The confusers

CONFUSER 1 modified

“You might be interested,” said a dude in Australia, “at how the news is being reported down here.” I was.

When the Poloz poodles at the B of C nibbled a quarter point off rates yesterday it not only shocked markets and stunned economists (more than usual), it was noticed around the world as something weird. That’s because just a few months ago it was widely reported that our central bankers thought Canadian real estate was overvalued by up to 30%. Danger, they hinted. Debt binge.

“So what gives?” the roo-jumper asked me in an email Thursday morning. “Are your bankers trying to chill the housing market, or turn it into the same bloody disaster that we have?” (The median house price in Sydney is C$844,000 while the median income is $67,000. Ouch. Anything actually habitable is above a million.)

Good question. Here’s the Reuters wire story most Aussies read:

(Reuters) – A surprise move by the Bank of Canada to cut interest rates on Wednesday could reignite Canada’s housing market and renew fears of a bubble, just as the market had finally begun to cool after a five-year run to record prices… “This means everyone is going to get back in the saddle and we’re going off to the races again,” said Toronto real estate agent Steven Fudge. “It creates a sense of relief that we haven’t seen the top of the market.”

Canada’s housing market paused in 2009 but didn’t collapse as it did in the United States, and prices have risen as low interest rates helped Canadians boost their borrowing to buy ever more expensive homes.

“The real estate market has nine lives. Every time it’s supposed to slow down, something keeps the party going,” said Benjamin Tal, senior economist at CIBC World Markets. “With the debt situation relatively elevated, cutting interest rates and adding fuel to the fire is not exactly the best thing for this situation,” Tal said.

James Laird, President of CanWise Financial residential mortgage brokerage, said the rate cut will have an immediate effect on the demand for mortgages, pushing people back into cheaper variable rates from higher fixed-rate products. “The Bank signaling that costs will be lower, even declining, should mean another year of growth for housing and real estate. We shouldn’t be surprised that when money is cheap people take more of it.”

Well, Zoocasa – one of the online house-porn sites for moist Millennials – said its traffic jumped by a fifth after the poodles did their thing. A realtor buddy of mine in Toronto called and chortled. “My phone is making love to me today,” he said. I looked at mine and felt quickly inadequate. “These guys sure know how to rescue a bad situation.” Back in November he’d been moaning weekly about listings over $1.5 million growing more frigid by the week.

So, you can see what the immediate emotional response was to this move. Lots of people think it means cheaper mortgages, the ability of people to therefore borrow more money, enhanced housing sales and (of course) higher prices.

Said one mortgage broker: “Those buyers who were capped at $800,000, this will allow them to go to the $850,000 that they really need to go to today, that tipping point in this housing market that makes the difference in a bidding war.” There ya go. Add $50,000 more devalued, depreciating loonies to the pile. The only trouble is incomes are not rising while rates are falling.

But one day after this boneheaded move, it’s becoming more apparent rates – at least mortgage rates – may not be moving at all.

The Bank of Canada does not impact fixed-rate home loans. The cost of those is set in the bond market and then filtered through the major lenders, the banks. And while bond prices have spiked and yields dropped over recent months as investors sought safety, these mortgages have yet moved little, if at all. The bankers are acutely aware of the fact bonds are at unsustainably low levels with yields liable to quickly back up. They also know loaning money at, say, 2% so people can buy houses at higher prices is going to bite us all in the butt years down the road when rates normalize. Is that the kind of risk you’d want your bank taking?

But the central bank rate does usually affect the prime rates at the Big Five and the cost of variable-rate mortgages. Except this time. The banks have not dropped their primes to 2.75%. In fact brave TD came out and said it wouldn’t. So, today, no VRMs have been nipped. No wonder. The banks are operating on thin margins these days with a big regulatory burden and new requirements to be richly capitalized. Once again, it’s all about risk, and keeping shareholders happy.

As the editor of Canadian Mortgage Trends points out, if competition forces the banks to drop VRMs, they’ll likely just reduce the discounts they now offer from prime. So, effectively, no change.

In other words, nobody with an existing fixed-term mortgage will pay less. No new borrowers taking out five-year loans will get a break. No existing variable-rate mortgage customers will see a discount. Not even an existing line of credit or business loan has been reduced.

This could change. Or not. Or stay confusing.

Regardless, in their haste and folly, the poodles have telegraphed to the world that Canada embraces debt and house lust as its economic salvation. To that end, we’re happy to sacrifice the dollar, starve the savers, enslave the kids and beggar the future. At least until the election.

292 comments ↓

#1 Edward on 01.22.15 at 8:36 pm

“the rate cut has already affected the price of Government of Canada bonds. The yield on these bonds determines long term mortgages rates, including five-year fixed terms. Wednesday morning, before the rate cut, three-to-five year Canada bonds were yielding an average 0.95 per cent. By the end of the day, they were down 22 basis points, according to the Bank of Canada web site. Longer terms mortgages should fall in tandem.”
http://t.thestar.com/#/article/business/personal_finance/2015/01/22/2-ways-homeowners-can-benefit-from-the-rate-cut-mayers.html

As I said, bond yields have fallen but that does not mean lenders will pass on a 20-basis-point decline. So far, they’re not. — Garth

#2 Jesse S on 01.22.15 at 8:39 pm

What a scam! I have a VRM and thought for sure I’d be paying less after a rate decrease. If rates went up, I’d be paying more guaranteed! Not fair..

#3 Van Isle Renter on 01.22.15 at 8:40 pm

It’s all about tanking the loonie and hoping for the best.

#4 Mark on 01.22.15 at 8:42 pm

Don’t know if mortgage brokers who think this BoC rate cut are delusional, or are just really that stupid to begin with. Not only are the banks not passing the BoC rate cut onto their customers, the mere fact of needing a rate cut (with likely more to come) shows just how serious the weakening in the Canadian economy has become.

Not to mention, there’s been a $5.1B default at Target, which is certain to hit the company’s creditors, including REITs, fairly hard. Any value left in the organization will probably end up in the hands of the DIP financiers.

http://www.alvarezandmarsal.com/sites/default/files/List%20of%20Creditors%20-%20Revised%20(as%20at%20January%2015,%202015)_0.pdf

Quite the list of medium sized businesses and landlords who are not going to be paid in full by Target.

#5 Dave on 01.22.15 at 8:42 pm

I find the actions by the Bank of Canada troubling.

#6 John Boswell on 01.22.15 at 8:42 pm

Madness. Madness.

#7 Ontario's Left Coast on 01.22.15 at 8:43 pm

So, this joke of a housing market lives to fight another day… When the poop finally does hit the fan, the fallout is gonna be all the more precipitous and unceremonious. Good luck to all! First?

#8 mark on 01.22.15 at 8:43 pm

Want to know how it’s reported by the local media and not the wires?

“ohhhh we might get our own rate cut tooooo!”

Unfortunately, in Australia where there’s a lot more variable mortgages and a lot more tax incentive for investors to speculate, it will be a bigger nightmare.

The things I’ve seen, in private mortgage brokers are artists, in public “oh no, no, we’d never lend like that”. I saw a guy with 0 down across 4 properties and all were interest only mortgages.

#9 Rick on 01.22.15 at 8:45 pm

And in a couple years, when rates skyrocket and these 5 year loans start to come ready for replacement, but the remainder of the loan is still worth 20% less than the current owed…oh, yay.

#10 crowdedelevatorfartz on 01.22.15 at 8:46 pm

2 days in a row where the comments are over 400 ?
Are there THAT many greaterfools on this site or just Smokey and Mark commenting way more than normal?

#11 Frustrated Kiwi on 01.22.15 at 8:47 pm

The way this move also crashed the NZ dollar was most personally welcome as we are currently converting US$ to NZ$ to pay for some renovations (still keeping well within the rule of 90). Mostly our commentators here were non-critical of the Canadian move, explaining it by oil. On our own crashing currency, one commentator I read stated:
“the market can be forgiven for seeing the two markets as a rhyming couplet.” Certainly, our housing markets seem like a rhyming couplet to me.

