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May 4, 2018 | Give It 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.

n case you missed it, the US created another whack of jobs last month. The unemployment rate is just 3.9% – the first time that’s happened in 18 years. Even better, more people are working but not demanding more money (good little slaves). Wage gains are tepid. Stocks love that. They went up 400 points Friday.

What it means: more economic growth, not a ton of inflation, steady business conditions, fat profits, better markets. And more interest rate increases. The stage is now set for another Fed jump in June and then one more (at least by the end of the year). That’ll make seven in about 18 months. So much for those geniuses who wander the steerage section of this blog telling you the cost of money will never rise. It did. It is. It continues. Never, ever believe what you read on the Internet.

– Bloomberg

Scotiabank economists pointed out Friday afternoon the odds are rising for our guys to jack the Bank of Canada rate again in June. Inevitably, it will drift higher. This happens at the same time real estate prices are sliding (see the last two posts), inflation is gathering, household debt’s at a screaming high and the toughest mortgage rules in decades have come into force.

The US economy is expanding, commodity prices increasing and global growth is surging towards the 4% mark. This is all great if you have an intelligent financial portfolio. It sucks large if you need to renew your mortgage this year or are a newbie trying to qualify for one. The shift from real assets to financial ones is definitely on. Your portfolio should have made you about 20% in the last two years. Your house is probably losing money. More of that to come.

Almost all of the big banks have now jumped their mortgage rates, reflecting the increased cost of money in the bond market. Rates in general are rising – from HISA to brain-dead GICs, to the amount charged on lines of credit, credit cards plus home loans. TD was the most aggressive some days ago, adding almost a half-point to its posted five-year mortgage. One consequence of that is a bigger penalty to pay for breaking a mortgage contract early, since it’s the posted rate, not the street one, which is used to calculate that penalty.

Another bummer is that every time the Big Five increase the cost of mortgages, existing borrowers get a little more trapped. That’s happening right now.

Chartered bank rates determine the Bank of Canada’s mortgage qualifying rate, also known as the stress test rate. It’s moving up from 5.14% to 5.34%. Yup, that makes it even harder for first-time buyers to qualify to borrow money and reduces the amount of credit they receive, but it also imprisons existing borrowers. You can’t go shopping for a new mortgage and a better deal any more without having to pass the stress test – no matter how little you wish to borrow, how great your credit score is or how much equity you have in your house.

Meanwhile, the stress test is spreading. Major credit unions are moving to adopt it – simply because with extreme household debt and unsustainable real estate values everyone’s scrambling to contain risk. Remember that every time the mortgage qualifying rate goes up a little (like this time) the amount of money people can borrow goes down.

This is a big deal. The reverse of what you grew to expect over the last decade. Falling rates made money cheaper, so people could borrow more of it – and houses rose wildly in value. Now rising rates mean borrowers can service a smaller debt on the same income. No surprise then that a detached house in Toronto costs 14% less than it did twelve months ago.

Anyway, stop fighting it. We’re on the rate escalator. Blame Trump, if you want. The central bankers. Wall Street. T2. Jeff Bezos, Elon Musk or the Fakebook guy. No matter. Inevitable. If your personal balance sheet shows too much real estate, big debt and few liquid assets, this is the moment.

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May 4th, 2018

Posted In: The Greater Fool

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