January 7, 2019 | One and done?

No rate hike this week from the The Ploz. When the Bank of Canada does its thing on Wednesday it will talk a lot but do nothing. Events of the last few months have backed central bankers off that tightening agenda they were pursuing, and our guy (Stephen Poloz) will certainly be taking his tone from that of the Fed boss (Jay Powell). Last week stock markets roared ahead when the key US banker said (a) rate increases will be tempered and (b) he’s not quitting, even if the big orange guy demands it.

As a result, markets are expecting the Fed to move once, maybe twice, in 2019 – about half the number of increases forecast a few months ago. Meanwhile the resolve Powell is showing in the face of political pressure is exactly what investors longed for. Without central bank independence, we’re all pooched.

Anyway, here are the odds for Canadian interest rates, thanks to the pointy heads at Scotiabank. You can see that even by the end of the year Poloz will stand pat. A safe bet would be one increase in 2019. And no cut.

So the news is mixed. Job creation has been strong in the last few months, and consumer spending is robust. But real estate has been wobbly and Alberta’s cap on oil production will chill things. Inflation’s under control (cheap gas helps) and the economy is growing modestly. Canadian stocks are bargains and expected to have a much better 2019. But, led by China, the global economy is slowing. And, of course, our biggest trading partner is led by a president as predictable as a weather vane.

What does this mean for real estate, mortgages and you?

The prime rate at the banks of just under 4% will be about 4.25% later in 2019. No big deal. Expect a slight bump in your HELOC rate, but far less than previously feared. The mortgage stress test minimum will creep up to almost 5.6%, although there is a possibility five-year mortgages at the banks will be lower by a quarter point (or more) once the spring rutting season starts.

(By the way, a rate pause from the BoC may also take some pressure off the feds – who have been actively considering putting a cap on the stress test – it’s an election year, after all. If the cost of money is unlikely to jump in 2019, Ottawa will leave things as they are. However, a return to 30-year insured amortizations is still possible.)

The impact on real estate? Pffft. A nothingburger. Higher mortgages and the stress test have already taken a big bite out of affordability, punted many first-time buyers and pushed up prices at the lower end of the market. Nothing much changes from here. A spring rate sale may goose sales a little, but the general economic condition will have a larger impact. If jobs and wages are plumping, people are willing to swallow more debt. But don’t count on it.

Vancouver, Victoria, Calgary, Edmonton and everything west of Winnipeg is in various stages of decline. The GTA has already seen (as detailed here on Friday) a massive drop in average detached prices. But 2019 should be fairly stable. Montreal continues to creep ahead, likely being the most under-valued market in the country. East of that, Halifax is the only place awake, and also a bargain.

What does the rate pause do to borrowing strategies?

Quite a bit.

If the central bank tightening cycle is ending sooner than expected (looks that way), the screaming need to protect yourself with a locked-in five-year mortgage rate just evaporated. Why pay 4% when you can borrow at 3.3% with a variable? If the bankers have reached what they consider to be a “neutral” level – where the cost of money is neither encouraging or discouraging economic growth – the risk of being whacked with a big rate increase upon renewal is largely gone.

Also remember that variable mortgages can usually be turned into fixed-rate ones easily, if the above scenario changes. Plus it’s cheaper to get out of a VRM than a five-year loan. And if you can borrow money to finance your houses at barely more than 3%, this leaves more cash lying around to invest in financial assets – which are currently tasty and on sale.

There. A puppy picture. And a whole blog without saying ‘Trump’.

Garth Turner January 7th, 2019

Posted In: The Greater Fool

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