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September 17, 2017 | The Journey

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.

“When it comes to interest rates,” says blog dog and financial guy Rob, “anyone I speak with (under the age of 40) cannot imagine a future of higher rates, that inflation is long dead and will never pose a problem, this interest rate environment IS the new normal, rather than an anomaly.”

He’s right. It’s a constant refrain: ‘the government will never raise rates because we’d all be screwed.’

But rates will go up. And lots of borrowers will get it in the ear. So pay attention.

My Porsche-driving, fancy colleague Ryan argued this concisely on the weekend. He showed you why the Bank of Canada rate (now 1%) will end up being 2.5% or even 3%. That would translate into 5% fixed-rate mortgages. With the coming stress test it means borrowers will have to qualify as if rates were 7%. Gulp.

Yup, it’s coming. All over everywhere, actually. What our big bank’s doing may well be part of a global trend set to absolutely rock the moister world. People who bought houses in 2016 or 2017 may regret it for decades. The reasons are contained in a recently-published document from the BIS – the Bank for International Settlements, which is kind of a central bank to the central banks. Here’s the argument:

Between the 1980s and the 2000s, the largest ever positive labour supply shock occurred, resulting from demographic trends and from the inclusion of China and Eastern Europe into the World Trade Organization. This led to a shift in manufacturing to Asia, especially China; a stagnation in real wages; a collapse in the power of private sector trade unions; increasing inequality within countries, but less inequality between countries; deflationary pressures; and falling interest rates.

This shock is now reversing. As the world ages, real interest rates will rise, inflation and wage growth will pick up and inequality will fall. The hardest prior trend to reverse will be that of low interest rates, which have resulted in a huge and persistent debt overhang. Future problems may now intensify as the demographic structure worsens, growth slows, and there is little stomach for major inflation.

In other words, for thirty years rates and inflation trailed off to nothing with the climax being the 2008-9 credit crisis. Like Adele, it nearly plunged the world into deflation and darkness. Cheap money encouraged people to borrow insanely. They did, forcing assets (especially houses) higher. Now growth has resumed and inflation returned but in a time when an aging population, rising life expectancy and falling fertility are dropping the supply of labour. Fewer workies in future to support more wrinklies equals higher taxes, lower savings and increasing rates.

Yes, it’s esoteric and theoretical. But the journey’s already happening.

Did you see the census data StatsCan popped last week?

Household debt went up (to a new record $2.007 trillion) – which is not good – but at the same time net worth went down (by $10 billion), because of falling real estate values. That’s new. “A decline in household net worth, albeit modest, alongside a sharp increase in consumer credit growth,” said RBC in response, “are notable as together they suggest that the ability of households to absorb higher interest rates continued to deteriorate.” Yes, we owe $1.361 trillion in mortgages and $609 billion in consumer credit. Interest rates are now swelling fairly rapidly, and household incomes are not. Figure it out.

On Friday CREA confirmed it. House sales in the biggest market fell 35% last month, prices are down 20% from the spring, and as a result real estate’s share of average net worth grew at the worst level since 2009. In two weeks expect further evidence as it’s revealed the September property renaissance was a poop.

Realtors and Millennials think this is temporary. But what if it’s not?

The coming 2% jump in interest rates – effectively doubling the cost of a mortgage from the levels of just a few months ago – may be (sort of) permanent. If central banks around the world raise levels to attract capital, given demographics and inflation, our guys will certainly follow suit. As Donald Trump’s (so far) abject failure to effect change has shown, globalization is relentless and unstoppable. Canada will never have its own interest-rate policy, and yet now has some of the most indebted, leveraged and over-housed citizens in the world.

As Rob adds, “Anyone who thinks a 23% bump in the minimum wage rate won’t have an impact on inflation and interest rates must be dreaming.”

Looks like we reap what we sow. Imagine that.

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September 17th, 2017

Posted In: The Greater Fool

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