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April 12, 2016 | No guff

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.

 

The Bank of Canada won’t drop interest rates on Wednesday. They don’t need to. Besides, they wouldn’t dare.

First, there’s the dollar which this week swelled uncontrollably (I know the feeling) to almost the seventy-eight and a half cent US level. That’s the highest so far this year and a big leap from the days when this pathetic and irreverent blog posted a dollar bill emblazoned with T2 in a sombrero. Mea culpa. All he had to do was promise to spend $125 billion we don’t have, and voila.

Actually the budget did quite a bit for the loonie, promising all that stimulus spending over the current Liberal mandate and totally abandoning the goal of a balanced budget. Like the quantitative easing/bond-buying binge in the US, this helps inflate asset values because it literally creates money.

So, as mentioned the other day, the TSX is the best-performing index in the world at the moment (up more than 5% YTD). It’s also reflecting a bump in commodity prices, with oil having bounced off its lows of two months ago, to more than forty bucks. (It’s interesting to note the average commodity bear market lasts a withering 22 years with prices plopping 54%. This one is just seven years old and values have toppled 66%. The conclusion – done and done.)

And then there’s the data. As suspicious as it was, the January GDP number for Canada was friskier than a hormonal moose, while the March job stats left most economists somewhat shocked. It’s hard to believe more than 40,000 new paycheques were churned out last month, but that was the official report – and it supported the narrative that Canada, like crude, may have just bounced off the bottom.

So, no rate drop. Don’t need it.

But more importantly, reducing the cost of money any further would risk blowing up one of the very pillars supporting this borrow-and-spend economy, which is residential real estate. As written in stone here yesterday, it is societal obsession and rank speculation which is now turning an inflated market into a classic bubble with but one outcome. More than anything else – rich Chinese dudes, sleazy realtors or your mom – it’s been ultra-cheap money which has fed housing. Properties are not worth more because their intrinsic value has risen, but because they’re cheaper to carry.

The correlation between prices and rates is irrefutable. But it’s the relation between houses and debt that really has the central bank worried. My colleague Ryan Lewenza, chief Canadian strategist at Raymond James, mashed up this chart. Wow.

debt

So for all those people in Vancouver and elsewhere who stare at me with their doe eyes and say, ‘But Garth, it must be evil foreign guys buying because regular people don’t have the money’, this chart should tell you where the cash comes from. The banks. When debt goes up, so do prices. When prices bloat, so does borrowing. It’s no mistake real estate has never cost this much, or that families have never owed so heavily.

It all means risk. And no more rate drops. Not in your lifetime.

It also means our new finance minister, Bill Morneau, has a big problem on his hands. “We’ll watch what happens in the market,” Morneau said on TV. “And should we believe that there are things that we should do, we will consider those. We won’t give any advance sense of what we’re going to do because we’ll pay attention along the way and come to the right conclusions.”

Bill’s first action to cool the nation’s housing blaze failed. The new down payment rules (effective mid-February) to ensure first-time buyers have more skin in the game through larger down payments did diddly. If anything, the fact he telegraphed these changes almost two months in advance just threw more gas on the fire. Buying intentions were advanced. More bidding wars erupted. Prices spurted higher. So did risk.

If the April numbers coming out of Toronto and Vancouver approximate those of March, a responsible government would move more aggressively to shut down the markets’ advance. Let’s wait and see if we have one.

Meanwhile, lock in your mortgage.

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April 12th, 2016

Posted In: The Greater Fool

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