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February 18, 2022 | What Goes Up on Debt Frenzy Comes Down Too

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

With bond yields rising since last summer, the U.S 30 year mortgage rate moved above 4% this month,  up more than 1.25% over the past year. In Canada, the popular 5-year fixed-term conventional mortgage rate has been climbing too, today in the 3% range and expected to reach the 3.4% area over the next couple of weeks. Variable-rate mortgages and loans, of many forms, increase when central banks start hiking base rates, presently slated for March.

This leap in debt servicing costs comes as average home prices in Canada and the U.S. have increased 30%+ over the past year, and the average purchase loan size hit a record $453,000 in America, $372,000 in Canada, and $582,000 in the most expensive markets of the greater Vancouver and Toronto areas. Toronto, Vancouver, and Montreal are Canada’s largest mortgage markets. With nearly $350 billion in mortgages outstanding, Toronto accounted for about 23% of the country’s $1.5 trillion Canadian mortgage market (source:  Statista Q3 2021 data).

As home prices have become increasingly unaffordable for most households, up to one in 4 homes in high population areas, have been bought by ‘investors’ looking to flip or rent for a profit. In the process, rents have risen in the most populated areas by a whopping 30% on average over the past year, and economic activity has become excessively concentrated in real estate transactions.

These trends are counter-productive to financial stability and resilience and set the economy and balance sheets up for a painful period of normalization. The inevitable weakness in household spending has been evident over the past few months, with December retail sales revised from -1.9% to -2.5% yesterday, the second-lowest real growth rate since May 2020 (EPB Research) and the January nonseasonallysmoothed number was 18.5% month over month. These are foreboding numbers for economies heavily reliant on debt-enabled consumer spending for growth. Government bonds see the trend to slower growth and are rallying as risk markets fall again today.

David Rosenberg discussed these trends yesterday in the clip below.

David Rosenberg of Rosenberg Research talks about the latest inflation data out of Canada, reaching a 31-year high. He says more than three to four rate BoC hikes will hit the economy. He also talks about the “painful” impact of rising rates on the housing market.  Here is a direct video link.

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February 18th, 2022

Posted In: Juggling Dynamite

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