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July 3, 2018 | The Crisis

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.

Oops. “Homeownership costs reached their highest levels on record in the first quarter of 2018 — considered by many as crisis levels,” said the nation’s largest bank on Tuesday. “While the situation isn’t as extreme as it is in Vancouver, Victoria continued to experience marked deterioration in affordability in the first quarter.”

Ah yes. Affordability. It’s all that matters when it comes to real estate. If people can’t afford houses, they don’t buy. Like in BC’s capital city where, as the bankers rightly observed, house lust has gone flaccid. The tally for June: sales down 29.7% year/year. Listings up 35.5%. Not good. Prices to follow.

The issues now are clear: trade uncertainty and Trumpophobia; crazed Dipper taxation (BC only); plus rising interest rates (the biggie).

This week all the major guys are lining up to warn you off buying property. RBC’s Research Dept is stark about what comes next. Scotiabank economists are bordering on shrill. And the market odds for a rate hike next week have rebounded to a convincing 85%. “Our view is that the Bank of Canada will proceed with a series of rate hikes that will raise its overnight rate from 1.25% currently to 2.25% in the first half of 2019. This would have the potential to stress housing affordability significantly,” says the Royal.

Adds Scotia:

“The Bank of Canada is still forecast to raise its policy rate five more times between now and the end of 2019 including twice more this year. The Federal Reserve is forecast to raise the fed funds target range four more times by the end of 2019 including the addition of one more forecast rate hike this year to two more by the end of 2018.”

In practical terms, here’s what to expect: the first immediate increase will be next Wednesday. The next will be September 5th or (more likely) October 24th. Then 2019 will bring three more increases, one in the winter, one in the spring and another in the final half. The prime rate at the banks, currently 3.45% will climb to 4.7%. Home equity LOCs will jump to more than 5% (for the best customers), and all mortgage rates will augment – more for variables than long-term fixed, as the yield curve flattens.

The major thing you need to know about is the benchmark Bank of Canada mortgage stress test rate. It sits at 5.34% and would swell to more than 6.5% in little more than a year if these events come to pass (which everyone says will). Just 15 months ago any schmuck could wander into a chartered bank, flirt with [email protected] and nab a fiver at little more than 2% – no stress test whatsoever if Mom had forked over enough for a 20% down payment.

The impact of a tripling of rates (effectively) in that period of time is, well, unknown – since it hasn’t happened before. But don’t expect ponies and puppies. Already B20 has knocked tens of thousands of buyers out of the market, and caused low-end property prices to swell, since that’s all the moisters can now afford. In turn this has depressed detached sales – seriously. Look at Van, for example – the number of detached houses trading in May crashed by 40% (June numbers are not yet out, but will be similar). This is what happens when people can’t sell, or find it impossible to move up.

But, I hear you cry, what about the Trumpster? Won’t this trade war thing terrify central bankers, making them retreat like manhood in a cold lake?

Nope, claim the economists. Forgeddaboutit.

“There is the risk of going at a slower pace should NAFTA developments take a much deeper turn for the worse than has been apparent to date or anticipated,” says Scotia, “but there is also the opposite risk of overshooting the long-run neutral rate if this cycle’s wage and price pressures continue to evolve in a fashion that further jeopardizes the BoC’s inflation mandate.”

Translation: sure, Trump can be a dick and cause trade chaos (before Congress reigns him in and the mid-terms whomp his butt), but what the central bank really fears is too much inflation – caused by new tariffs, lots of fresh jobs, higher commodity prices, minimum wage increases and rising incomes. The US is virile, our economy is strong and the global one is expanding faster than at any time in almost a decade. Most central banks – even the slap-happy one in Europe – are now dialing back on stimulus. The Bank of Canada cannot risk falling behind, and already inflation is nearing the upper end of its target range.

And this: “We believe risks such as a trade shock would have to be quite severe in order to lead the BoC to allow inflationary pressures to build without tightening policy. At this point in time we don’t judge the risk of the abrogation of the NAFTA agreement as a serious one.”

Monetary policy may not be sexy, but there’s no one single thing which will affect the value of your property as much as this. Real estate soared when rates sank. That ship has sailed.

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July 3rd, 2018

Posted In: The Greater Fool

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