#12 YVR Realtor on 01.22.15 at 8:47 pm

I don’t know if the rate cut makes much of a difference to the monthly payment but I can tell you that every agent in our office in Vancouver is booked solid with showings today.

I think what happened is people that were on the fence have realized that the banks can’t raise rates anymore (or it will be a very long time when they do).

Anyways, based on our low inventory, prices have only one way to go, at least for the short term. IMHO, I truly believe that housing is one sector that this government will not let down.

#13 Muttley O'Toole on 01.22.15 at 8:47 pm

Obviously “loonie” (looney?) doesn’t mean the same thing in Canada as in Australia.
Here it means: slightly cracked (or around the bend; lost his marbles; one sausage short of a barbecue; the lift doesn’t go to the top floor; and so on etc.)

#14 Harbour on 01.22.15 at 8:48 pm

Just makes more people build up the debt on their line of credit

#15 The Future Is So Bright I Have to Wear Shades on 01.22.15 at 8:48 pm

Rate cut – band-aid measure to help lenders recoup some losses on new contracts while they are waiting for overdue loan & mortgage payments on others ?

#16 Apocalypse 2015 on 01.22.15 at 8:51 pm

Hard to believe that it was considered an outrage in 1962 that the dollar was worth only 92.5 cents US.

http://www.coinbooks.org/esylum_v13n36a09.html

PREDICTION:

By the end of 2015, our dollar will be worth

.62 US$

#17 The Patient on 01.22.15 at 8:54 pm

Garth, what would you have done if you were in Poloz’s shoes yesterday? Raise the rate by 0.025%? Keep it the crazy-low same?

It’s one thing to go on about what’s wrong. Quite another to lead the way out.

There was no compelling reason to ease. I expected no change. — Garth

#18 Ray Vasquez on 01.22.15 at 8:55 pm

To Jesse S

You want to talk about a scam, Royal Bank is paying only 1.65% for a 5 year GIC.

Others are paying 2.85%, 2.95%, 3.00%, 3.09%, 3.10%.

#19 Cow Man on 01.22.15 at 9:00 pm

Sir Garth:

Your last paragraph tells it all. Is the Bank of Canada independent of the Prime Minister who appoint its Governor. Not likely. I have only ever met one federal MP who I ever trusted. He is now writing a daily blog.

#20 John Prine on 01.22.15 at 9:01 pm

This is Stephen Harper pulling all these strings, poor Poloz did look uncomfortable making his pitch, like he knows this is so wrong but doesn’t want his career ruined. The feds are NOT arms length from the BOC.

Needless to say all the savers who have worked to stay out of debt are the ones that suffer to make the landing easy for the financially challenged and lazy.

#21 Steve-0 on 01.22.15 at 9:01 pm

Im not smart enough to know if this rate cut is going to be good or bad long term, But I do know my balance diversified portfolio has been making out like a bandit YTD. Up 4.6% so far this year (in CAD $), mostly because of the sinking Loonie has been making my US equities do extra nice.

Thanks for the good advice Garth!

#22 aL pacino on 01.22.15 at 9:03 pm

They also know loaning money at, say, 2% so people can buy houses at higher prices is going to bite us all in the butt years down the road when rates normalize.

***************************************
You’re so funny.
rates are never going up again,EVER.

#23 José on 01.22.15 at 9:04 pm

Garth said: “Regardless, in their haste and folly, the poodles have telegraphed to the world that Canada embraces debt and house lust as its economic salvation. To that end, we’re happy to sacrifice the dollar, starve the savers, enslave the kids and beggar the future.”
————————–
Glad to have you aboard Garth. But a year and a half ago I suggested that Poloz and the BOC was on the wrong path, were sacrificing the dollar, savers, inflating the housing bubble and over stimulating consumer debt. The OECD recommended that the BOC raise interest rates by a quarter of a point to send a gentle message to over zealous home buyers.

Unfortunately, you were critical of me then.

The BoC had not moved then. — Garth

#24 Smartalox on 01.22.15 at 9:05 pm

Breaking News: the King of Saudi Arabia has died.

Let the speculation begin on what this will mean to Oil prices going forward, and what contributions the current oil pricing policy made toward his demise!

#25 Saskatoon-Living on 01.22.15 at 9:06 pm

Really?? You know damn well O is going to be calling the banks next week and rates will be dropped.

#26 VanIsle Retiree on 01.22.15 at 9:07 pm

Presumably, the BoC is hoping that the CDN economy will be able to hang on by its nails until there is sufficient economic growth to allow rates to normalize. Certainly the lower dollar coupled with continuing growth in the US will help. Also, the US may not be able to increase rates meaningfully for a time yet, given the strength of the USD against every other major currency. But if the US recovery sputters, surely we will be in some trouble here.

#27 BRands101 on 01.22.15 at 9:08 pm

“No existing variable-rate mortgage customers will see a discount.”

Is this not the point of the VRM? Bet on rates staying the same or, if lucky, drop 25 points?

#28 LONG LIVE THEKING on 01.22.15 at 9:08 pm

Oil at $200 in a week.

#29 No Debt on 01.22.15 at 9:09 pm

The term “Spring Election” is beginning to have a mighty nice ring to it.

#30 Shawn Allen on 01.22.15 at 9:10 pm

Understanding Why Variable Rate Mortgages Might Not be Cut

Normally when rates drop banks can lower both the deposit rates and the lending rates and earn the same spread.

So if short-term deposits are 1% and variable rate loans are at 4% and then the Central bank drops rates by a quarter point the bank can pay 3/4% on deposits and charge 3 and 3/4% on variable rate loans and it earns the same 3% spread.

But imagine that short term deposits like chequing accounts are already being paid zero (no need to imagine, that has been reality for a while).

Now if the bank cuts its variable rate laons by a 1/4% it reduces its spreads. It can’t reduce the deposit rate as it already at zero.

THIS is what has squeezed bank spreads. They always have some deposits at zero that they usually make a fat spread on.

But as variable lending rates came down the spreads on the zero cost deposits kept getting squeezed. Now we are the point where banks may say, enough, if the spread is too low, I simply won’t lend.

TD’s action is just like what gasoline retailers do. It’s cooperation without collusion. TD said no prime cut and hopes all the other banks do the same. IF one blinks then maybe they all will, If not 3% will hold.

#31 Block on 01.22.15 at 9:11 pm

I don’t think the baby boomers running the Bank of Canada understand how hard it is for those who didn’t buy real estate before 2002-2008.

Mortgages are currently available for 2.5%. The Boomers paid up to 15%. Why do you think houses cost more now? — Garth

#32 nonplused on 01.22.15 at 9:12 pm

This is madness. The loonie has fallen almost as much in the last year as the Swiss Franc has risen (although that was much quicker) and they are cutting rates? Oh I get it save the little guy by making imports more expensive?

I could see the price of a new Dodge diesel going to $100,000 if this keeps up. No more Toyotas for you, Mr. Canadian consumer.

#33 H on 01.22.15 at 9:12 pm

70 cent dollar
Budget Deficit
Further reduced rates
Canada QE

Paste this put on fridge.
Then tattoo “pay off debt asap” on arm.

Jan 2009
Oil dropped to $30 a barrel
Consumption was 81million (today 90 million)
In 2009 Opec shut off 4 million a day
Oil hit $74 in June 2009 with predictions of $200

Today they simply wont shut off. Russia Wont. Iran wont. And so on.

In the states they CANT shut off. Only “shutting off” today gets them a “declining well”. NOT OFF.

So with this in place. We are on cruise control.

#34 Totalchaos on 01.22.15 at 9:13 pm

Muttley O’Toole,

“Loonie” means Crazy in Canada too, however, our dollar has a picture of a loon on it. When the coin first appeared, I’m not sure if anyone had any idea it would have such an appropriate nickname.

