) the real estate market would crumble and the government won’t allow that, (d) public debt servicing costs would explode (so the government won’t allow it), and (e) higher rates are a Boomer scare tactic and we hate you.

So Wednesday – the final hours of the Trump experiment – is decision day for the Bank of Canada. Some people have speculated lately that because of Covid’s second wave, the lockdowns in Ontario and Quebec and the big job losses last month, that the central bank would cut its key rate a little. But that seems unlikely.

In fact, here’s a new survey of 16 leading Canadian economists by Finder supporting that – 75% say a cut isn’t warranted. That’s because 2021 is the Year of the Vax and as the months roll by more and more folks will be inoculated, allowing the economy to re-open, restoring growth and kindling monetary demand without more stimulus.

But what comes after that?

What about all those people swallowing huge new dollops of debt to buy houses at record-high prices with financing at well below 2%? What happens to them in five years if they have to renew at a higher rate, especially if rate increases mean house values will moderate or even (gasp) decline?

Here’s what the economists predict:

Will rates rise? 87.5% of these economists say, yep.

Source: Finder

So almost 90% believe the next move by the central bank will be up, not down. Two-thirds of them (69%) say the increases will start within the next two years. The rest say they will commence the year after. Thus 100% of them state the cost of money will be greater than today by the time a five-year mortgage term is up for renegotiation.

Why?

Today is not normal. That’s why. These home loans rates are weird. Unsustainable. The rate structure in place is the result of a once-in-a-generation, global pandemic, emergency recession, holy-crap reality that a year ago nobody expected. And now nobody expects it to last.

What comes next? The majority of people, Ottawa says, will be vaxed by September. Lockdowns will be lifted once case numbers start to decline (seems to be happening already in Ontario and across the US). Service industries will open again. Workplaces will resume. WFH will be under pressure. Half of economists say many people will be expected back at their places of employment by this autumn. Another 25% say it will be in the first three months of 2022. But it will happen. Concurrent with this will be more spending, more consumption, commuting, travel, child care costs, GDP growth and price inflation. As the cost of living creeps back to 2%, for example (it was 1% at the end of 2020), you can be sure the bond market will have pushed yields up in advance. And it’s here that fixed-rate mortgage costs are set.

How about Biden?

Big news, with (probably) a big impact. There will soon be a $2 trillion Covid stimulus plan coming out of Washington now that the Dems control the White House and all of Congress. In fact, expect a lot more spending than would have been the case during a second Trump tenure. Plus an accelerated agenda for vaxing the nation – 100 million people in the first hundred days. That will help economic recovery and, yeah, fuel inflation with all that new stimulus.

Now, all this is good. Better than the alternative. Normal is a long ways off, but 2021 will surely be beating a wide path in that direction. The last ten months have been a long, dark, depressing anomaly. They were not harbingers. They will not frame the long-term future.

Even the Bank of Canada’s former boss said it a few days ago: “I think there’s going to be a boomlet when we come out of this crisis, later this year.”

So, in conclusion: houses jumped 17% in value across Canada during the 2020 pandemic because mortgages cost 1.5% and people could borrow more while paying less. So they did. They pigged out. FOMO and YOLO ruled the land.

But the virus will soon fade, taking with it the reasons money was cheap and why you got to stay home for a year. How is this not simple, and obvious?

Lock in. Set up a weekly-pay mortgage. Start saving for renewal day. Oh, and get new tires.

Garth Turner January 19th, 2021

Posted In: The Greater Fool

Next: Hypervalued Asset Markets Lock in Negative Future Returns »