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September 16, 2018 | Now What?

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.

Well, here we go again. Incorrigible, undisciplined, even reckless, families are racking up new levels of debt. Real estate values may be retreating, but interest rates aren’t. The impact is becoming palpable. There will be stark results.

The latest StatsCan numbers show the share of gross income required to service debt is rising once more. Just below its all-time peak of seven years ago, it’s now back to 2008 levels. The apex was 14.9%. Now it’s at 14.2%. Given that’s an average number, it means a lot of people pay less (over half of Canadians have no mortgage) and many families hand over a helluva lot more. And guess where they live?

The Bank of Canada has jacked rates four times in 14 months. Markets are giving heavy odds for another hike next month, and the US Fed is expected to go twice by Christmas. Both banks, it’s believed, will add two more in the first half of 2019. This is thanks to higher GDP growth, full employment in the States, Trumpian protectionism, American tax cuts, a corporate binge and all of the inflation that this brings, including stiffer consumer prices and wage demands. Add in NAFTA – if a deal is reached (and it will happen) – then our central bank has a lot of catching up to do. The Fed, after all, has moved seven times.

So we now owe $2.19 trillion, with about two-thirds of that in the form of mortgages. By the way, Canadians are the most heavily indebted peoples in the G7 group of industrialized nations. That should get your attention. It means higher interest rates, which are a certainty given our relationship with the States, will have a disproportionate impact on family finances, and housing prices.

CIBC economists had something to say about that a few days ago. They pointed out a sea change – the first time in a quarter century that the rate on government bonds is higher than it was five years ago. So? So it means a long-term trend in declining, bottoming, falling, cheaper interest rates is over. The cost of money will continue to normalize. Never again in your lifetime will you see 2% five-year mortgages – and that means peak house is behind us.

Says the bank: “With that trend set to continue, we estimate that 70% of households with five-year fixed rate mortgages outstanding at the beginning of last year will have renewed at a higher rate by the end of 2020.” Yup, and here’s the chart…


This is a startling stat. It’s real evidence of how the rising cost of money is affecting us, plus it suggests what’s coming. Throwthe information above in a blender. (a) Canadians owe more than $2 trillion with the greatest debt load in the western world. (b) Debt’s actually increasing again. (c) Interest rates are on an unstoppable trajectory, at least for the next year. (d) Already seven in ten mortgage households are paying more, and have less to spend.

The bank says higher rates will cost Canadians $8 billion more than they are paying now to service their debts. Serious coin. So the economists make the inevitable conclusion: less consumer spending and an impacted housing market will lead to a slower Canadian economy. Add in deficit-riddled governments continuously raising taxes (BC leaps to mind) plus the impact on jobs and small businesses of higher minimum wages (hello Ontario and Alberta), and this is a formula for real estate woes. Given that property prices in the major markets of the GTA and the LM already exceed the financial grasp of average families, and mortgage credit regs have been seriously tightened, what other conclusion is there?

The greatest risk to real estate has always been higher rates. Real estate bubbled when the cost of money collapsed starting in 2009. Now that we’re returning to historic levels, housing turns toxic for the over-leveraged. In turn, the entire market’s affected.

Two years and half a dozen rate increases ago this blog bristled with posters saying the cost of money would never pop. ‘We’d all be screwed then.’ And, ‘the government will never allow it.’

But then I just read in the comment section that Nine Eleven was a hoax and the Great Financial Crisis was deliberate. Maybe it’s time we all shut up.

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September 16th, 2018

Posted In: The Greater Fool

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