#35 mr-b on 01.22.15 at 9:13 pm

Stevie and F created this monster. Harper will try to get through the next election before anything substantial is done to stop this madness.

Just like the LIEberals… it’s all about staying in power.

And people wonder why we have no respect for politicians anymore.. sheesh.

#36 Sheik Yerbouti on 01.22.15 at 9:13 pm

OMG Garth, a contrarian website to you is claiming it is $700k cheaper over a lifetime for millenials to buy instead of rent (mind you, in the US and assuming someone is inflexible enough to stay in the exact same location for 30 years)
Read it and weep (or smile)
“The $700,000+ mistake nearly 6 in 10 millennials may make ”
http://www.marketwatch.com/story/the-700000-mistake-nearly-6-in-10-millennials-may-make-2015-01-22?siteid=yhoof2

US rates can be fixed for 30 years. Here they reset in five. US property tax can be deducted from income. Same with mortgage interest. Not here. US house prices are still 20% below their 2005 peak. We have just peaked. Renters here are vastly subsidized as cap rates remain low. Not so to the south. I could go on. — Garth

#37 Shawn Allen on 01.22.15 at 9:13 pm

The mythical $1.10 Canadian dollar

Yeakh people were talking about how far we have doen from that $1.10 level.

But come on, that was a needle peak. It lasted like what? The better part of a morning as I recall.

We have come down from being briefly around par and then in the 90’s… That $1.10 was more a dream than a reality.

#38 Mark on 01.22.15 at 9:13 pm

“PREDICTION:

By the end of 2015, our dollar will be worth

.62 US$

Good luck with that. The US will probably be searching for some way to devalue sooner or later as well, as their economy continues to fall off a cliff. Remember, the best opportunities arise when everyone is sitting universally on the other side of the trade. I’ll gladly take the opposite of your ‘prediction’. Since Canadian personal/consumer indebtedness is significantly higher than in the US, we’re due to suffer far more severe deflation here than in the US, and that means a stronger currency.

#39 Marco on 01.22.15 at 9:14 pm

I only see this as a move to entice would be buyers to take the plunge and keep the housing bubble inflated till the election. With the falling loonie and consumer essential goods set to rise this small interest rate reduction isn’t going to help offset the rising cost of living. Even if the banks decide to lower their mortgage rates. Do you see the falling loonie eroding consumer confidence? Or are the would be buyers just going to be blinded by the rate reduction?
Cheers.

#40 ANON on 01.22.15 at 9:16 pm

Rates won’t ever rise from the supply-side of credit. Credit is beeing put on the table to be taken away (under the same 5-6 thousand year rule: you have to give it back plus some extra change).
Rates will rise when it is revealed the demand-side of credit actually does not have the money plus extra change to give back anymore.
Which should not be confusing, because it is becoming clearer by the day: it is “aboot” now.

#41 not 1st on 01.22.15 at 9:16 pm

Garth, you learned an important lesson this week. Never underestimate the folly of politicians and central bankers.

Next lesson up, welcome to the non-economy economy. There are no economic fundamentals anywhere anymore on the entire planet, its just artificial stimulus infused debt, everywhere. We are all Japan now.

#42 Wildrose squirrelly nutter on 01.22.15 at 9:17 pm

Eat the rich…

http://calgaryherald.com/news/politics/big-city-mayors-back-review-of-albertas-flat-tax-on-income

#43 Paddle on 01.22.15 at 9:18 pm

I think people start to believe that they will never increase Mortgage rates again. After all we have been told for a few years now to lock in mortgages because rates will go up. The fact is nobody has a crystal ball and knows what’s coming. Who would have sought a year ago that we see oil prices in the 40 dollar range. Nobody saw the move of the Swiss Bank decoupling the Swiss Franc from the Euro coming. And nobody expected a rate cut yesterday. Of course rates will eventually go up. A dead clock is right twice a day.

#44 Mark on 01.22.15 at 9:18 pm

“But as variable lending rates came down the spreads on the zero cost deposits kept getting squeezed. Now we are the point where banks may say, enough, if the spread is too low, I simply won’t lend.”

Exactly, but the story that isn’t reported so well is that credit-worthiness of Canadian consumers absolutely sucks. And banks are now starting to price their products in anticipation of defaults. As time goes on, the BoC may very well lower rates further, but the banks will demand increasing risk premia because credit risk is clearly rising with declining personal and home equity.

The finances of a wide swath of Canadians have only been sustainable, over the past decade, through housing appreciation. Whether its the excess credit card spending that gets “refinanced” into the mortgage every few years (very common). The 84-month auto loans that seem all-to-ubiquitous. Or even the excess income of the FIRE industry which flows through to a large number of Canadians. As house price appreciation stops and goes into reverse, as it has over the past year or two, the ‘wealth effect’ of rising housing prices becomes the ‘un-wealth effect’. Very damaging unless another industry rises out of the ashes and arrests the deflation that inevitably ensues.

#45 Babblemaster on 01.22.15 at 9:20 pm

What’s going on? It’s all so confusing? Not really. This government will stop at nothing to keep the housing bubble inflated and the banksters happy. The real health of the economy matters not-at-all. They want everybody to borrow till they drop. That’s what they do. During their latest leadership stint, they are responsible for the biggest federal debt increase ever. If you think dropping rates was something unexpected, wait till we have a bail-in. Anything to keep the banksters happy.

#46 Sheik Yerbouti on 01.22.15 at 9:20 pm

Garth
First the loonie was deflated, now we need to see the price of hockey sticks drop like a puck…..
“Gatineau thieves take 93 hockey sticks worth $38,000”
http://www.montrealgazette.com/News/ottawa/Gatineau+thieves+take+hockey+sticks+worth+with+video/10751451/story.html

I mean 93 sticks worth $38,000!!!!No wonder the Leafs cannot compete at these prices…..and they can no longer get their sticks or super blades from Target

#47 Jean-Claude VanDammeCouver on 01.22.15 at 9:20 pm

Excellent post, especially the last paragraph.

So why did this happen Garth? Just to squeeze a 25 basis point increase in profits to shareholders of the major banks? Or to devalue the dollar more and increase foreign investment? I just dont get it…

#48 RayofLight on 01.22.15 at 9:20 pm

The King of Saudi Arabia, the one that started the oil price wars, died to-day (GBHS). There is a real possibility the new heir to the thrown will reverse this policy and adjust production to support oil prices. I will look for this, and if so, rotate into oil companies /drillers etc. in a heartbeat!

#49 Waterloo Resident on 01.22.15 at 9:21 pm

Let me explain to everyone why this move to lower interest rates is going to make the Canadian economy WORSE, not better = MORE EXPENSIVE IMPORTS.

Yup, that’s about it.

With the Canadian dollar falling about 3% in the past 2 days because of that bank rate cut, everyone’s cost of imports is going to go up in price by about 3%. And since Canada doesn’t manufacture much in the way of its own consumer products (most come from China), that means everyone is soon going to feel a decidedly MORE POOR since they now have to spend 3% more just for everyday things. It’s like a sudden 3% tax being applied to every one of those day-to-day things people need to buy, the only exception to that being the cost of gasoline, which has gone down considerably.

So let’s imagine that the government wants to get the economy moving again, and they lower interest rates to make houses more affordable; GREAT. Now at the same time imagine that they put in a new 3% tax on everything that you have to buy, on everything except gasoline, Canadian made cars, and houses. What do you think is going to happen to the economy? Houses now a BIT cheaper, while everything that you need to buy every day has suddenly gotten a LOT MORE EXPENSIVE. That’s right, the economy will suddenly start to LOSE STEAM, the exact opposite of what the government was trying to get done in the first place.

