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October 24, 2018 | Move over

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.

We knew the cost of money would be going up. We even knew why. But, what comes next?

So here’s the key para from the Bank of Canad: “Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target. In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.”

Now you have it. The official release/explanation’s concluding words are crystal. Rates, The Ploz says, “will need to rise” beyond the current bump higher. How much? Up to “a neutral stance to achieve the inflation target.”

The ‘neutral stance’ we already know from past bank pronouncements is between 2.5% and 3.5%, depending on where inflation sits. The current bank rate is 1.75%. So figure it out.

And how fast?  That depends on, “how the economy is adjusting to higher interest rates, given the elevated level of household debt,” plus the Trump trade wars. In case there was any doubt, Ploz added this during the media scrum: ” “The reality is the economy is running at its capacity and it is no longer needing stimulus, and so it’s our job to prevent the thing from overheating.”

So there it is. (a) Yes, rates will pop further. (b) Expect as many as five more increases. (c) They’ll likely dribble out over the next year. This is new and valuable info.  It was shared with you for a reason. Shortly thereafter, all the banks raised their primes. And the Toronto stock market shed 2.5%. Weed stocks smoked.

Why did the central bank do this when real estate is weaker, family debt historic and surveys show up to half of people say they can’t pay any more?

Simple. It’s not the Bank of Canada’s job to be a bleeding heart, softy, enabling bunch of empathetic pandering pushovers. That’s what the NDP’s for. These guys, in contrast, are mandated with keeping a growth-oriented, low-inflation, competitive economy alive. If people bought too much expensive real estate with oodles of leverage, tough. That’s their problem. The bankers only care if it impacts the wider economy. What they’re focused on now is a healthy US economy, the new trade deal, business investment and (they hope) income growth.

In short, by late Spring the bank prime (today 3.95%) will be about 4.5% and the mortgage stress test over 6%. Obviously if you can’t hack that and have a variable-rate mortgage, lock it up. If you have a LOC or home equity loan, chances are it’s variable and interest charges just increased again. Suddenly it no longer makes sense to keep funds in a HISA paying 2% when the line’s costing 4.5%. So, pay it down.

Also be careful about leverage. Last year smart investors scored with a fat spread between the cost of a HELOC (about 3.5%) and a double-digit return on financial portfolios. This year rates are rising and equity markets entrenching. Yes, you’ve held on to the 20% gains made in the last two years, but 2018 is going sideways. So time to review even tax-deductible debt, if higher rates are starting to pinch your finances. And, yeah, more to come.

Now, against this reality – the normalization of money in both Canada and the US – let’s beam up to Planet Re/Max. As we enter this magical world, you’ll note the ivory gates inscribed with the hallowed words, “It’s always a good time to buy.”

The company’s a media whore, but a good one. Publicists churn out releases every two or three months, usually under the guise of a ‘market report.’ Unlike credible surveys and studies written by reasonable people, these have no statistical summary, no methodology, no sample size and zero evidence to back the claims made.

Got another one this week. “Luxury condo market soars, while single-detached luxury home sales fall short,” was the headline. The release was, as usual, rewritten as news and published by mainstream media. For example, these were the headlines in the Financial Post: “Luxury home sales drop 35% in Toronto and Vancouver, but millennials fuel rise in high-end condo sales. With foreign buyers taxes slowing the luxury home market, lower-end luxury condo sales are up as millennials use inheritances and baby boomers downsize.”

Do not believe it for a moment.

Yes, as reported here, detached home sales have plopped 30% or more in major markets. Prices are unsustainable now that rates are rising. Sales fall first, prices second. But the condo market’s not immune. There is no mass moister rush to buy.

More fake news: “We’re also seeing an emerging trend of Millennials entering the lower end of the luxury condo market, as they tap into their inheritance to invest in this popular property segment,” says Re/Max. Enough kids snapping up $2 million condos to merit a news release? Nope. Not happening. Consider this statement: “In Victoria, condos in the $1-2 million range experienced a 19 per cent increase year-over-year and condos in the $2-3 million range experienced a 67 per cent increase year-over-year.” 67%? Wow. Sounds huge. But the actual number of buyers of $2+ million condos in that city turns out to be 5, up from 3 last year. And there’s nothing to indicate if they were young, old or just crazy.

The point? Anyone 30 or younger has no idea what a rising rate environment can do.  They deserve help. Re/Max knows better. It deserves a big wedgie.

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October 24th, 2018

Posted In: The Greater Fool

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