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July 13, 2017 | Next?

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.

Rate Day plus one, and fallout’s still raining down upon us. It sure looks like the cost of money is going up and the cost of a house is coming down. How far and how fast for each is the question. But not the only one. All this has blog dog Ross, in Toronto, scratching his head and staring meekly into his wife’s narrowing eyes.

“Why is expensive money on a low priced house better than cheap money on a high price house?” he asks. “Will house prices adjust enough to be affordable even with higher interest mortgages?

“I’ve been renting for the last 17 years, or all of my adult life, which is fine with me but not for my wife. We’ve saved up over a half million in cash and funds, but really have been turned off from buying even though we’ve been looking for the last 4 years. Anyway, this is the type of questioning my wife is asking me, that I don’t have an answer to.

“P.S. If you use this question on your blog, please don’t use my name, my wife reads your blog too.”

Oops. Sorry, pal. You might want to arrive home tonight drenched in Axe…

We’ll get to this quandary in a minute, but let’s start with an update on what’s been going down since Gov. Poloz dropped the hammer. First, the bond market is on steroids. Two-year Government of Canada debt has soared to the highest level in five years. The benchmark five-year bond is above 1.5% – an epic move from the 0.9% where it sat a few months ago. Meanwhile the dollar rallied bigly on the rate news and remains above 78.5 cents.

What’s it all mean? Probably that there’s more to come, with markets buying the story the economy can take it (even if real estate can’t). The odds of another rate increase this year went from dust a few weeks ago to 74% on Thursday, which would completely erase the two cuts Poloz shocked us with in 2015 as oil cascaded lower.

By the way, those moves two years ago not only crashed bond yields (and mortgage rates) but also torpedoed the value of preferred shares, since the Canadian pref market is dominated by rate-reset issues which are, like me, overly sensitive. So 2015 proved to be a hard year to have preferreds, even as they kicked out a 5% dividend for just owning them. But, as you have been told on this blog many times, that was a mama of a buying opportunity – and today prefs have soared right back to their pre-crash glory. More to come, too. Plus a 4% tax-efficient divvy. Sweet.

A central bank rate increase in 2017 was not even on the radar six months ago, let alone two hikes. “I still think he’ll go further and faster than markets expect,” says Bay Street economist Derek Holt.

Meanwhile a Boston-based hedge fund set up with the intent of shorting the poop out of Canada is now seeing this latest interest-rate news as a big piece of its Beaver-Aramgeddon scenario. Here is the soothing cover of its report this week:


This is the sell-Canada argument of the JKD Capital fund (and here’s the link to its report):

We wrote in our 2016 year-end letter that we believed that Q4/16 marked the top for the Canadian housing market. We believe that events over the past six months have confirmed our thesis. To recap:

  • Government regulatory changes to the mortgage markets in Q4/16 and again this past week have significantly tightened credit and mortgage availability, which should lead to a national housing correction, increasing foreclosures, and a recession;
  • the largest publicly traded subprime lender in Canada suffered a run on the bank in what will likely prove to be a harbinger for the coming crash;
  • Canadian interest rates spiked as the BoC has taken a more hawkish stance amidst a backdrop of apparently coordinated central bank tightening talk;
  • the Toronto housing market—the lynchpin for the Canadian economy—has finally cracked;
  • the Vancouver housing market, while bifurcated, generally continues to be soft (except for condos) as a result of the foreigner tax and Chinese capital controls;
  • the recent coalition between the NDP and the Greens in B.C. likely bodes ill for housing in the region; and
  • the sell-off in oil should result in another leg down in Alberta.

In short, this is the perfect storm for the Canadian housing market and economy.

So far, by the way, the fund’s performance has sucked – down 40% since inception four years ago. But as this blog has proven, you can be premature but still manly!

Now, what about Ross? (Damn, sorry…)

In a world where real estate gains are no longer certain nor predictable, debt gets uglier. Property declines could turn mortgages into wealth-eating parasites. Rates may rise for years to come, making renewals painful experiences. Higher rates mean more of every monthly payment goes for interest and less for principal repayment. Getting rid of a loan gets harder. Takes longer. Costs more. This is the bad, old world people lived in before anyone heard of selfies and phones had wires. It may come back.

So if higher rates mean cheaper houses (which they do), then debt is lessened even if the monthly cost rises. This is not the way Millennials think, of course. So just tell your wife to grow up. Should work well.

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July 13th, 2017

Posted In: The Greater Fool

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