So here’s what’s going to happen:

One more interest rate cuts in 3 to 6 months, then a few months after that when the dollar drops below 70 cents (due to the fact that the U.S. will have begun to raise their rates at that point), the Canadian government will begin to dramatically raise interest rates to match those rate rises South of the border. At that point our economy will quickly and dramatically fall into a decidedly hellish Japanese style depression. Housing will crash (both sales and prices) over the next 15 years, the job market will go into reverse (something already starting), and government revenue (from vanishing consumer spending and from vanishing oil revenue) will also quickly evaporate. Massive tax rate hikes combined with government austerity measures will be introduced, and at that point I will be moving to some other country to avoid the coming crushing wealth tax that will be introduced a few years later.

With both falling revenue and a slowing economy, less and less foreigners will want to loan money to the Canadian government to pay our massive debt burden that we have, and that will make interest rates either rise to 10% and above, or our dollar will fall to less than 40 cents U.S., possibly even lower. Most likely our Canadian dollar will fall to something close to ‘worthless’.

That’s it; Canada will be toast and Canadian Tire money will be worth more than the Canadian dollar. Enjoy the Canadian economy now because in 20 years’ time you won’t even recognize it.

I know this because I make my money betting on exactly these sort of things.

So far that’s okay with me, in U.S. dollars my investment have gone up almost 9% in just the last 2 days alone, so I’m smiling.

#50 Harbour on 01.22.15 at 9:21 pm

Saudi Arabia’s King Abdullah Is Dead, Succeeded by Prince Salman

http://finance.yahoo.com/news/saudi-arabia-king-abdullah-dead-232707122.html

#51 TRT on 01.22.15 at 9:21 pm

Unbelievable that some posters here still believe in the “..when rates go up” mantra. If you didn’t get he memo , rates are not going up in a very long time. In fact, the bond markets are pricing in another cut in April.

Got to give it to the Harper gang. They will have it their way or no way.

#52 Mike Smolski on 01.22.15 at 9:21 pm

Advice needed please!

Just purchased a house ($445k) after making considerable equity on a previous house, wondering if I should put 20%, 30%, or 60% down in these times of uncertainty.

Also, to go variable 5 yr or fixed at 2.99?
Household income of about $140k with no other debts, wife and I aged mid 30’s.

Would really appreciate your guys’ thoughts.

Cheers!

#53 H on 01.22.15 at 9:22 pm

In 2009 OPEC shut off 4 million barrels.

Jan 2009. Price: $30
Jun 2009 Price: $74

Predictions in Jan 2009…”going to $10″
Predictions in Jun 2009..”$250 a barrel easy oil is gone”

Look it up.

And then 81 million barrels a day were consumed.
Today 90 Million consumed with just 1 million over supply.

You want inflation? Rates to normalize? Steam to come out of the housing?

You guessed it. Commodities need to rise. Read Dragis speech if you want evidence how oil effects inflation (deflation in this case)

#54 Marco on 01.22.15 at 9:22 pm

“Well, Zoocasa – one of the online house-porn sites for moist Millennials” – Garth

Man, looks like the realtor zombie apocalypse. Thanks for the laugh.

#55 Smoking Man on 01.22.15 at 9:23 pm

Set my kid up with a Forex trading account. He saw how much I made in the last two weeks.

He use to work for Swift trade till they went under, kids don’t try this with out serious mentorship..

He made 1500 bucks never having more than 500 bucks at play.. After a month, if he’s still profitable, he can bump up to 4 contracts. With all this volatility , in and out fast.

If you want to see screen shot P & L, click on my name. The little bugger Never lost on a single trade.. Using my chase ass technique.

#56 Franco on 01.22.15 at 9:23 pm

Totally agree with #17 – The Patient. As you said yesterday, the BoC is privy to more info than we are. Must be scary stuff happening for them to lower interest rates. This is just a shot in the dark, lets all hope it hits the target.

#57 Obvious Truth on 01.22.15 at 9:26 pm

Markets have clearly been front running the BOJ and ecb for many months now.

Anyone can check out 10 year bunds and treasuries charts. New lows? Utilities may have yelled Kapow!

Canada is of course special because the yield curve is screaming recession. You have to figure the bankers are aware of this.

On the plus side we have a trillion euros finding their way to markets.

Of course nobody knows exactly what will happen. We take the course we feel will benefit us the most. But why would people take on more debt when central banks are handing out trillions? Confusing indeed.

#58 Rainbird on 01.22.15 at 9:26 pm

“when rates normalize.”

This phrase has been repeated countless times without any evidence or proof that it will happen any time soon. What is the point of repeating this phrase? It’s like yelling “fire” too many times. No one is listening any more.

That’s why it will be so exciting. — Garth

#59 Mark on 01.22.15 at 9:27 pm

“Of course rates will eventually go up. A dead clock is right twice a day.”

What sector in the Canadian economy is going to create capacity utilization pressures requiring the BoC to act? Any idea?

Rates can remain low for a very, very long time if/as deflation sets in, and nothing emerges to get the demand side of the economy going again.

Identify the sector that’s going to create the demand, invest accordingly, and you probably can be quite wealthy in the next leg of the long-term economic cycle.

#60 will on 01.22.15 at 9:29 pm

I think Rob Carrick of the G&M said it very well. This should not be seen as an opportunity to take on more debt. It should be seen only as an extension of the window of opportunity to pay off the mortgage. Not an exact quotation but I think that’s close to
what he meant.

#61 jean on 01.22.15 at 9:29 pm

Since last Thursday, seven separate central banks have taken action to guard against deflationary forces now moving like an out of control wildfire around the globe…

http://wallstreetonparade.com/2015/01/seven-central-banks-take-anti-deflationary-actions-in-past-week/

Switzerland, Canada, Denmark, Peru, Turkey, Japan, EU

#62 HD on 01.22.15 at 9:31 pm

@ #30 Shawn Allen on 01.22.15 at 9:10 pm

Text book Game Theory indeed.

Best,

HD

#63 Happy Renting on 01.22.15 at 9:33 pm

At the gym tonight the TV played two things: a Love-It-or-List-It type reality show, and CP24 talking about how the rate cut means it’s time to buy RE. Yuck to both!

#64 Alex on 01.22.15 at 9:34 pm

You do realize that the people bidding for the $850k or $1M or even $1.5M+ homes (perhaps overpaying) are the same ones that are selling their homes (to buy those) with significant crazy gains !! The majority of those buyers have more than the conventional 20% down due to the equity growth in their previous home AND the smart ones are locking in for 5 years making a substantial dent in their mortgage during that time.

We are blessed in Ontario that the problems in Albert don’t (for the most part) carry over to us. My family left Edmonton Alberta and moved to Ontario in the early 80’s for the same reason people will do it this time – saw this coming from a mile away because I have already lived it. The bright spot is that more businesses in Ontario benefit from a falling loonie than the opposite. When our dollar gained years back, my fathers business all but dried up and those lucky enough were able to reinvent themselves and have basically been on life support since – you realize very quickly that Canada is a small market. I read a lot of doom and gloom and perhaps for some, unfortunately, it may be so … But there is a large contingent of Canadians that have made excellent financial decisions and used their ability to borrow to secure their future … Cheers to those !!
I will still sensibly invest in an income producing property before I ever put a $1 in stocks, but that’s just me.

Good, because a one-asset strategy for most people ends in tears. — Garth

#65 harden on 01.22.15 at 9:35 pm

Real estate is local as you say. In Van with tanking dollar, here’s to more HAM

Yes, Canada looks so robust. Who wouldn’t want a $700K condo in Yaletown> — Garth

#66 Nomad on 01.22.15 at 9:36 pm

Watch the president of HomeCapital canadian lender talk on BNN today. He says that they will not drop their rates by much. Makes sense, they want to make that extra money on the margin.

http://www.bnn.ca/Video/player.aspx?vid=536379

I hope the big banks do the same. Their stocks took a beating and investors would welcome a decision to keep the VRM the same so we get better earnings.

