Last month this pathetic blog told you to expect 2013 to be the year that the new, sexed-up, Carney-less Bank of Canada raised its interest rates. Twice, in fact. Both increases, I suggested, would come late in the year, likely when the bank does its thing around Labour Day and again just past Thanksgiving.
So what? So the prime would become 3.5%, and everybody with a variable-rate mortgage would have a bad day. But that’s just for starters. The chartered banks would naturally follow suit, and heap another helping of basis points onto their entire mortgage roster. After all, mortgage originations have plowed dirt in the last few months. Nobody – nobody – in the Big Five expected volumes of new mortgages to evaporate the way they have since last July.
That, of course, was when the elfin deity, F, and his peckerettes lowered the boom on property virgins everywhere, Vancouver and the entire Toronto condo market. By killing off the 30-year mortgage he raised mortgages rates the equivalent of 0.9% for new buyers, which led directly to the cascading in sales I’ve been bleating about for months. So imagine what another half point would do, coming at the same time as the bond market sees tumbling prices and swelling yields. (That’s already happening.)
So here’s the scenario keeping realtors up at night, fingering their Land Rover keys, trying to decide between the lease and eating. Fixed-term mortgages (like the ever-popular fiver) start to move higher in the late winter and early Spring, pacing the bond market moves (where the banks fund them). Then in the autumn, VRMs increase twice as the central bank finally starts to normalize things.
Suddenly everyone in Canada with a variable-rate mortgage or a fixed-term rate coming due in 2014 or 2015 – most of them at a ridiculous 3% or less – is guaranteed to have higher payments immediately, or upon renewal. Are they going to be horny to sell and move on up the property ladder? Fuhgeddaboudit.
And how about property values? If rates rise even a half point, with affordability already at the breaking point in most cities, won’t prices have to drop? Of course they will. And this is exactly where we’re headed. In other words, all those delusionals who have flooded this site for the past few years saying Canada is the new Japan, that the cost of money could never rise again and interest rates would actually be dropping, will simply have to change their Depends. There was never any doubt rates had but one direction in which to travel.
But don’t take this from me, just because I’m always right and have six-pack abs. I mean, here’s the biggest bank repeating my words. This week RBC (where mortgages come from) also stepped up to the plate and said the Bank of Canada will, in fact, insert the carrot.
“The Bank of Canada should be the only major central bank to actually make the move to tighten this year,” head fixed income and currency strategy dude told analysts. “We’re looking for 50 basis points in aggregate tightening skewed toward late this year.” Joining the Royal, by the way, are economists at TD Bank. And the GreaterFool Economics Department (pictured above). After all, it’s so obvious where we’re headed.
The US economy is in the middle of an awakening which every month is adding jobs, more real estate sales and consumer confidence. The re-elected president just won the fiscal cliff fight against a bunch of Republicans still wondering where their manhood went. The S&P 500 has re-established a five-year high after climbing 13% in 2012. US corporate profitability is at near-record levels and grew 12% in the last quarter. Even in little Canada we saw about 40,000 jobs created last month, where an American renaissance has an immediate impact.
Given the renewal of growth, there’s no way central banks will keep throwing gas on the economy in the form of stimulus spending and, especially, rock-bottom cheapo money. To do so would court inflation, bring damaging wage-price escalation and lessen hard-won productivity. Nope. Ain’t gonna happen.
Besides in Canada, where household debt now surpasses that to the south, where houses cost almost double those in America and HGTV horniness has made every 22-year-old think she deserves yards of granite and glass sinks, the feds need to turn the tap off.
Will there be consequences? Of course. Real estate will be collateral damage for a while, and especially in some markets. But the alternative – keeping mortgages cheap and house prices rising – is no alternative. To do so would turn a sometimes-painful correction in Canadian housing into a zombie blood-letting more disturbing that the Lang & O’Leary Report.
So, if you’ve been thinking about selling, do it. If you’re buying, get pre-approved and practice being a prick. If you have a mortgage renewing within a year, do something about it. If you’re variable, lock in.
And get your news here.