March 5, 2020 | Wiped

So, here’s the good news.

The prime rate at the Big Banks just eroded nicely, down a half point to 3.45%. That means consumer and car loans cost less. The rate on your line of credit just dropped. Ditto for the HELOC. Five-year mortgages are moving close to 2.5%. One lender now has a 1.99% three-year offering. And variable-rate mortgages are a bargain – likely to move lower.

The mortgage stress test – diddled by Ottawa just weeks ago to make it less gutsy – is on its way to just 4.5% (given current bond yields). That’s almost a full point lower than a couple of months ago.

There’s bad news, too. Are you sitting?

Savers are being crushed. High-interest account will pay less than inflation. A 5-year GIC at the Big Blue Bank is yielding 2%. Yeah, also under inflation and you have to pay tax yearly on money you don’t get. Sucks.

When it comes to real estate, the plunging cost of home loans and the defanged stress test will unleash a lot of new buying power. Given the shortage of listings in most places, this translates into price pressure. We’ve already seen that in the last month. Big jumps in the GTA (17%) and Montreal (13%). The rash action by the Bank of Canada this week will only serve to make housing less affordable and undo three years of government efforts to get the hormones back into the gland. Unless, of course, the virus keeps all the buyers at home washing their hands and guarding their hoards of toilet paper.

Also bad news (maybe)?

Mr. Market has no idea how to price things at the moment. Stocks soared Monday, tanked Tuesday, exploded Wednesday and died Thursday. Thousand-point sessions used to be stunningly rare events. No more. Meanwhile bond yields have been driven towards zero and bond prices set on fire. Investors with balanced portfolios have seen equity holdings flip wildly while their fixed-income stuff appreciates. Now everybody should understand why you always hold bonds. Even ones that pay you nothing.

Does this portend crappy days ahead? And, if so, wouldn’t this be a really bad time to buy a house in Toronto and swallow a million in mortgage debt?

Ah, that’s the question.

Well, Canada’s in some trouble. Oil prices have fallen 30% and $45-a-barrel crude (world price) is a disaster. Especially in a country when we can’t even get a pipeline built. Meanwhile the FN goofs caused serious economic damage by squatting on rail lines, and the feds seem incapable of decisively dealing with the radicals. Warren Buffett just pulled out. There’s a huge federal deficit now and no path to getting rid of it. Government spending will have to jump if the economy stutters, just when reduced economic activity means lower revenues. And now, the virus.

The central bank move this week – cutting rates by a half point (more to come) – was about as clear a signal as you can get that the economy is sliding. Resource-rich Canada was hobbled by the climate change agenda of Ottawa, aboriginal demands and commodity weakness even before Covid-19 whacked demand by shutting down China, kicking the airlines and plunging crude.

This week I spoke with an experienced, talented resource engineer who for the first time in his life can’t find work in Saskatchewan. Meanwhile his condo in Saskatoon has lost a third of its value. “Trapped,” he said. “What am I supposed to do now?”

So low rates might look sexy amid a forest of condo towers in urban 416. Maybe more kids renting condos will be able to buy the same units, and go from being miserable loser-tenants to happy owners with giant debts. But make no mistake. Overall, this is not good.

What to do?

If you have a balanced, diversified, liquid and global portfolio, ignore the noise. It’s going to last a while. The virus will be here all Spring, into summer, maybe longer. Nobody knows. But it will end. Growth will continue. Pent-up demand will shove values higher, fast. Don’t try to time it, since you can’t. Missing the good days of recovery is a bigger hit than waiting through the bad ones.

Real estate? Nothing’s changed. If you need a house, and can afford one, buy. If you can carry a big mortgage without a job, go ahead. Jump in. But don’t buy into a weakening economy just because mortgages got a half-point cheaper. Don’t wade into debt because you’re pregnant, are suffering from FOMO or your mom’s beating on you. There are a number of negatives swirling these days which should keep reasonable people from wanting any more debt – no matter how cheap it comes.

And if you’re a saver?

Sorry. You’re pooched. You might as well spend it. But not on a cruise.

Garth Turner March 5th, 2020

Posted In: The Greater Fool

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