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February 28, 2021 | Reset, Part deux

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.

It might not be exciting as watching the latest version of Seal Team, but the bond market show has been just as full of blood and grit. On Friday five-year Canadas zipped briefly about 1%. Wow. That’s a three-fold increase in four months. It’s a half-point surge in two weeks. And while the yield backed off a little as the weekend dawned, it still felt like a Predator or Reaper killer drone strike. The target being neutralized: hapless newbie house-hunters.

First they faced relentless price inflation, the return of the flippers and speckers, multiple offers, bidding wars and arrogant, let-them-rent realtor rockstars. Now the days of the 1.5% five-year mortgage are doomed.

On Friday we laid out why the bond market’s in turmoil as debt prices fall, yields surge and investors scoff at central bank assurances inflation’s under control. CBs are losing it. Suddenly there’s too much stimulus – government cash, cheap rates and bond-buying – in addition to the vaccines, mass inoculations, corporate profit plumping, a big drop in infections/deaths and economic reopening.

Despite new borrowed billions every week to buy up bonds and suppress rates, it ain’t working. The cost of money is increasing right along with the debt. It’s evident to anyone buying a house, a two-by-four, a puppy, a boat, a few litres of gas or hiring a plumber that inflation is out of the bag. Wage pressures will follow. Imagine where oil prices go when planes start flying again. Rates will keep rising. Governments that spent wildly beyond their means, banking on historically low carrying costs, could whack us all. From pandemic depression to pathogen excess in a few short months. Who knew?

Ron is a Toronto realtor who’s been chucking properties for decades. This weekend he sent me predictions worth sharing. (I’m unsure if he drives an Audi, but let’s take that risk…)

1) Those living off their house ATM will feel it first. Banks will pull the plug on further lending, and reduce lines of credit. The stress would kick in earlier for some than others, but I figure by 6 months those who needed the LOC in the first place will be feeling the heat. Frequently they turn to the grey market @ 10% or above, then capitulate and dump the house.

2) Affordability takes a nose dive as the cost of money jumps up. That takes the real buyers out of the market. The specs will sit on the sidelines waiting for more blood in the water. Bottom line is demand drops, and supply pops.

3) Many Boomers have been waiting for the Pandemic to list because they were uncomfortable selling with all of those germs hanging around.  Look for thousands of listings to hit the market in April onwards.

4) My inbox if flooded every day with Condo developers offering me a full 6% to sell one of their 2 and 3 bedroom units. In the recent past those sales were done by salaried employees, who cost a fraction of the 6% of sale price. Now they just need to move the product. Thousand more units are coming on stream that were planned before the world changed

5) At our office meeting this week, one of the managers more or less read verbatim the glowing 2021 projection prepared by the Toronto Board. It was so bright, I had to dim the monitor on my computer. Being a good team player, I said nothing, as did the other old timers who have seen this rodeo before, a long time ago.

6) Wild card? When. The sweet spot for a Federal election is between the early economic dead cat bounce that will begin by early May, and the havoc caused by higher interest rates, that kick in after July.  I think the second half of the year is going to be a lot rougher than the first half.

Some practical news flowing from these changes: lenders are being deluged with mortgage applications as people desperately grasp for the lowest rates in Canadian history. TD moved a quarter-point higher on Friday. Others will follow. If you have a variable rate, lock in. If you haven’t pre-approved yet to finance a purchase, do so. It was only a matter of time, after all, before the cost of money started to normalize. All those people in the steerage section who told you higher rates were impossible were snorting hopium.

What else?

Well, it’s March now, going into the eight or ten most frenetic weeks of the year for housing. There have never before been conditions like this – insane-high prices, a global pandemic, mass vaccinations, historic govy spending, central bank intervention, rapid rate changes, crushed affordability, plus the virus, nesting and WFH that erased listings and inflated demand. It’s a new world for buyers. And not a swell one.

But maybe Ron’s right. Inventories could jump along with loan costs. Maybe a slew of smart owners will realize it’s an historic opportunity to be sellers – cashing out at the top then buying into falling prices. Maybe the kids will grasp that it’s better to have a higher rate on less debt than the opposite. Or that FOMO is lethal. Or that the future may look nothing like the present.

Or not.

What a rutting season this will be. Incoming!

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February 28th, 2021

Posted In: The Greater Fool

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