When Big Box home stores pack it in, you know something’s up. Rona’s decision this week to shutter 11 mega locations in BC and Ontario not only throws too many people out of work (over 800), but coming after weeks of rate turmoil, it chills.
Yeah, yeah, the Quebec-based chain has had the poutine kicked out it by Home Depot. We know that. Two hundred jobs went in February. Another 125 admin positions punted yesterday. But retreating from markets like Mississauga, Abbotsford and Woodbridge – where people are about as house-horny as it gets – is a leading indicator of real estate retreat. The company will also convert 63 more stores into smaller discount centres and trash corporate sponsorship programs.
Why? Simple. Slagging sales in high-cost suburban locations where consumers are pigged out on debt and home ownership rates approach 80%. It’s exactly the scenario central bankers nightmare about – families taking on so much debt to buy inflated houses that disposable income evaporates. Along with jobs.
And now mortgages have jumped. This will not end well.
By the way, American rates have swollen like a donkey in love. Thirty-year home loans just popped from 3.9% to almost 4.5%, for the biggest one-week increase in 26 years, all part of the same rate fever which tumbled the bond market in the wake of speculation the Fed will soon begin tapering down its stimulus program.
Bad news? Higher loan costs might be in Canada, but not so in America. That’s because the Yanks have been merrily reflating the real estate bubble which almost ate capitalism five years ago. House prices in twenty cities are rising at an annualized 12%, the most torrid rate since the spring of 2006, when subprime loans allowed Oakies to buy McMansions in Florida. House sales are the best since 2008. New construction has taken off, with housing starts back above the one million level.
There are bidding wars in Phoenix, Boston, Chicago and Vegas. Prices in Detroit, of all places, have risen 14%. As in Canada, a lot of this has been fueled by tight inventories and dirt-cheap money. So, a rate cool-off is not such a bad thing, even though most economists insist the buying frenzy won’t quell much.
This underscores a key difference with us, of course. Canadian houses cost half again what equivalent homes in America change hands for, since the correction here’s only just begun. A general mortgage rate increase of just 1% in Vancouver or Montreal would slaughter real estate, while in the States rates would have to travel from 4% to 7% before the average home becomes unaffordable on the average income. See how screwed we are?
Of course the greatest screwees will be people living in $800,000 houses with $700,000 mortgages in Mississauga where they can’t shop at Rona anymore, who listened to Peter Schiff and put all their savings into gold bars they keep in Ziplock bags in the guest bathroom toilet tank. Let us pray for them.
Unless they read this pathetic blog when it was first published last night, went to that wicket in Scotia Plaza I pass every day, and handed the rocks over. At least they’d have sold hundreds of dollars above the bottom gold looks destined to reach. The yellow stuff dipped under $1,200 an ounce Thursday night, hitting a three-year low amid the latest news showing the US is irrefutably on the mend. The psychology of gold is worsening by the hour, as stock markets rally and assets like REITs and preferreds (which, unlike bullion, pay you to own them) recover.
As one Wall Street biggie told Bloomberg: “When the market gets into a trend, people just want to follow it, and now we’re in a severe downtrend, so the psychology has become terrible.” You bet. After gold plunged two months ago there was a huge rush by metalheads and bullion-lickers everywhere to buy more. But after this $200-an-ounce dump… crickets. The simple fact is, you can’t fight the Fed. The future holds a rising America, higher rates and a stronger greenback. No hyper-inflation. No currency crisis. No financial mess. No reason to own gold.
The speculation now is a wave of selling could take the yellow stuff to as little as $800 an ounce. That would represent a loss of almost 60% since the peak in 2011, when this blog told the doomers to collect their profits.
So clearly, there are two crimes against nature. Failure to rebalance. And ignoring Garth.