Damn. And I was going to write about happy thoughts today. Bummer.
The question now is whether or not the Big Owe, the reincarnation of the elfin, but testy, deity F (RIP) will phone Peter Veselinovich. I’m betting not. So far the new federal finance minister, Joe Oliver, gives every indication he’s the political equivalent of those little plastic thingies that golfers put down to mark where their balls used to be.
Remember when BeeMo and Manulife tried to sneak mortgage fixed rates down to the 2.89% level? Little F was on them like bad underwear, squeezing until they yelped, gave up and stopped encouraging more debt and higher house prices.
This week Veselinovich’s company, Investors Group, better known for mutual funds with fat fees and back-end surprises rolled out a limited-time, short-term, teaser, variable-rate mortgage mortgage at the surprising price of prime minus 1.01%, which these days means it costs just 1.99%. The number’s intended to catch attention, and make people drool. Kinda like that North Toronto million-dollar house that went on the market at $699,000 and received 72 offers.
But there are implications. First, spreading the meme of cheap money available at slightly more than the inflation rate only encourages more debt (which is what IG wants, obviously). Second, there’s a direct line connecting low rates with high house prices. Now that SFHs in two of our major cities are at the $1 million mark, how is this in anyone’s interests? Given the fact household incomes are static, and yet household debt swells ever-higher, price escalation means the trip back down will be steeper.
Third, it’s a race to the bottom. More deflation. In the absence of organic economic growth, it’s all about stimulus. Mortgages at 1.99% are intended to encourage people without money to buy properties they wouldn’t otherwise be able to afford, or to purchase more expensive real estate than would be possible at the crazy, insane rate of, say, 2.99%.
Time for a chart. Here’s how the debt load of Canadian families compares with other countries. Hmm. Notice the direction everyone else is headed in? That sure makes sense in a world turning deflationary, where debtors are usually crushed. As you can see, we’re special.
Source: Moody’s Investor Service
Maybe the Big Owe’s also aware of a report just done by Moody’s Investor Service on why giant US retailer Target is flaming out in Canada. As you may know, Target made a big splash here by opening 124 stores nation-wide in a bid to take on Wal-Mart and sell more cut-rate crap from China. But business has been so disappointing rumours have circulated the chain may be slipping back across the border.
Why did Target bomb?
Because, says Moody’s, Canadians are tapped out. We are more “economically stressed” than Americans, and it’s being tied expressly to our piggy-like devotion to debt. “The challenged macro economy has created even more competition for the scarce consumer dollar. This makes Target’s entry even more challenging as it tries to carve out a profitable niche.”
You bet. The housing bust of 2005-7 forced American families to deleverage – pay off debt – so today indebtedness there averages ‘only’ 100% of disposable income. In contrast, we’re at 164%. And rising. If Mr. Veselinovich gets his way, debt levels will now puff up faster than a diseased whale carcass cooking in the Newfoundland sun.
By the way, speaking of the US real estate experience, evidence shows the lower a middle class person’s income, the greater amount of personal net worth they put into a house. Just like us with our 1.99% mortgages and 5% down payments. There’s no question the current Canadian market is being carried on the backs of those who need both mortgage insurance (because they are high-ratio borrowers) and cheap loan rates. But these are also the folks least able to withstand a decline. Meanwhile rich people are more diversified, and do not have all their eggs in one basket.
So this is interesting. See who got slammed the most when American real estate values cratered…
Well, there ya go. Even-cheaper money, along with big debt and higher real estate values, while the economy languishes and employers hack. Hard to imagine a scenario in which more people could learn about economics all at the same time.
Make the call, Joe.