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July 28, 2017 | What Now?

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.

 

Six months ago nobody thought Canada would raise rates in 2017. Six weeks ago nobody expected rates could rise twice by the end of the year. But one prime rate hike, two rounds of mortgage increases, one Bank of Canada move and a boffo economic report later, here we are.

Current market odds of a second rate hike – in October – are running close to 80%. And, shockingly, there’s now a four-in-ten chance they could be jacked one more time before this pivotal year is out. The very thought of this was enough to send the dollar skidding higher by most of a cent, over the eighty mark.

And, wow, look at Mr. Bond…

 

The yield on five-year Canada bonds – the benchmark used for pricing fixed-rate mortgages – is in heat. From a low of half a point a year ago (when the geniuses here said rates could never rise), it has risen by more than 300%, and is likely on its way higher. This means you can pretty much count on more hikes in mortgage rates, which are already closing in on 3% and may well be 4% by next summer.

What happened?

The big news Friday was the economy. After being in a funk last year, the GDP’s gone ballistic. It’s growing at the fastest rate in 17 years – since way back when people were lining up to buy Nortel and busy creating Millennials. The 4.6% growth rate in May wipes the floor with the 1.2% rate of US expansion. This is the seventh month in a row the economy has swelled, which is the best stretch in seven years. Combine that with better job and trade stats, and the mighty Land of the Beaver rocks.

 

Of course, not everything is cool. While oil, manufacturing and retailing were romping, housing was limping. Real estate and rental leasing fell for the first time in six months and the activity of real estate agents plunged 6.3%.

This is consistent with the fading street price of housing that this pathetic blog has been detailing with gruesome, horrifying yet addictive regularity lately. The official price of a detached home may have fallen in the GTA by about 16% since April, but that’s not taking into account the vast number of transactions which aren’t closing in a domino game of crashed deals. Stats in the months to come will show what agents are seeing daily.

Like Uri Kogan. His weekly report on sales and listings in a demand area of north Toronto is a snapshot of seller despair. There are 76 active listings in his area of focus (Steeles/Centre/Yonge/Dufferin) and last week there were 0 sales. Zero. The most recent accepted offer was made 20 days ago. Prior to that, only five houses sold in July. This is how a serious price correction starts – when buyers lose their motivation and simply disappear.

Well, a better economy’s a good thing, of course. I told you a couple of months back to tactically increase your Canadian portfolio weighting. Now you know why. You were also advised a year ago to pick up preferred shares when they were, like me, cheap and irresistible. Because these give a great dividend and also rise right along with interest rates, prefs have jumped about 15% in value in a year while paying you cash flow to own them. How sweet is that?

But robust growth for Canada will also guarantee a little more inflation and consistently rising interest rates. The bank prime of 2.95% will certainly be 3.2% and possibly almost 3.5% by year’s end. Secured HELOCs will rise to the 3.5% level. Fixed-rate, five-year mortgages will be similarly prised, putting them a full point higher than a year ago. Yeah, money’s still cheap, but every day more people wake up to the understanding (a) we will never again see 2% loans and (b) Justin can’t save you.

Things to do next week: lock up your variable rate mortgage. Get some preferreds. Drop your selling price. Start a neighbourhood realtor support group. Adopt a dog. You may need someone to lick you this winter.

 

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July 28th, 2017

Posted In: The Greater Fool

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