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June 14, 2017 | It’s Coming

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.

Investors who’d shorted the loonie lately – making bets it would tank along with housing, for example – ended up taking it in the shorts. The dollar jumped on the news interest rates will be rising. The Bay Streeters were crushed. More crushing to come, this time on Main Street.

Yes, the American central bank upped the cost of money on Wednesday, as forecast, by a quarter point. So what? So it’s the third time in six months the most important rate in the world has grown, and the Fed says there’s more to come. The latest projection is one more uppity in 2017, then three in 2018. Thus a rate which was essentially zero will turn into almost 3%. Big deal.

The Bank of England would be pumping its rate as well this week, were it not for the damaging election result. In fact rates almost everywhere will be creeping their way higher over the next couple of years as global growth kills the last vestiges of deflation. Even in soggy Europe, home of negative bond yields and falling prices, inflation has gone from below zero to positive. Also a big deal. It’s taken almost a decade to get over the credit crisis of 2008 but, baby, we’re almost there.

Rate bloat is coming here, too. On Monday the Bank of Canada let that one rip, powering the dollar and sinking the shorts. After comments by that monetary cougar Carolyn Wilkins, the odds of a rate increase by the end of the year exploded from 22% to 72%. That was also fueled by boffo job numbers published Friday showing a huge number of new positions created. Meanwhile our economy is growing at three times the rate of a year ago, putting us at the top of the G7 heap. Go, beavers!

However, we’re also at the top of the debt heap. Any increase in the BoC rate will have consequences, immediately impacting variable-rate mortgages, demand loans, business borrowings and (especially) all personal lines of credit and HELOCs. Remember the dreary news this blog brought you last week – we’ve amassed about $200 billion in these lines, and 40% of people make no payments on them. Zilch. Nada. Another 25% pay only the interest accrued.

Also recall that surveys show half of all households say they’d be hard pressed to keep their heads above water if monthly interest rates increased a mere 10%. Worse, four in ten newbie homeowners, mostly Millennials, say they regret having bought because of the extreme monthly costs involved. So just wait until they renew their mortgages in 2020 or beyond. Ugly.

Deniers argue it’s exactly this killer debt load which will prevent Canadian rates from bobbing higher with those in the US. They tell each other on Twitter ‘the government’ would never allow it, cuz we’d all be pooched.

However, it’ll happen. The central bank has wanted to raise rates for years in order to stem the debt orgy by totally undisciplined borrowers, but a weak economy, tepid job growth, saggy commodity values and trade woes prevented it. No more. Hence Carolyn’s big shock. The climax approaches.

Won’t this have a negative impact on residential real estate, which now accounts for a fifth of the entire economy? And how about the banks who hold hundreds of billions in personal mortgages? Will they be impacted?

Yes, and yes. Some collateral damage is inevitable. But rates will not be spiking higher – slithering instead. Bank share prices may be impacted as profitability is trimmed in a rising rate environment, however no drama. Far more impacted will be property values as mortgage rates normalize, the appetite for new debt diminishes and as buyers can carry less. The main driver of bubble markets and obscene price increases has been the low cost of money, not Chinese dudes or empty houses. That will be evident to everyone in a few years after 2.5% mortgages turn into 5% obligations.

The good news? Your premium savings account rate might go from 0.55% to 1%. Awesome.

Finally, pity the Mills. These kids, now in their mid-twenties, were growing hormones the last time a mortgage cost over 4%. To a third of the entire population, borrowing money at little more than the inflation rate is entirely normal and most are utterly unprepared for what comes next.

Great. They already hate us. This could be epic.

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June 14th, 2017

Posted In: The Greater Fool

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