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November 25, 2015 | The Odds

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.


A month ago the odds of a US interest rate hike were 27%. On Wednesday they were 74%. By this time two weeks hence, you can probably make ‘em 100%. On December 16th, barring a global military conflict or Janet Yellin being abducted by Nectonites, we’ll be launched into a  new era.

So pity the poor Millennials, average age 26. These moist creatures have grown up on house porn, come into real estate puberty and been infused with their MLS value system during the period when mortgages were the cheapest ever. The last time a rate hike occurred was when they were bumpy teens listening to 50 Cent and Snoop Dogg (my fav).

In fact a whole generation of people, now bigger than the awesome Boomers (33% of the population vs 31%) have never actually known what it feels like when the cost of money goes up, instead of down. Moreover, they don’t believe it’s possible. Ever. After all, how could a poor 22-year-old then qualify to buy a $500,000 condo? It’s the end of life as we know it. #sucks.

As this pathetic blog has tried to make clear, rates will rise and they won’t stop for a while. The increases will be steady, slow and methodical. The Fed will go maybe five or seven times before it pauses, with the ultimate goal of adding about 2% to the cost of borrowing over the next twenty or thirty months.

That doesn’t sound like a lot – until you realize it could double mortgages. As also warned, this is not a US-only thing. Bond markets are joined at the hip, so yield increases there mean the same here, and the Bank of Canada has a 93% record of following the Fed. So, yeah, gonna happen. Tell your daughter.

We already have evidence. Quietly, lenders are getting their ducks in a row with five-year fixed loan rates now ahead about a quarter of a point, in advance of next month’s event, and following the pop in bond yields. It’s hard to over-emphasize the sea change at hand. Lending costs cratered twice this year as the Bank of Canada cut its trend-setting rate twice, in January and again in July. For a time you could score a 1.89% mortgage – ridiculous when inflation was running at 2%. And all of this helped goose the housing market in the Bubble Cities, while throwing gas on the fires of human house lust.

So what can we now reasonably expect?

Sit down. Hug your dog. Have a scotch. The TD Bank (they grant mortgages, remember?) thinks fixed-rate home loans will increase by up to three-quarters of a percentage point over the months to come. So, goodbye to the twos and hello to the threes. This first-stage move will dampen sales by between 10% and 15%, says the bank, and the impact will be most pronounced in (a) YVR and (b) 416.

Exactly. The two cities where the locals think they’re immune, because everybody on the planet wants to move there. Fact is, markets that go vertical (just like tech stocks, or Psy) are the ones that inevitably blow up first. Buyers over-extend themselves snapping up slanty Leslieville semis, soulless condos or beater houses on the wrong (east) side of town, and are then most affected by rate hikes and jitters. All it takes for things to descend is the meme to spread that real estate means risk.

In case you failed to notice, there’s also been an uptick in variable-rate mortgages – even though the Bank of Canada has not hiked rates (and economic David Madani thinks another cut is coming in 2016). This results from lenders having to goose deposit returns to attract silly folks who want GICs, and also in anticipation of the beginning of the end of cheap money.

Of course, people being as delusional as they are, when the reality of higher mortgages spreads there’ll be a rush to buy and ‘beat the increase.’ Such a fitting end: fools panicking to pay top dollar for inflated assets with an increased debt load instead of waiting and going in lower with less debt – all to save half a point for a maximum of 60 months. Sigh.

But, the kids aren’t buying it. Cheap, available money is an entitlement to them, just like iPhones or work/life balance (that’s so cute). They truly believe “the government won’t allow” rates to rise, as if Justin had something to do with it. Debt-pickled homeowners have swallowed massive risk which can only be contained if mortgages stay cheap and houses keep on appreciating. Neither will happen.

Well, in three weeks we’ll know. But I wouldn’t bet against the inevitable. Look where it got Stephen Harper.

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November 25th, 2015

Posted In: The Greater Fool

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