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July 16, 2015 | Not Good

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

It won’t take a lot to push the dollar into the 76-cent range. Or to see oil below fifty bucks. Hell, at this rate, both could be reality by quitting time on Friday. The currency was worth almost 87 cents at the end of last year – about six months ago. Oil was a hundred bucks a barrel last summer.

Face it. This is not good. Oh, people with nicely-balanced and globally-diversified portfolios will do fine (bonds jumped yesterday. So did Canadian equities. And the US motors on, while Europe inflates), but that’s not most of us. Folks with too much net worth in real estate, or too much debt (or both), and who really, really need their jobs should be a little worried. Maybe more than a little.

Unfortunately, that’s most Canadians now that we have a home ownership rate of 70%, record mortgage debt and TFSAs which are 93% unfunded. These people were the ones who needed to listen carefully to Stephen Poloz this week when he said, “The economy is undergoing a significant and complex adjustment… Of particular note are the vulnerabilities associated with household debt and rising housing prices. And we must acknowledge that today’s action could exacerbate these vulnerabilities.”

So, will the interest rate reduction actually backfire and trigger a real estate correction?

Some people think so. They should.

Despite the Bank of Canada doing its desperado thing and nipping its rate down to just 0.5%, there’s no reason to expect fixed-rate mortgages to decline, given what US central banker Janet Yellen said this week (and previously). American rates will rise later in 2015, and bond yields will pace the increase. It’s already happening. US mortgage rates went up again yesterday. Canadian bond yields have aped those to the south 97% of the time, and will do so again. So fixed-rate, five-year mortgages here (which are funded in the bond market) should be higher by Thanksgiving.

So consider a likely scenario: First, summer house prices in YVR and 416 go nuclear as all the misguided hipsters read “RATES GOING DOWN” on Twitter, and rush out to bid on slanty semis with bugs and potlights. Second, mortgage rates don’t actually decline because the banks are already getting killed on spreads. Third, fixed-rate home loans start to rise in the autumn and into the winter, taking everyone by surprise – especially when they hear it’s just the beginning of a multi-year trend. Fourth, with Iran pumping more oil and commodity prices in the dumpster, oil subs below $50, doing serious damage to our exports and key energy industry. Fifth, this slide (plus the dumb BoC policy) gives us a limp loonie, which seriously increases consumer inflation, eroding family cash flow and making life suck just a little more.

Finally, there’s a federal election in October (or sooner, I hear), which throws in a lot of additional volatility, uncertainty and potentially regime change. That disappoints and alarms markets, prompting the Bank of Canada to raise rates next year to support the currency, regardless of the negative economic consequences.

Now, do you really want to have purchased a $900,000 beater house in Toronto with a mortgage of $850,000, knowing the economy (and maybe your job) is unstable, lettuce costs a fortune, real estate values are starting to decline, and your 2.4% mortgage may renew at 5%, with your house worth less?

And what’s this? A media report yesterday says the feds are quietly considering changes to CMHC rules that would require 10% down payments instead of today’s skinny 5%. One scenario, says the Financial Post, would be to have two tiers of down payments – one for all the reasonable people who live in Lethbridge or Moncton, and then a higher bar for the house-lusty real estate porn addicts in Toronto and Vancouver.

That’s unlikely to come to pass this year (for obvious political reasons), but it sure would be an effective way to throw cold water on selected markets – so don’t rule it out for 2016.

Well, I hope I’m wrong (not that I can even imagine what that feels like), but it seems reasonable anyone leaping into a real estate deal on the basis of the rate cut this week could eventually have their ass handed to them. Our two-city bubble was unsustainable enough even before this unwise decision. It will be more so after a few weeks or months of hyperventilated exuberance. Meanwhile the floor boards of the economy slowly rot away beneath the party.

Really smart people would be selling. If any remain.

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July 16th, 2015

Posted In: The Greater Fool

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