Some days ago, I made three predictions. In a year…
* The prime rate will have doubled.
* Oil will be $100 a barrel.
* The dollar will be at par.
Since then, mortgage rates jumped for the second time in as many weeks. A lot, actually. Sixth-tenths of a point in a few days, taking a five-year closed term to 5.85%.
Oil closed Wednesday in excess of $71 US. This means the black stuff has risen 100% in price in the last three months. If these were normal times, that would be shocking and consequential news â€“ especially since gas will again be $1 a litre in a few days.
The buck now sits just north of 90 cents, driven higher by oil but depressed by a collapse in Canadian trade. Meanwhile the US dollar continues to drift lower, a trend which will define the future.
Obviously, if Iâ€™m half right, the cost of living will increase (mortgage rates and gas prices alone will do that), which erodes disposable income, and yet the economy will stagnate (a high dollar kills exports and manufacturing jobs, if there are any left).
Itâ€™s precisely this scenario â€“ rising loan costs, big energy price hikes, reduced consumer spending and a jobless recovery â€“ which make me wonder what the hell current real estate groupies think theyâ€™re doing. Itâ€™s hard to imagine average home prices rising over the next couple of years, while mortgage rates are destined to jump substantially. In normal times, that financial vice would crack the nuts of even the staunchest property squirrel, but now there are almost no voices of caution being heard.
So, pity the child buyers. Born circa 1985, they were in Huggies the last time the equity markets tanked, and have grown up in an era marked by growth, rising prices, jobs and dirt cheap interest rates. So when prices drop a little and mortgages sink in cost, they see this as a giant buying opportunity.
This will end badly. Eight months after the crash, weâ€™re at it again â€“ encouraging inexperienced young couples to buy assets very likely to fall in value, with little or no equity, financed by leveraged loans which will grow every more costly. Hard to think of a worse plan.
So, if you want to score, use more head than hormones.
Rates, oil and loonies will all be rising. If you canâ€™t figure out how to turn that into money you donâ€™t deserve much.