Days ago I told you that five-year, fixed rate closed bank mortgages would be going up. That’s just happened. The hike ain’t much – about a tenth of a point – but rest assured there’s more to come. You can imagine the result, coming as this does during the biggest real estate slow-walking event since we all nearly croaked in 2009.
This has nothing to do with the Bank of Canada. However, dudes Poloz and Carney made it clear this week the next rate move by the Big Bank will be up, not down. That may not happen for a year (at the outside), but when it does, those people left with variable-rate loans will wish they’d spent less time watching Global.
That this would occur was never in doubt. First, the feds are appalled at the debt orgy which their low rates unleashed. The notion of conservative little beavers eschewing carnal pleasures so they could store their nuts (I’m now strangely aroused) was always at the core of monetary policy. These guys actually thought families would employ the cheapest money ever to pay off high-rate debt, or trash mortgages.
Instead, we’ve pigged out on the stuff. The credit bubble is now way more worrisome than the housing bubble, simply because it takes a lot longer to get out of debt than sell a house. And households devoting more and more of their income to servicing loans have less to spend on important things, like cheap TVs from China and Korean Imitation Automobiles. So the more credit’s extended, the longer the GDP numbers will suck.
So, the Bank of Canada will never lower its rate. Period.
However, this has nothing to do with five-year mortgages sprouting. For that, blame bonds. As mentioned earlier this week, US 10-year Treasuries (the global benchmark bonds) are having the worst time in two years with prices falling and yields spiking to 2013 highs. The same is happening in Canada. The 5-year GoC bond yield has pushed through a three-month high, and is up about a third of a point.
Why? Because of the stuff I’ve just detailed (which doomers hate me for). The US economy is steadily resurging; equity markets have been on a tear; the American housing market is making a sustained comeback; and investors are no longer happy hiding their cash in bonds where yields are lower than Mike Duffy’s credibility. So heaps of money are moving out of bonds and into stocks. As the world improves, appetite for risk (and return) grows.
To hold bonds, conversely, investors demand higher yields. So, up they go.
This is not a temporary event. Of course, yields and prices will fluctuate continuously (like stock markets), but the trends are clear. America recovers. Corporate profits satisfy. Global growth staggers back. Consumers spend more. The storm abates. Equities rise. Bonds fall.
And because banks finance five-year mortgages with five-year bonds, there’ll be a steady drum beat of little rate hikes over the months to come. Nothing dramatic. But the outcome is clear. Come August you will really, really, really wish you’d listed that condo in April.
Speaking of market timing and death by home, let’s revisit GTA-area realtor Ross Kay, whose bold prediction that house horniness has just died got a lot of people excited. You may recall that he has a ‘real estate engagement’ index that pinpointed May 19th as the day the market expired, and that interest has now declined 73% from its peak last April.
If he’s correct (and he claims a 200% five-year record of accuracy), this will show up in MLS sales number in July and August. You can just imagine the impact that will have on an already-wobbly situation. It’d undoubtedly set the scene for a dive in prices.
But what is the ‘engagement’ index? “Here’s a partial list,” he tells me. “It includes an inventory of homes for sale, open house attendance, home showing statistics, MLS (online) listing views, national media headlines, plus blog traffic.”
“My only interest in going public with the index was because I had to assist clients through the 1990 to 1995 market after the great run of the late 80’s. It is a learning experience when a grown man is crying at a kitchen table and all you can do is save his family from losing another $10,000 if he waits another month.
“Today after 13 years of good market and the rash influx of the majority of real estate agents, who have no experience going from a runaway market to an absolute collapse, there is simply too much unethical advice being spouted by groups/individuals that Canadians believe protecting them.”
As this blog has shown many times, real estate boards lie. They revise sales stats without disclosure, for example, then create Frankenumbers to mask market changes. Corporate media outlets are untrustworthy. They do little research or fact-checking, and run ads as editorial. Banks deceive. They tell borrowers how to miss mortgage payments then punish them, and create false ads. Is it any wonder people are cynical?
“Interesting aside.” Adds Kay. “I was shocked to see the number of views coming from IPs attached to financial services corporations viewing my site in the last 24 hours. It appears any claims the industry does not read Greater Fool are unsubstantiated as you were the first place the index was ever publicly released.”
Don’t say that. Makes me feel so… mainstream. Yuck.