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May 9, 2018 | Shocking

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 Donald Trump unwisely blew up the Iran deal this week, it sure didn’t help your mortgage. Oil jumped a few bucks on the news, topped seventy dollars and convinced some people it’s on the way to eighty or even ninety by year’s end. So if you think gas prices are crazy now, just wait.

Oil means inflation. It pops the cost of most everything. Turning off Iran’s big pipe was the last thing needed, now that bond yields have been swelling, central banks hiking and Canadians dealing with an epic debt overhang. It’s another thing the Trumpster has been doing to increase the cost of living, along with trade tariffs, big deficit spending and protectionism. His corporate tax cuts are also stoking the fires, since they’ve led to rising corporate profits, higher stock markets and an unemployment rate of just 3.9%. That means wage pressures. More inflation. Higher bond yields. Rate increases.

Well, look at the Bank of Canada’s bond chart. Tells you all you need to know.

Government of Canada Marketable Bonds – Average Yield – 3 to 5 year

Source: Bank of Canada, May 8, 2017 to May 8, 2018

The yield on government bonds here in cold Canada has been tracking those in the excited states – of course. That’s what the bond market does, because wealth has no allegiance to any nation. Higher inflation and tighter monetary policy to the south of us bring exactly the same outcome here sooner or later. Our central bank follows the lead of the Fed nine times out of ten. This is no exception. Not different this time. The next few years will see the cost of money rise – perhaps more vigorously now that the American president has squished Iran and jacked crude.

Current odds of rate hikes here, by the way are as follows: 95% for two additional increases by the end of the year. The prime rate by Christmas will then be a hair under 4%, and most HELOCs will rise to almost 5%. The five-year fixed (posted) mortgage rate will also be 5%, and the Bank of Canada benchmark rate (for the stress test) will be about 5.8%. What a shocking increase since mortgages were being dished out everywhere at 2% last spring.

So what?

So, payments on a $500,000 mortgage would jump from $2,100 a month to $3,139. Ouch. But, you cry, nobody actually pays the stress test rate. Borrowers just have to qualify as if rates were actually that high. So stop scaring us, dude!

True enough. The stress test requires any new borrower (or renewers changing banks) to prove they can handle a loan at that level, which means they still get the bank’s retail rate – but the amount of credit they’re offered is reduced. Thus a family with a $100,000 income and $50,000 to put down on a property that could have borrowed $545,000 last spring may soon qualify for a mortgage of only $367,500. They’ll be shopping for a $400,000 house, not one listed for $600,000.

That’s why rates matter. Just as low rates inflated real estate, so higher ones will deflate it. Ironically, the more inflation an economy generates, the more upward pressure there is on the cost of money. Those pressures are now building. Look at the bonds. They’re pumped.

Meanwhile politicians make things worse, as this blog has tediously pointed out. Taxes are inflationary, too – like governments that raise unrealistic expectations. Too many Canadians are over-reaching for real estate, adding to over $2 trillion in borrowing, completely ignoring the train in the debt tunnel. Incredibly 12% of us are now sub-prime borrowers with credit so poor even [email protected] has given them the heave-ho. As the central banker said days ago, 8% owe 20% of all that money – and mostly they live in Toronto and Vancouver.

Even before the Iranian mistake it looked like the Fed would raise rates 7 more times before this cycle has peaked – if history’s any guide. That probably means four or five here, so you can do that math. It’s the perfect storm – an indebted nation, incompetent leaders, regulatory overkill, rising rates, and the kind of envy-based generational warfare on display here yesterday. Why the children would want to own inflated, costly, indebted, imperiled assets like houses is beyond me.

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May 9th, 2018

Posted In: The Greater Fool

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