#67 Tommydouglas on 01.22.15 at 9:37 pm

Well I was a coward again today. [email protected] persuaded me to stay in mutual funds for my matched workplace contribution. At least I am in a diversified fund this time. Also let me know it was a great time to get in to the housing market with the rate cut. Sigh.

#68 B Riding Dirty on 01.22.15 at 9:38 pm

Can someone tell me about the petrol dollar war???

#69 ANON on 01.22.15 at 9:40 pm

#47 RayofLight on 01.22.15 at 9:20 pm
The King of Saudi Arabia, the one that started the oil price wars, died to-day (GBHS). There is a real possibility the new heir to the thrown will reverse this policy and adjust production to support oil prices. I will look for this, and if so, rotate into oil companies /drillers etc. in a heartbeat!

======
Excellent plan! However, look a bit into solvent customers to support those prices before spinning too fast. %-}

#70 BallsofSteel on 01.22.15 at 9:42 pm

Talk about The confusers, I click on 60 comments and up comes:
“0 comments ↓

There are no comments yet…Kick things off by filling out the form below.”

Where have they all gone? You’ve lost them GT.

#71 Retired Boomer - WI on 01.22.15 at 9:46 pm

Interesting (and yet strangely unsettling) day in the market. Nice market ‘pop’ erased all that RED for the new year and left a used Kia’s worth of profit.

Still unsettling though.

The northern neighbors are doing weird things, but on a small scale-thus far. Not sure what to think. Big Oil numbers still too low for long term reality.

Let’s not make any false moves said the Bankster.

Gotta move some of this to SAFER stuff…

#72 Craig on 01.22.15 at 9:47 pm

Re: #18 Ray Vasquez…. I’ve got an even better scam than that. Today I received a a letter in the mail from TD VISA indicating that that cash advances ( sorry but I have a line of credit that I will probably never need) will be charged a rate of 27.99% when minimum payment is not made within 30 days. If I was ever that desperate for cash I could get a better rate down the street at Nunzio’s Knuckle Joint than these bozo’s are charging ! Outright extortion if you ask me.

#73 S Harper on 01.22.15 at 9:47 pm

Garth not everything is about houses. Sell some of your stocks and buy a clue.
Thanks,
Stephen

#74 Country Girl on 01.22.15 at 9:49 pm

Banks will likely wait until spring and then offer a new lower interest rate to increase mortgage sales during the spring real estate season.

#75 JSS on 01.22.15 at 9:51 pm

Big day for the Canadian banks yesterday, and good news for their shareholders (assuming banks don’t pass the .25pct increase to their customers)

If you can’t beat em then join em.
Become a Canadian bank shareholder. They’re still on sale.

#76 Landslide Victory on 01.22.15 at 9:51 pm

Welcome to your new office Prime Minister Mulcair.

#77 Yitzhak Rabin on 01.22.15 at 9:52 pm

“And while bond prices have spiked and yields dropped over recent months as investors sought safety”

I think you should replace the “investors sought safety” part with:

Front-ran a risk free bond speculation trade on margin as incompetent central banks desperately print money by buying worthless “assets” to delay the inevitable collapse of the global banking and financial system.

I read here though, that they had everything under control so who knows.

#78 sydcixel on 01.22.15 at 9:53 pm

The independence of central banks is a myth.

http://www.economist.com/blogs/freeexchange/2012/05/americas-economy-0

#79 Fiendish thingy on 01.22.15 at 9:53 pm

This RE market may have 9 lives, but it will eventually suffer 9 deaths.

#80 Mark on 01.22.15 at 9:53 pm

“Today I received a a letter in the mail from TD VISA indicating that that cash advances ( sorry but I have a line of credit that I will probably never need) will be charged a rate of 27.99% when minimum payment is not made within 30 days.”

Its all about elevating TD’s claims in the inevitable bankruptcy of someone who is in credit card debt. And/or punishing those who have the money but are dumb enough/not organized enough to make their prescribed payment in full.

#81 Nemesis on 01.22.15 at 9:54 pm

#”That’sNotARateCut”… #”That’sARateCut”… #”JustCentralBankersHavingFun,YouAllRight?”…

http://youtu.be/_vW54lAtldI

#82 Fuzzy Camel on 01.22.15 at 9:54 pm

It seems we can keep borrowing and spending until our currency resembles Zimbabwe’s. Question is, who the hell is buying our bonds??? I wouldn’t be buying Canadian bonds @0.75% and inflation of 10%+/year.

Garth, fill me in my good sir, who is the fool buying our bonds??

#83 Happy Renting on 01.22.15 at 9:55 pm

#68 BallsofSteel on 01.22.15 at 9:42 pm

Just refresh your web page.

#84 My Life is a Pile of Shit on 01.22.15 at 9:56 pm

@ #21 Steve-0

“Up 4.6% so far this year (in CAD $), mostly because of the sinking Loonie has been making my US equities do extra nice. Thanks for the good advice Garth!”

You could have done better had you disregarded Garth’s advice and held nothing but USD, which appreciated 6.5% YTD (relative to CAD). All your gains are from USD; your US equities are a drag on performance.

Still love your name. — Garth

#85 Piccaso on 01.22.15 at 9:57 pm

So my rich land lady is replacing all the windows and frames in her $800K house.

The house might be 10 years old max, I wonder what that is costing?

#86 Happy Renting on 01.22.15 at 10:00 pm

Hey Mark, does this mean we’re closer to realizing the “enormous plethora of consumptive power ahead of [me] in the future”?

#87 Joaquin on 01.22.15 at 10:01 pm

If all this results in Justin Truedumb not winning the next election, I’m 100% for it.

#88 José on 01.22.15 at 10:03 pm

#23 “The BoC had not moved then.” — Garth
—————–
No, they were just threatening to cut.

#89 Smoking Man on 01.22.15 at 10:07 pm

You guys can debate whats wrong or right with the economy, bla bla, bla.

State servalliance, false flag gallore why…

85 families have more than 50% of the world’s wealth. And they want to keep it that way.. Wouldn’t you..

The Herd has been dummied down by school as per plan..

The 85 have a choice, feed us all, or kill us all. Cause my PhD in herdonomics says the hungry herd, in spite of being spyed on will find creative ways to communicate, then come for the heads.

Terrorists, are a smoke screen, they are afraid of you basement dwellers waking up. And they want to know when you do. Hell I’m the list.

That’s why my money is on thermo nuke war..

Quick and easy when you buggers get out of hand.

#90 RayofLight on 01.22.15 at 10:11 pm

# 67 ANON.

The center of the frack drilling activity is the sand producers. The best in class for the frack sand producers is US Silica (SLCA.N). IF you are drilling for either oil or gas, you need high quality sand (compression strength and good porosity), and you need it delivered in quantity, economically. SLCA.N is your “go to” equity once you feel the “drillers are back”

#91 Bill Gable on 01.22.15 at 10:13 pm

This move is pure Politics – and a desperate Hail Mary by Harper – as he watches the Economy implode.
The parallels to the Thirties and other well documented economic disasters, are stunning.
What a mess – and this all makes me really queasy.

#92 gladiator on 01.22.15 at 10:14 pm

I think it is now perfectly clear that this move is a purely political one: keep the party going till election time, and let Joe Blow deal with the hangover, because politicians will surely be able to avoid it. September is when the show will start. Strong Spring market I tell ya.

#93 Nomad on 01.22.15 at 10:15 pm

1- Every investor out there was hating REITS.
REIT are right now pushing against 52-week highs and pay 4.5 to 8% dividends.

2 – Investors and analysts where hating US banks.
Today BMO’s ZUB US Banks ETF is +4%.

3- Investors and analysts out there was hating gold.
Goldcorp went from 20 dollars to 29 dollars a share in 30 days.

Nothing is predictable.
Own EVERYTHING.
And buy it when it overshoots downwards.

#94 east van on 01.22.15 at 10:19 pm

The median house price in Sydney is C$844,000 while the median income is $67,000. Ouch. Anything actually habitable is above a million.

So more than half the houses in Sydney are uninhabitable???

