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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

August 6, 2018 | Don’t

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.

In under a month the cost of money will rise again. Yeah, just weeks after that last increase. It will be the 5th time in a single year, and come at a miserable moment for realtors. B20 wrecked the spring market. Now the BoC will nail the autumn.

The call’s being made by the economists at Scotiabank. Pay attention. These guys have been wicked accurate. They forecast more interest increases by the Bank of Canada on September 5th, December 6th, then twice again in the first half of next year. Thus, in 12 months the bank prime will be 4.7%, five-year mortgages about 4.5% or higher, and the stress test sit at 6.34%. That’s exactly three times the qualifying rate for a fixed-rate home loan just two years earlier.

Since there’s an irrefutable correlation between rates and house prices, this additional increase will reduce available credit, ensure people qualify to borrow less, and reduce real estate values. In other words, it will take courage, stupidity, or both to buy a house in a major Canadian market before next summer. Of course, if you don’t mind paying too much, go ahead.

Why is this happening?

My Porsche-driving, Trophy wife-possessing, suspender-snapping fancy portfolio manager colleague Ryan gave you one big the reason on the weekend. Inflation. It’s back. This changes everything. Trump is the Inflation President. US rates will be steaming higher. Our guys will follow. Just like they have over 90% of the time in the past.

The normalization of rates is, in fact, a slam dunk given the latest news. Despite the brewing trade war, our exports surged to a record level in June. We shipped $37 billion worth of stuff to the US that month and imported goods valued at $33 billion. Exports surged. The Trump steel tariff did minimal damage. The numbers blew past economists’ estimates.

As you know, the latest GDP stats in both Canada and the States have been fat. Job creation has been robust (the next report’s on Friday). Nineteen of 20 industries that Stats Canada monitors are expanding. Canada is feeding off the giddy growth to the south that was fueled by a massive corporate tax cut, the peeling back of regulations and a protectionist president bent on erecting walls while goosing industry and consumption. The US is growing at more than 4%, and chows through most of what we sell.

 

Chart by Financial Post

No wonder Bay Street has gained almost 11% in the past 12 months and it sitting at an all-time high. (But it’s still under-valued.) If oil follows the path many expect – adding 50% to current values over the coming year – there’s a lot more to come. Despite Trump’s trade war, his thumping of NAFTA and disdain for Mr.Socks, it’s inconceivable there won’t be some kind of bilateral agreement with America. When it comes, markets will push higher.

So expansion means inflation which begets higher rates. If houses cost a sane amount, this would be okay. But they don’t. So it sucks. The escalation in money costs which economists now envision will further reduce credit and depress house values. The impact of this will be especially evident in BC, where the provincial government has launched a tax blitzkrieg against real estate. The collateral damage could be epic.

So if you want cheaper houses, wait a few months. If you’ve been thinking about selling, do it now. Inventory’s still relatively low in many areas, which has prevented prices from diving. That will soon change.

If you need shelter, can afford it and don’t care about a paper loss that could last a long time, call your Mom. But if your goal is making money, lowering risk, containing volatility and avoiding debt, don’t. She’ll get over it.

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August 6th, 2018

Posted In: The Greater Fool

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