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July 14, 2015 | Over-Stimulation

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.

Sigh. Yet another boring post on monetary policy? Apparently I don’t have a life. But as we approach Ground Zero (Wednesday at 10 am EDT, 7 am PDT, sometime next week in Labrador) this whole interest rate thing seems to be spiraling out of control.

Why does this announcement matter so much?

Politically, it’s pivotal. This is the last time the central bank can dick around with rates without seriously influencing the October 19th federal election. After this, the next Bank of Canada announcement is September 9th – right in the final weeks of an historic campaign. If the bank were to cut then it’d be a top-of-mind reminder the economy’s so weak we must sacrifice the dollar and give money away in order to rescue it. Adios, Mr. H. Not the glorious exit he planned.

Cutting now would arguably drop the cost of loans during the heat of summer, giving voters time to forget about it all, making everybody’s house go up a little while allowing the government two months to spin it away. The central bank would justify it as more ‘insurance’ against a threat that’s already arriving – a recession, complete with job loss and more income equality. And now that oil has tanked again (thanks, Iran), it’s looking like Canada’s subpar performance could be long-lasting.

But cheaper money has always resulted in more debt (which is the whole point of a rate cut – to increase borrowing and spending), and now even realtors are starting to freak. That’s right. When the boss of Royal LePage tells Ottawa not to cut rates because people are turning into loan-sucking carnivores, it’s worth paying attention.

“The country’s all-important real estate market does not need a rate cut,” says Phil Soper, in a rare epiphany. “I worry that stoking this engine further could move us from a perfectly manageable major market expansion into a more difficult correction, as price levels decouple from more household incomes.”

Soper says as far as real estate goes there’s no recession . In fact, YVR and 416 are borderline out-of-control, now that the banks’ mortgage war has delivered 2.4% five-year fixed-rate borrowings. A quarter-point heist tomorrow could conceivably, in a super-heated competitive environment, shove that almost to the 2% mark. That wuld make debt less expensive, but houses more costly – since there’s a negative correlation between mortgage rates and property prices. This is now the greatest risk facing middle-class families, forced to borrow epically and concentrate their wealth in a single asset.

The economists are all over on this one. BeeMo and RBC eggheads now say Governor Poloz & the Poodles will cut, joining Capital Economics’ David Madani..

“With residential mortgage rates likely to edge lower in the months ahead on a potential 25 basis point rate cut from the Bank of Canada tomorrow, we wouldn’t be surprised to see house prices edge dangerously higher in Toronto and Vancouver over the near-term,” Madani told clients on Tuesday. “With prices already completely out of whack with household incomes, however, this will only set up for an even larger day of reckoning over the longer-term.”

Scotiabank’s Derek Holt, however, says a cut would be a really bad idea for the economy. Despite crappy trade deficit numbers this week (non-energy exports cratered), he thinks goosing consumer debt with another rate slice will just make everything worse – turning this into even more of a condo economy, with an inevitable bad outcome. This would “risk delaying the rotation of growth sources away from the household sector and toward the investment and export sectors through over-stimulating consumption and housing and setting a low bar for hurdle rate targets.”

And because this pathetic blog is all about over-stimulation, consider this from bad-buy realtor and housing analyst Ross Kay: so far this year the average house price in BC is increasing 1% a month. “How was the staggering increase possible,” he asks?

Simple. Mortgage rates plopped a quarter of a point after the last Poodley move, allowing the average mortgage to rise by $17,000 with no increase in monthly costs, translating into a $34,000 house price increase since most move-up buyers have 50% equity. So, now everybody pays more. If the central bank does it encore tomorrow, up she goes again.

Finally, the Seriously, dude? award this week goes to the Bank of Commerce. It issued a media release just hours before the Bank of Canada bomb, claiming 93% of people “are unlikely to increase their borrowing if rates come down further.”

That was a thirsty underwear moment.

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July 14th, 2015

Posted In: The Greater Fool

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