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July 12, 2017 | Buckle up

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.

For weeks there was little doubt rates would rise Wednesday. The poohbahs at the Bank of Canada did everything but send out a Tweet announcing it. They’ve wanted to start plumping the cost of money for at least a year, but needed to wait for the economy to buck up. The fact so many people on this pathetic blog and elsewhere said rates would never rise again, “because nobody can afford it” should give an indication of how many oxen are about to be gored. Wear your hip waders.

Here are three things to ponder. First, the yield on Government of Canada five-year bonds…


So much for all those wasted comments about the bond market being at odds with the central bank. Yields on government debt have soared and bond prices have crumbled. In fact the yield on two-year Canada bonds has surged more than those of any other developed country. Why? Because we’re now on a tightening path that’s expected to last for years.

By the way, this is where mortgages are priced. Not by the government, not by the Bank of Canada and not even by the lenders. Instead, it’s the bond market that dictates what people pay for fixed rate loans. So, that chart tells you why they went up last week, and why there’s more to come.

Second fact to realize is this little itsy, quarter-point rate bump signals the end of an era of emergency rates that people started to think was normal. It’s wasn’t. Nor are bidding wars, bully offers, blind auctions or rock star realtors.

Canada is the second G7 country (after that one run by deporables) to embark on a course of higher interest rates. That has led to speculation central banks globally will start backing away from the ridiculously-cheap money and Kardashian-sized stimulus that’s characterized the world since 2009. No other country’s monetary policy is more joined at the hip with that of the US than Canada. As this blog has reminded routinely, over 90% of the time our bond market follows America’s, as does our rate policy. It’s not different now.

So expect more. Like the economists at Scotiabank and a bunch of their Bay Street colleagues who see another hike this year, one more in the Spring and probably several after that. Meanwhile the US Fed indicated Wednesday that nothing’s changed – a slow and steady return to normal rates is the path ahead.

Third, what’s the impact?

Immediately the bank prime rose to 2.95%, and most secured lines of credit jumped to 3.45%. Variable-rate mortgages increased and fixed-rate home loans already plumped late last week. This may cause some buyers with pre-approved mortgages to make offers before their deals expire, but it’ll end up simply scaring most off. There’s no way to put lipstick on this pig. What happened Wednesday will help pooch the market.

If you need any further proof, here it is:

“There are more than 700,000 Canadians who might be watching the next Bank of Canada decision very closely, because even a modest interest rate increase could push them over the financial edge.

“A new study out Tuesday from credit agency TransUnion shows that of the 26 million credit-active Canadians in the country, 718,000 can’t absorb a 25-basis point increase or they won’t have enough cash flow to cover their debts. Raise rates one percentage point, something not likely to happen overnight, and 971,000 Canadians end up in a cash crunch.”

Yes, rates are going up 1%. We should be there by this time next year, unless the economy starts to tank. As stated here a few weeks ago, 2.5% five-year mortgages are so gone. Even HSBC with its predatory 2.36% offering has seriously started to backtrack. Now the loan’s available only for small-dollar deals. Soon, extinct. Over the course of the next two or three years millions of people will be renewing their cheapo mortgages for more than they imagined on houses that are worth less. That sucks.

The only surprising thing is that anyone should be surprised. The 2008-9 credit crisis was a once-in-a-generation event. Rates crashed to rescue the world. Now it’s over.

Here, this may help…

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July 12th, 2017

Posted In: The Greater Fool

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