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December 22, 2016 | The Big, Hairy Deal

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.


That bump in US growth announced Thursday confirms the obvious. American interest rates will be going up again in a few months. Ours, too. Look at 5-year Government of Canada bonds. They’re little firecrackers, exploding from a yield of just 0.5% in March to 1.2% now. In the debt market, that’s a big, hairy deal.

Already banks like TD and the Royal have moved their fixed-rate mortgages up. Only a matter of time now before the five-year pops back through the 3% mark – also a big deal since the bankers were handing these things out at barely more than 2% during the summer. Lenders are paying more for funds (as yields everywhere rise), plus recent federal reg changes make insuring mortgage loans more costly.

So, get used to the idea rates have bottomed. RBC has even decided to make people taking long amortizations pay a higher rate along with those shifty self-employed losers, like financial advisors and independent plumbers. It’s a whole new world out there, which is looking more and more like the old world.

Meanwhile Americans are bracing for a steady stream of hikes. It took just a day for the latest Fed increase (a quarter point) to ripple through the mortgage market, where rates are now at a three-year high. Largely because of Trump, the benchmark 30-year rate is 4.3%, and it could be 5% if the Fed makes good on its promise of three more jumps in 2017.

Of course, Americans still get to lock into a rate for a full three decades, and if the cost of money falls during that time they can refinance at the cheaper level. In Canada, it’s a game of rate roulette, with the longest term being only five years. That means anyone taking out a mortgage today better be prepared for renewal reaming.


“I’m a big fan of the blog,” says Dan, necessarily. “One question I’d love to know more about is: why not Montreal? It seems major cities in Canada are all been experiencing some RE bubble, but Montreal’s prices still seem reasonable. As far as I know they also have an influx of immigrants, a decent economy and of course the same low mortgage rates as us. So how come they seem to be immune to the bug?”

Good question. After the GTA (where urban singles average $1.3 million and suburban shacks are now a million), Montreal’s the second-biggest real estate market in the country, with four million inhabitants – twice the number in Vancouver. And yet houses are dirt cheap.

Across the region, singles had a median price last month of just $308,250, up about 6% year/year. Condos rose modestly by about 4%, to $248,000. Granted, Quebeckers earn slightly less on average than most Canadians, but this is absurd. These are Milwaukee prices!

The answer may be more cultural than economic. Yes, Quebec has had the separatist thingy hanging over its head for the last forty years which led to reduced capital inflows and lower economic activity. That’s resulted in Qubeckers earning slightly less on average than the rest of us. But owning a house in Montreal just seems to be less important than, say, having good cash flow to afford wine and buy flowers for beautiful babes.

The homeownership rate across Quebec is 61% – almost ten points below the ROC – and in Montreal itself owners barely beat renters, at 54%. This is a profoundly more European approach to shelter. There’s no stigma about renting. In fact, it’s fun. On Canada Day armies of people engage in the annual jour du déménagement, and haul their crap off to a new place.

Interesting – Quebec has the lowest home ownership rate in Canada, and the highest proportion of unwed couples in the world. Must be the poutine.


Ross from the GTA writes us for help with his ancient aunt. “She is single, nearly 80, in good health, lives on a 2/3 acre lot near Yonge.  Hers is one of the two last post-war bungalows remaining on the street. The others have been torn down in favour of faux palaces, each reminiscent of a different empire of antiquity, each clashing with the others. Good taste left town a while ago.

“Recently, the only other bungalow holding out sold for $4M. Which empire made the purchase is yet unknown. My aunt won’t budge.  She has over $1M liquid, plus a teacher’s pension and other assets. And a really big dog.

“Her stated reason for staying put, besides not needing the money, is that she couldn’t find a place that would be nearly as good for the dog.  I’ve tried my best Garth impressions, but nothing has convinced her to take the plunge. Maybe it’s because I lack a dog and drive a Kia.  How much is this dog potentially going to cost my aunt by not selling? Surely money can solve this dog’s needs. Creative suggestions welcome.”

Four mill in a balanced, diversified portfolio should deliver 6%, Ross, which is $240,000 a year in cash flow. If Auntie lives a dozen years, that’s $2.8 million in income, plus she’d still have the $4,000,000 left. Of if she didn’t want the cash and merely let it grow, by age 92 she’d have slightly more than $9 million.

For a lousy $10,500 a month (less than half the portfolio’s income) the stubborn canine-lover could live in luxury in 226 Dunvegan, in a mansion on a large lot in the heart of Toronto, with ten grand a month left over for limo rides to the park, hand-made dog treats and a fresh bitch every day.

Oops. I think I just gave Bandit a heart attack…

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December 22nd, 2016

Posted In: The Greater Fool

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