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September 1, 2017 | Echo boom?

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.

 

So the summer ended with a bang. “Wow,” said a learned TD economist. Which about summed it up. Last this week we learned the economy’s more stimulated that Bandit following a bitch in heat (I’ve never had the heart to tell him he’s fixed). We’re actually leading the developed world – which is why the dollarette rocketed over 80 cents and people started talking about another interest rate increase on Wednesday.

Next week, the moisters cry? Seriously?

Well, it’s no slam dunk, but as Friday ended the odds were 50% that the prime (and everything else) will rise by another quarter point in a few days, and 90% that there’ll be an increase in October. So at a minimum interest rates will soon he upped. Maybe more than anyone actually expected.

My buddy Derek Holt, chief egg at Scotiabank, is now sounding like a raging bull. “Scotiabank Economics expects the Bank of Canada to raise its overnight rate by 25bps next Wednesday,” he says, flat out. “We believe the central bank remains on the path toward raising its policy rate by about one full percentage point by the end of next year in a more front-loaded set of moves—and likely more increases than priced in by markets through 2018.”

 

Wow, again. Here’s a major bank warning there are four rate increases to come over the next 15 months. That would result in a prime of almost 4%, secured home equity lines at 4.5%, unsecured lines at 6% and five-year fixed mortgages also at 4%. Of course, if you add on the 2% that the new universal stress test will soon stipulate everyone must pass, this is as good as having 6% mortgages. And to think, a fixed fiver was just 2.3% six months ago.

Now, let’s remember that survey a few weeks ago showing a third of people say they were financially hurt by the central bank’s itsy little quarter-point jump in July, and another showing six in ten would feel seriously impacted if rates popped 1%. And imagine the impact on people who bought houses three years ago with 2.5% financing, who will be renewing at perhaps double that in 2019. Finally, what will be the effect on prices? We know real estate values rose as money costs fell, in almost perfect correlation. Will the reverse now be true? Or does all this economic growth mean the party continues? Will the moisters start buying again?

“Parallels are often made between the stock market and the housing market,” comments Old Ron the Realtor, “but for most people buying equities is optional, whereas having a roof over your head is a necessity. So even in a dreadfully flat market we can depend on homes changing hands. That forms an underlying strength that resists a full scale rout. Moreover, the economic fundamentals are strong, with GDP growth nationally. Against those two realities (inherent demand, and stable economic conditions) it is at least conceivable that we have, after a rapid $200k correction, found a balance between buyer demand and product availability.”

What does history tell us? Wrinkly Ron continues: “As I recall the crash of 1989 to 1994 involved a two-step decline. The first was a rapid 10% dip (we have had 20% this year) followed by a slow painful decent that was influenced by recessionary economics and not local realities. So now we will see. The key will be the number of buyers who put their toe in the water. If we continue to hang around current levels, we may have a true plateau in price that could last a while. If demand gets too robust, then the resulting uptick in prices could bring everyone with a pick-up truck and a tool box back into the market place, facilitating an echo boom.”

 

Of course, it could be a hard landing and the disorderly decline of a market which destroyed affordability. Maybe central bankers blew it – keeping rates too cheap too long. Derek Holt hints those two cuts back in 2015, when oil collapsed, were a bald mistake. When you look at what happened to Canadian real estate values from the summer of ’15 until governments freaked and intervened, it’s tough to disagree. They created an asset gasbag plus an historic borrowing orgy, and now threaten the ground on which indebted homeowners stand. The result could be shocking.

Anyway, the cost of money may rise on Wednesday and, if not, certainly on October 25th. It appears OSFI (the bank regulator) will indeed usher its stress test into the market. These are about as close to guaranteed as you can get these days. They’re a lot more real than an old realtor’s wish.

Buy at your peril.

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September 1st, 2017

Posted In: The Greater Fool

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