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December 11, 2016 | In the rear view

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 year will be history in a couple of weeks. Shed a tear, all ye mortgaged deplorables. It was the cheapest 12 months in, like, ever for home loans. Hope you locked in. A new era’s upon us.

What’s your mortgage rate? The average across Canada is 3.02%, down just five beeps from 2015, which was the lowest on record. According to the mortgage industry, the average rate for renewers in 2016 was 2.7%, the cheapest since people stopped trading beaver pelts and tummy rubs for housing. Of the million or so families who got a new term this year, three-quarters paid less than their old rate and the rest paid more. In 2017 and beyond, almost everyone will face a premium.

So what?

A quarter of all Canadians are so house-strapped they couldn’t find an extra $1,000 if they needed it. If rates go up a lousy quarter point, over 700,000 people will be in distress. If rates rise 1%, over a million families will be in a tough spot. That’s what. And it’s now clear the bottom is behind us.

This may be why the number who think it’s a good time to buy real estate just declined 8%. It’s obviously why Re/Max says annual price increases in Vancouver will go from 20% to 2% – and that’s still wildly optimistic. Already – despite the lowest rates on record – two-thirds of new buyers must get a boost from the Bank of Mom, and the amount of parental cash going into real estate has increased 300% in the last 25 years.

Low rates have allowed people to finance ever-rising house prices, which have allowed those prices to rise. It’s a vicious circle. Five years ago the average mortgage rate was 50% higher (the cheapest fiver was 3.51% in 2011). So now Toronto and Vancouver houses cost 50% more. Real estate has not become more intrinsically valuable. Instead, the cost of borrowing to buy it has fallen. As prices jumped and incomes did not, debt’s exploded.

That brings us to today. The perfect correlation between real estate values and interest rates will become as evident on the way down as it was on the trip up. The early indications of that are evident in the US, where mortgage rates are more sensitively tied to the bond market. So look at what’s happened since the goofy billionaire ascended:


As you may know, Americans can lock in a rate for three decades, while most people here are on a five-year schedule. Expectations that Trumpian inflation, economic growth, trade-trashing and tax cuts will keep rates rising for some time (starting this Wednesday) could result in “rate lock”. That’s when people figure moving to a nicer, bigger house isn’t worth giving up a cheapo mortgage. So they don’t. The market locks up. Prices decline.

The rate increase to the south has been about half a point since the election a month ago. While the future’s uncertain, the betting is the Fed will raise twice next year and a few times following. Given that Americans face a similar situation to us – precious little inventory for sale and big price gains in the era of low rates – this could knock real estate back considerably.

As predicted, the Bank of Canada did not drop its key rate last week. In fact, there are no more cuts coming. The next move will be up, but that is still months away. In the meantime, however, five-year mortgages will continue to get more expensive as bond yields swell (Government of Canada five-year debt popped up considerably at the end of last week).

Layered over this economic reality is Canada’s political situation. BC declared war on property prices, and is winning. Ontario just increased its onerous land transfer tax on high-end homes. Ottawa’s Moister Stress Test is knocking 5% to 15% of first-timers out of the market, or forcing them to buy less house. New federal regs next year will force lenders to assume mortgage default risk now borne by taxpayers. Already mortgage lenders are withdrawing some home credit from the self-employed, or landlords.

None of this, of necessity, foretells a property crash. But it does mean owning a home next year will cost more. If history’s any guide, houses will cost less. But where have you heard that before?

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December 11th, 2016

Posted In: The Greater Fool

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