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October 23, 2018 | Too Hot

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.

Did you catch the survey a few days ago showing 85% of first-time homeowners are hitting the wall? Their budgets are shot. Creamed. Pooched. There’s nothing left to give, since they stretched like crazy in order to buy.

No shock there. That’s what young buyers do. They gamble.

But these are not normal times. Since 2009 interest rates have lain fallow, only rising, phoenix-like, since the summer of 2017. With tomorrow’s hike by the Bank of Canada, there will have been five increases in little more than a year. And three more to come in the next eight or nine months.

Just as stock markets have been reacting to rising bond yields lately – selling off from their record-high levels – so real estate is feeling the crunch. The pressure, it seems, has only just begun. This week’s survey (an Ipsos poll) is a shocker.

So, kids, it asked, thinking of the cost of money rising, are you worried about paying your monthly bills? Might this even cause you to contemplate bankruptcy? The results: 62% are worried, and 46% are mulling over financial suicide (which is what bankruptcy means). These are huge numbers – all the more worrisome because interest rates are still near their historic low point. Just imagine if mortgages were back at their long-term average of  8%. There would be moister guts everywhere. But houses would cost a lot less.

The Ipsos poll also found angst among all ages. A third said more increases could cause them to fail and almost half (45%) claimed they’re already struggling “with the effect of higher rates.”

Higher rates? Give me a break. The bank rate is just 1.75%. Long-term mortgages are still 3.5%. Secured lines of credit are 4%. This is still ridiculously cheap money – exactly why the central bank is desperate to get rid of it. The distortions caused by loans at this level are growing a sea of risk.

Ten years ago the prime rate at the banks was 5.75%, and we thought that was cheap. Five-year mortgages were over 7% – or exactly double what they are now. It’s no real coincidence, either, that houses cost twice as much, or family debt loads have gone up 100%.

In short, the pendulum now swings back towards the centre. Two per cent loans are history. Real estate will inevitably soften or decline, depending on local conditions. If you’ve been trying to sell a condo in Toronto or a detached house in Van, you already know it. But every major urban region will be equally impacted. There is no scenario under which interest rates stop rising, or are reduced. Sorry kids, you blew it.

Despite faltering stocks (weed shares are being hammered this week), weaker oil and the looming US midterm elections, there is core strength in both the Canadian and American economies. Inflation is back. There are more people working in America than at any time in half a century, and the Canadian unemployment rate has bottomed. Corporate profits have been outstanding. Nine rate increases by the Fed have crashed nothing. Now that the USMCA is in place, our trade picture is looking ducky. In short, the economy is running hotter than Chrystia Freeland.

Too hot means more inflation. That devalues the currency, starts a wage-price spiral and, ultimately, makes housing less affordable. The central bank has a mandate to battle rising costs, prices and non-productive income gains. And battle, it shall. This is the essence of modern monetary policy – to protect us from ourselves.

Sadly the feds don’t get it. The latest stats out of the indy Parliamentary Budget Office show fat deficits as far as the eye can see. Meanwhile Ottawa’s new carbon tax is destined to swell the bureaucracy, add about $500 to every family’s expenses and turn into a giant money-recycling scheme with 90% of the amount collected doled back in the form of cheques designed to – guess what – make you vote Lib in 2019.

At the same time, leading up to that election, the feds plan on ramping up infrastructure spending, running big budget shortfalls and generally throwing money around. This, as the bishop told the actress, is highly stimulative. It adds to inflation. It runs counter to the central bank trying to remove monetary stimulus. Plus, finance guy Bill Morneau is expected to announce corporate tax cuts in his next budget, including the ability of companies to depreciate equipment faster – just like Trump did. Yup. More stimulus.

The bottom line: Wednesday’s rate jump is not the end. Maybe not even the middle. May God have mercy on the moisters.

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October 23rd, 2018

Posted In: The Greater Fool

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