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August 11, 2019 | Splat

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.

Mortgages at 0%. More FOMO. Is this stuff possible?

The die may have been cast at the end of the week. We shed 24,000 jobs in July. Unemployment hit 5.7% (the States is 3.7%). Fewer people have been working in each of three of the last five months. Last week a 30-year Canada bond hit the lowest yield… ever.

While the Fed trimmed its key rate recently, our guys did not. It now appears American rates will go down again on September 18th and October 30th, leaving the Bank of Canada with one of the highest levels in the western world. So, Mr. Bond Market says, the odds are rising for a chop here. Maybe on September 4th. For sure at the end of October.

This is a problem for Ottawa, where a federal election’s slated for ten days before Hallowe’en. Already mortgage rates have been plunging, pushed down by competition among hungry lenders and encouraged by a collapse in bond yields (as prices rise). Five-year money is available in the 2% range. Ten-year money is just under 3%. There are even 1.99% mortgages available from some crazy CUs. Meanwhile inflation is 2% – which means: (a) mortgage money is almost free and (b) the central bank rate of 1.75% is already negative.

Why is the cost of money plopping? Some of the reasons…

  • The Trumpian trade war with China has sent a lot of investors scurrying into the safety of bonds, where (if held to maturity) you always get your money back. US Treasuries were at near-record lows last week as the White House prepped fresh tariffs and Beijing let its currency slide.
  • Inflation is kaput. Despite ten years of economic recovery, this key gauge of growth continues to flop. Without inflation institutional investors (they buy most of the bonds) don’t ask for a premium. They’re just happy to preserve capital. Rates tumble.
  • Risk – bonds have less of it than growth assets like stocks. With equity markets near record highs and volatility (thanks to Trump) mounting, bonds have attracted huge amounts of money – pushing prices higher and yields lower.
  • An aging population globally (including here) means more savers and bond buyers. That increases the demand for fixed-income assets and drops yields. The demographic makeup of the western world suggests this will continue.
  • Interest is the cost of money, which is influenced by supply and demand. The world is awash in debt at the moment, with the US adding $1 trillion this year alone. That’s all financed with bonds. More supply, lower cost. The world now has $13 trillion in bonds with negative yields. The bondholders are paying a small price, in other words, for security.
  • The US dollar has been on a tear for a long time. Foreign investors are happy to buy American government bonds even when they pay almost nothing because it gives them a currency hedge. And Trump is actively pushing rates lower, exerting relentless pressure on the Fed to chop, since this will add stimulus to the economy and help him (he hopes) win in 2020.

Conclusion: the Bank of Canada has nobly resisted reducing the cost of money. But this is destined to fail. Down she goes.

A key question: what’ll this do to real estate? What happens if mortgages hit 1%? (A Danish bank went to 0.5% last week on some terms and negative on others – but still added on fees.)

Well, cheap money has a history of goosing house prices in this country. Now a rockstar bank economist suggests that may happen again. BMO’s Doug Porter says Ottawa will have to toughen up its stress test and add other hardass measures in order to keep the rabble from gorging on cheap home loans and rushing headlong into inflated properties, as rates dribble lower. The cost of money, he suggests, “will remain low for long – or forever.”

Porter also worries about population growth, more real estate demand as investors leave stock markers, low vacancy rates, increased speculation and Airbnb madness. “Taking these trends together,” he says, “it seems that the risks are heavily tilted to upward, not downward, pressure on prices over the medium term. In this landscape, domestic policymakers may need to consider other ways to control speculation – especially from abroad – in a world where interest rates stay below inflation, or even below zero.”

Of course, it’s not all about rates. Remember that Canada just lost a mess of jobs, and an economic slowdown may be in the cards. Meanwhile our No. 1 export, oil, has been mired in the $50 range (it was twice that not so long ago) and China apparently hates us. So economic uncertainty could temper the realty fire smouldering within Millennial loins.

Meanwhile plunging rates will pretty much crush GICs and your high-interest savings account. Money for nothing. What a world.

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August 11th, 2019

Posted In: The Greater Fool

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