By East Van standards. — Garth

#95 Leo Tolstoy on 01.22.15 at 10:22 pm

It doesn’t matter if mortgage rates go down further. They’re already scraping the bottom of the barrel.

The point is, potential homebuyers were scared. No more. Poloz and the BoC have emboldened them. Now with the removal of fear, home buying and home prices will continue to ratchet higher.

Sorry to all the posters who are Debbie Downers on real estate. And also to those who also think the USD will decline. Sad year for all of you.

#96 screwed on 01.22.15 at 10:28 pm

#64 @ Normad

I hope the big banks do the same. Their stocks took a beating and investors would welcome a decision to keep the VRM the same so we get better earnings.

***************

A big fat “insert here” from all the holders of VRMs

Why should we part with our hard earned incomes to support your bank’s bottom line?

What has your bank ever done for me?

I’m drawing a line in the sand here. If the banks are not passing this on to holders of VRMs or CLs, I’m done here.

Sell, liquidate and Au Revoir Canada and Canada’s banks. I’d have to be hit with a 2×4 sideways and upside down if I stayed here anylonger.

#97 Smoking Man on 01.22.15 at 10:32 pm

#93 Leo Tolstoy on 01.22.15 at 10:22 pm
It doesn’t matter if mortgage rates go down further. They’re already scraping the bottom of the barrel.

The point is, potential homebuyers were scared. No more. Poloz and the BoC have emboldened them. Now with the removal of fear, home buying and home prices will continue to ratchet higher.

Sorry to all the posters who are Debbie Downers on real estate. And also to those who also think the USD will decline. Sad year for all of you.

………

I’m impressed, you understand the herd, I’m also impressed with the Debbie downers, they’re awake, just not enough to influence change.

Stupid is the hardest thing to change. But like all good poker players. It’s not the Cards that wins, it’s playing the player that wins every time..

#98 Lukas on 01.22.15 at 10:33 pm

I think the signal that the BOC sends is more important than whether or not the big banks will follow suit and drop their lending rates. Many were expecting a rate increase this year. Looks like we are going to stay put for a while. This should have a positive impact on the housing market.

#99 palebird on 01.22.15 at 10:34 pm

#37 Mark

And just how are the Americans going to devalue the USD ?? With 1 trillion going into Euroland there is going to be a lot of “smart” money running from that and straight into the US market. The USD is king of the poophill, still, and there is nothing they can do about it. Look out below. Everything is relative and the Canadian $ is going to be plumbing some lows against the USD in the next year or two.

#100 Mark on 01.22.15 at 10:35 pm

“It seems we can keep borrowing and spending until our currency resembles Zimbabwe’s. Question is, who the hell is buying our bonds??? I wouldn’t be buying Canadian bonds @0.75% and inflation of 10%+/year.”

Canadians are buying the bonds. They’re trying to repay debt, which is basically the same as buying bonds, a trend that is certain to accelerate as the economy continues into the crapper. We aren’t anything like Zimbabwe because Canada chronically produces more than it consumes. And inflation is practically non-existent in Canada, not 10% as you claim.

#101 Marco on 01.22.15 at 10:36 pm

@ S Harper

Stephen if it’s not all about houses (and oil) then raise rates already and stop this debt binge.
Thanks,
A citizen

#102 Ret on 01.22.15 at 10:36 pm

#32 “No more Toyotas for you, Mr. Canadian consumer.”
The Corolla, a Lexus suv, and the Rav-4 are made in Canada. Granted they are probably not 100% Canadian content.

The Canadian plant was a factor in our 2014 Rav-4 purchase. With the CDN/USD currency swing, our vehicle is probably cheaper here now than in the US even with the outrageous Canadian freight charge added.

This may be the time to buy before auto makers and Harley-Davidson reset list prices. If a vehicle is worth for 20% more in USD than in CDN, what do you think will happen to MSRP’s?

What will a .75 cent CDN look like? It won’t be dancing in the streets, I can assure you.

The vehicle could be made in Slovakia or Mexico with parts from China. No one cares. US pricing sets our pricing. We’ll just see how long the love affair lasts with the .80 CDN.

#103 Sideshow Rob on 01.22.15 at 10:37 pm

#47
Zero chance of that.A possible $1.00 pop tomorrow in sympathy. Then back the regularly scheduled programming. ie: oil price drop

#104 Mark on 01.22.15 at 10:40 pm

“Why should we part with our hard earned incomes to support your bank’s bottom line?
What has your bank ever done for me?

The bank provided you a service you deemed to be valuable. That is, provided you with the ability to consume in the present with money you did not already have. Lending spreads have been abnormally low for much of the past decade or two. Now they are trending closer to normal, and probably will overshoot to be above normal.

Did home owners/borrowers really think they could use someone else’s money (the bank’s) to create a windfall for themselves by merely owning an inanimate object, to wit: a house? Lol, that’s a good one. Banks are in business for the win, they’re not charities set up to hand out un-earned capital gains to those who borrow from them.

#105 Mark on 01.22.15 at 10:42 pm

“Hey Mark, does this mean we’re closer to realizing the “enormous plethora of consumptive power ahead of [me] in the future”?”

Houses are going down in price by the day as the economy spirals into the toilet bowl. Stocks, well, up. So just keep at it, follow the advice of a balanced portfolio, and history is definitely on your side.

#106 TurnerNation on 01.22.15 at 10:45 pm

Apparently Justin T. Is at Shangrila now. Will check it out.

#107 chirag on 01.22.15 at 10:45 pm

Weaker CAD = cheaper Canadian homes for foreign buyers. So not only will the rate cut boost domestic buyers, foreign buyers have just got a 15% discount from 6 months ago to buy Canadian houses. Inevitable that house prices will be higher this year.

#108 Market Man on 01.22.15 at 10:45 pm

Don’t forget that CHMC announced that it was increasing
It’s fees April 1st adding to the cost of a mortgage. The fee for mortgages with a five-year maturity will rise from 0.2 per cent to 0.6 per cent.

And let’s not rule out more changes to the program

#109 screwed on 01.22.15 at 10:47 pm

#101 @ Mark

Who says anything about charity? I signed a contract, I make my payments. For 4 years I’m being told that rates could go up any minute and for 4 years I was anxious that one day, maybe my business would fail and rates could go up and the family would lose the house.

4 effen years. Now there’s rate drop and you’re coming here telling me I should give a care? 4 years of billions of profits, one record after another and all on the backs of millions of Canadians working hard and “supporting” their nice banks with their debt payments.

No, sorry dude. Now it’s payback time. The banks can bleed a little. The economy is tougher and you have no idea what this year has in store for all of Canada.

First one out, wins. Last one standing, turn off the lights.

You can have your bank shares and stuff it.

#110 Rexx Rock on 01.22.15 at 10:47 pm

Great news today that the EU will print 1 trillion dollars over the next 2 years.We need to keep the stock market rally to last for the next US election.Its funny I watched the state of the union speech and Obama didn’t mention once about paying down the 18 trillion dollars in debt.Its to bad Canada can’t print a trillion dollars to stimulate our economy and stock market.
Qe and 0 % interest rates forever,its what the central bankers want for their citizens.

#111 dienekes on 01.22.15 at 10:48 pm

Did the BOC reduce the overnight to create a larger margin for the banks to allow them to capitalize themselves for the impending financial armageddon decending upon us?

#112 Mark on 01.22.15 at 10:48 pm

“And just how are the Americans going to devalue the USD ?? With 1 trillion going into Euroland there is going to be a lot of “smart” money running from that and straight into the US market.”

In 1933, devaluation was accomplished by tinkering with the redeemability of US dollars into gold. Today, policy makers could either use helicopter drops of fiat money, or simply bring many of the so-called ‘off-balance sheet’ liabilities of the US government onto the balance sheet explicitly.

