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January 9, 2018 | Get Ready

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.

Let’s get ready for next Wednesday.

For the third time in just half a year the central bank will raise interest rates. This is entirely consistent with what the American central bank (the Fed) has done, where the cost of money has popped four times in a year. Remember how this macho but gender-sensitive blog told you our guys follow their guys 92% of the time? Bingo.

In anticipation of the next increase the Canadian dollar has puffed (up 11% in the past year), and now the bond market’s in tumult. Yields in both Canada and the US are shooting higher since the world is inflationary, Trumpian and expanding, throwing off more jobs plus profits and higher rates.

Here, for example, is the 5-year Justin Bond yield. Yup, looks just like the Rockies.

Click to enlarge.

This chart means five-year mortgage rates will be rising, since bonds finance home loans. Meanwhile a central bank rate increase will add another quarter point to the cost of variable-rate mortgages, which float with bank prime. Also about to change are personal lines of credit (typically prime plus 2% or more) and secured home equity lines, or Helocs, usually priced at prime plus a half. Of course, business loans and credit card rates will also be adjusted.

It’s worth reminding that most LOCs secured by residential real estate are demand loans – so the bank can call at any time and demand payment. That may be unlikely now, but not so much if rates continue to rise and house equity declines. It’s also a weird but true fact that four in ten people with home equity loans don’t actually make any payments. The lines just get fatter as additional interest is tacked onto the available principal. Makes you wonder how long this goes on before the lenders want their money back.

Well, six out of six major banks now (as of Monday) say the cost of money will go up next week. The boffo jobs numbers of last Friday convinced most economists the Bank of Canada can wait no longer. Over 78,000 positions were created in December when only 1,000 had been expected. The 2017 jobs total was almost 425,000 and the last 90 days brought more hiring than at any time since 1976, when it was still okay to be a man.

All further doubt of a hike on Wednesday was removed with a survey of businesses, released by our central bankers. It showed widespread plans to invest and hire (50% of corporations will be creating jobs), putting pressure on the labour pool and likely leading to a shortage of workers. That washed away any further doubt we’re on the same path as those craven Yankees.

But unlike Americans, families on this side of the line have been steadily piling on more personal debt and are now massively vulnerable to rising rates. While over-borrowed homeowners think ‘the government’ will keep rates low in order to protect them, it’s not happening. Unfortunately a lot of people will be rate road kill over the next three years.

But could central bank boss Stephen Poloz choke, answering the prayers to thousands of slanty-semi owners with $900,000 mortgages?

Maybe. You never know. But no rate hike next week would surprise the markets, certainly leading to a big dollar bust. A cheap loonie is unhelpful when Ottawa’s wrestling a pig over the NAFTA deal, and seen by the Trumpians as an unfair trade advantage. So, the mortgaged are sacrificed on the altar of trade. Did they think they were special?

Lock in your mortgage. Money is still plentiful and cheap by historic standards.

Buy short bonds, which are not so impacted by rate increases.

Buy rate reset preferreds. They’ve been tracking higher along with the cost of money and provide insulation against central bank tightening.

Watch that home equity line. The cost is rising, and so will minimum interest charges. If you live in an area where house prices are wobbly, you could get The Call.

Don’t buy real estate. Not yet. Too much uncertainty between mortgage costs, the stress test and markets falling into a serious imbalance between the number of listings and lookers. Buyers of one year ago are licking their wounds, praying for a market advance. Many won’t make it. Then you can pounce.

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January 9th, 2018

Posted In: The Greater Fool

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