Bearishness towards the CAD$ is far too universal at this point, and such is usually a recipe for a very strong reversal. Canada’s long-term structural trade surpluses, and extreme levels of consumer indebtedness imply quite significant deflation (ie: truncation of consumer demand), which is quite fundamentally positive for the currency. At some point a bottom will be reached, and up, up and away we go back towards fundamentals (which is significantly over par).

#113 tkid on 01.22.15 at 10:51 pm

#48 RayofLight,

The former king was on life support, the new king reportedly has dementia. It makes it sound like there is a power(s) behind the throne. Look for a much younger man if you want to find the one who wants oil prices driven into the ground.

#114 No Canada, No on 01.22.15 at 10:53 pm

Move to US 2 weeks ago to US.

Got an offer I couldn’t refuse.
Renting 2br house for 1650 with everything almost brand new. Commute is 20 min on the car, 30 min on the train. This is Philly, PA. Prices for everything seems cheaper by 1/4, at least.

What I quickly learned and what amazed me is that americans don’t give a damn about Canada. I even heard few times “Toronto, where is that?”.

They even barely heard about Canadian housing bubble, yukies – the last pride of Canada means nothing here.

4bd on 0.3 acres with swimming pool is 500k – that in neighbourhood where police arrives in 4 min if you park a van (checked myself, was driving to buy a kitchen table). If you buy a house for 1 mln – it means you’re a millionaire living in a million dollars house :)

Canada now is on its own with condo-economy, angry bankers and citizens that completely lost their mind.

#115 ANON on 01.22.15 at 10:53 pm

#88 RayofLight on 01.22.15 at 10:11 pm
# 67 ANON.
The center of the frack drilling activity is the sand producers. The best in class for the frack sand producers is US Silica (SLCA.N). IF you are drilling for either oil or gas, you need high quality sand (compression strength and good porosity), and you need it delivered in quantity, economically. SLCA.N is your “go to” equity once you feel the “drillers are back”

=====
Roger that!
I was wondering more about the high quality consumers (i.e. with access to credit) falling over themselves to burn that pricier oil, but I’m always keeping an opened mind on porosity and compression.
Never played on the markets, I’m simply fascinated about taking the social pulse (and trolling a bit for reactions) of those aware something is wrong in these quite unprecedented times, but thank you for the SLCA.N tip anyway.

#116 Mukadi on 01.22.15 at 10:54 pm

And in less than a week the exchange rate went from

CAD 1.15/ USD 1.00 to CAD 1.24 / 1.0 USD.

As Nostradamus told me last week, it’s going to be CAD 1.35/ 1.0 USD by the year end..

#117 Mark on 01.22.15 at 10:56 pm

4 effen years. Now there’s rate drop and you’re coming here telling me I should give a care? 4 years of billions of profits, one record after another and all on the backs of millions of Canadians working hard and “supporting” their nice banks with their debt payments.”

While I have sympathy for your individual predicament, here's the math. Canada's banks are roughly 15X leveraged. That is, they have 15X more assets than they have equity.

The typical Canadian new house buyer a decade ago bought on roughly 15X leverage, ie: they put 7.5% down and bought a house.

Bank stocks have, over the decade, roughly doubled. In fact, RBC went up 107% over the past 10 years. A 100% return.

How well did the person who borrowed to buy in a decade ago do? Well house prices doubled. Their 7.5% equity became 57.5% equity, for a total return of 666%.

So homeowners have outperformed banks, in price return, approximately 666% to 100%.

In light of such under-performance, why shouldn't it be "payback time" for the banks? Are bank shareholders somehow less worthy of seeing good returns on their investment, than leveraged homeowners?

"billions of profits" is entirely subjective, and is a matter of how much $$$ was invested up-front. And the evidence is, Canadian banks, compared to Canadian RE investors, have seen very poor return on equity.

#118 Smoking Man on 01.22.15 at 10:56 pm

#110 dienekes on 01.22.15 at 10:48 pm
Did the BOC reduce the overnight to create a larger margin for the banks to allow them to capitalize themselves for the impending financial armageddon decending upon us?

Relax, bankers are playing nice with each other right now, but as they tallie up the first quarter, and the dandy lions grow, the Bank that did the worced will be the first to drop their pants. The others will text each other and go.. Do you believe what that bastard did..

Then, Mortgage wars… Just watch..

After all, it’s a game of bounce… And who wife gets to passively brag about who has the best cottage in Maskoka..

It’s coming, thank the wives..

good Night dogs,

#119 devore on 01.22.15 at 11:01 pm

#18 Ray Vasquez

You want to talk about a scam, Royal Bank is paying only 1.65% for a 5 year GIC.

Others are paying 2.85%, 2.95%, 3.00%, 3.09%, 3.10%.

How is that a scam? Just go to where they pay you 3.10%

#120 Jim Bentein on 01.22.15 at 11:03 pm

“Waterloo resident” gets it, but his view is a little too stark for my liking. But, clearly, the BOC move is madness. Yes it will help some exporters (including crude oil producers who pay their employees and for many services in Canuck dollars and sell their crude for U.S. dollars). But, as he points out, every Canadian consumer will be hurt, since virtually everything they use is imported. Wait for the next trip to the grocery store. Also, you might want to reconsider that vacation to Disneyland. Well, as luck would have it, I have just the cure. Move to Mexico. Then you’ll be on a permanent vacation. That’s where my wife and I live. We’re in Mazatlan, which is on the same ocean as Vancouver and Victoria. But condos here cost $150,000 and newish houses about the same. Our property taxes, for a 10 year old house are $85 Canadian a year. It’s safe cause it’s a tourist city and it’s policed up the ying yang. And the fruits and veggies aren’t imported. Oh, and even though the Canuck dollar has tanked relative to the U.S. dollar, it has only dipped slightly relative to the Mexican peso. And believe me, it still buys a lot more here than it would in the U.S.
You also should have long ago moved your savings into U.S. dollars, preferably in the form of blue chip stocks, but that’s another subject.
Good luck.

#121 Freedom First on 01.22.15 at 11:08 pm

Currency wars. Oil. Geopolitics. World Unemployment crisis growing. World financial insanity.

Now, my Alberta ear to the ground report: Albertan’s are now aware of the number of people laid off the last 2 months only because the unemployed are now visible to them, and many are seeing the slowdowns in their place of work and are nervous. From what I hear, the big big big worry among individual Albertan’s today is caaaassshhhh flow.

#122 TurnerNation on 01.22.15 at 11:09 pm

Yea he’s here. If only I owned cowboy boots. Actually I own only boots – no shoes or laces – euro style boots natch. Like 8 pairs.

#123 Coastal Cruiser on 01.22.15 at 11:16 pm

I work for the BC Provincial Government and part of my job is logging inspections. Here on southern Vancouver Island logging operations have slowed down significantly. 1 contractor in my hometown just had its workweek reduced to 4 days. Chinese log exports are down and export prices are down at least 20%. About 50% of Old Growth logging trucks are of the road. The only thing that’s doing well is cedar shingles and lumber shipped to the US which is going crazy.

#124 devore on 01.22.15 at 11:17 pm

#109 screwed

Who says anything about charity? I signed a contract, I make my payments. For 4 years I’m being told that rates could go up any minute and for 4 years I was anxious that one day, maybe my business would fail and rates could go up and the family would lose the house.

That’s what fixed rate mortgages are for. Why are you getting a variable rate mortgage, and then complaining the rates are variable?

#125 Craig76er on 01.22.15 at 11:23 pm

I’ve just come from my second conversation with a senior banker in the last five days. Both were concerned about the AB situation; the second one, more precisely, about the fly-in jobs disappearing like the last snows of Spring and the effect that would have not just in AB but in other provinces. As various blog dogs have said, the BoC has seen the forward numbers and know what’s coming next. Hang on tight…

#126 Bob on 01.22.15 at 11:27 pm

@ freedom first….you’ve hit the nail on the head. I wasn’t in Alberta for 08/09 but I’ve never met so many freshly laid off people in my life. I filled up for 65.9 today and it just put another nail in the coffin of consumer confidence.

#127 Alan Dershowitz on 01.22.15 at 11:29 pm

In the works for later this year: A Canadian QE round. The Canadian dollar will tank all the way back to 1.55C$ to the US$ by 2016, as it was some 15 years ago. Mark my words!

Alan “dirty old liar” Dershowitz

#128 Alex on 01.22.15 at 11:34 pm

Garth,
There is real estate, then there is REAL Estate … I don’t buy in GTA and anyone analyzing “the numbers” won’t either … Same goes for Vancouver, Calgary and the like. If you are into buying condos, ANYWHERE, then I am sure I can find some florida swamp land you may be interested in. I don’t buy commercial or industrial as those vacancy rates are tied to the state of the ecomony, making most of your points very worrisome … I only invest in multi-units homes and multi residential apartment buildings for several reasons … I am (of the most part) subject to lower interest rates (particularly multi unit homes as I lock them in at 2.89% for 5 years) … When economy goes in the dumps there is more demand for rentals … Cashflow is generally guaranteed as risk of loss of cashflow is spread over many units. People always need a place to live and I have a great mix (intentionally) of 1, 2 and 3 bedroom residential units (lower end to mid range)
If you look at my comment #124 in the previous article you posted, it demonstrates my ROI – those are REAL numbers! Now I agree that one is a home run, but I analyze every last unit/property and my lowest ROI is 13.15% cash on cash invested – this does not include equity build via mortgage pay-down OR value appreciation. like I said before, If I have a 36 unit low-rise building Netting $120,000 cashflow annually after mortgage payments (prin+int) what do I really care what it’s worth this year or next or after than … Currently worth $2.2mil, how does my life change if appraisers tell me value fell to $1.8mil ? Same cashflow – if mortgage is up and rate is higher? Well then net cashflow after mortgage payment may decrease by $24-30k annually??? Does this mean I have to trade in my Bentley Mulsanne for a Bentley GT??? Oh dear, how embarrassing would that be.
Long story short … There is no “balanced” portfolio that anyone can show me that has built the type of wealth my “single asset” portfolio has built for me in the last 4 years. Respectfully.

I enjoy your blog very much, but I think it’s very relevant for insanely debt ridden followers, not all live that way … As I said before – there is another side – and it’s freakin awesome. If the drop in interest rates had life changing benefits to you and your financial situation, then there truly is no hope for you.
Alex
“The Monopoly Man”

#129 Herf on 01.22.15 at 11:39 pm

#91 Bill Gable
“This move is pure Politics – and a desperate Hail Mary by Harper – as he watches the Economy implode.”

I think you’ve nailed it. I think with the possibility (probability?) of economic chaos about to erupt in Alberta because of depressed oil prices, the Cons are trying to reignite the economic fire in Ontario by dropping interest rates on mortgages, which is helping to sink the C$ in the process. Not that it will help much or very soon, if at all (with the major loss of manufacturers in Ontario over the past decade, what’s left to light?). But with an election forthcoming this year, Harpo can then ballyhoo about his party being the “only creditable, sound managers of the economy”, blah, blah, blah, while grasping at the hope that somehow, the Ontario economy reignites somewhat, thus hopefully swinging votes his party’s way. If the Ontario economy happens to pick up steam before the election, so much the better.

In other words, the Cons are trying to win/keep Ontario (maybe even make gains in Quebec) while hoping Alberta voters (their main support base) still remain onside. They’re perhaps hoping oil prices spike up before the election, but if not, by keeping low-information, house-horny, heavily indebted voters fat, dumb and happy with the drop in mortgage rates, the Cons hope to win on all fronts. All politics.

#130 Alan Dershowitz on 01.22.15 at 11:40 pm

#82, “fill me in my good sir, who is the fool buying our bonds??”

It is the Canadian treasury, at artificially low rates. Later this year, with a mega-round of hone-made QE, more to follow. Gotta love our govt!

#131 Rob on 01.22.15 at 11:42 pm

The housing market will collapse after the election. The canadian government will not let the housing market collapse before then. The BOC knows that the middle class is fucked with all there money in their house. If the housing market fell, the middle
Class will be wiped out.

#132 batt519 on 01.22.15 at 11:47 pm

This should be your nightly news broadcast….

https://www.youtube.com/watch?v=6ebyQ8jov5Q

Regards.

#133 Strathcona on 01.22.15 at 11:48 pm

Garth,

I’m a big fan of yours, but starting to lose faith. This latest BOC move, as well as similar moves by other central banks, proves your thesis of deflation was correct.

In real terms, property keeps staying high, even if prices here have fallen a bit here in Edmonton. Most new listings are now 30K less than they were in the fall here.

My point is, the bond market has been buying bonds at a low yield, at a high price for the last decade. If you’re worried about a zombie apocalypse, check the bond market for a pulse; you won’t find one.

Even Russia annexing another country, and bringing their bond yields over 17 percent, oil below $50, can’t unhinge this property market.

#134 Washed Up Lawyer on 01.22.15 at 11:49 pm

Garth has warned us for many years about a one asset strategy. I have been curious for a few months about the continued construction of the Fort Hills oil sands mine.

Teck has one asset. Commodities. Coal is down. Copper is down. Oil is down. Maybe it is a good time to build another mine with lower labour and materials costs.

Shell has placed the Pierre River mine on the shelf. Total has placed the Joslyn North mine on the shelf.

Contrarians I guess.

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/threat-to-ceo-as-teck-resources-battles-against-plummeting-industry/article22594174/

#135 screwed on 01.22.15 at 11:50 pm

#117 @ Mark

What you fail to mention is that the loans were written with money from “thin air”. You mention that 15x leverage. It is book money to them. They don’t owe this money back to anyone. If borrowers had defaulted they would have used CMHC or in my case, just written it off.

The borrowers took the risk of buying the house and leveraging up. Nobody can predict the future. Banks eager to lend it out.

Sorry, but your logic fails to impress me.

The banks owe us.

Regardless of what will happen though, I’m cashing in.

#136 Renter's Revenge! on 01.23.15 at 12:02 am

#117 Mark:

Good response to “#109 screwed”, but it’s futile. Screwed’s comment exemplifies the typical Canadian passive-aggressive attitude of someone who doesn’t have the self-esteem to do what it takes to succeed in life, and can’t stand see others do so. They’re the “schooled” that Smoking Man is always talking about…

#137 Observer on 01.23.15 at 12:02 am

So the average urban working stiff will pay a 20% premium on imports so this housing bubble can stay propped up and some guy in Fort Mac can buy a shiny new pickup truck? Are you kidding me? I guess $750.000.00 houses and $150.000.00 salaries aren’t enough when times were good?

#138 Catalyst on 01.23.15 at 12:04 am

The B/A spread moved immediately with the boc move so those businesses utilizing B/A rates on operating facilities or term facilities through swaps saved money. But that won’t help residential R/E…

#139 [email protected] on 01.23.15 at 12:05 am

Thankfully I converted most of my CADs into USDs back in 2008. Thank you Poloz, keep up the idiotic work.

#140 Oil Is Sticky on 01.23.15 at 12:18 am

#38 Mark on 01.22.15 at 9:13 pm
“PREDICTION:

By the end of 2015, our dollar will be worth

.62 US$

Good luck with that. The US will probably be searching for some way to devalue sooner or later as well, as their economy continues to fall off a cliff. Remember, the best opportunities arise when everyone is sitting universally on the other side of the trade. I’ll gladly take the opposite of your ‘prediction’. Since Canadian personal/consumer indebtedness is significantly higher than in the US, we’re due to suffer far more severe deflation here than in the US, and that means a stronger currency.

——-

I Agree

62.5 cent dollar by year end. Mark 2003 was only 12 years ago and things are MUCH worse for Canada now compared to then. Thanks Harpo !!

#141 MinInMission on 01.23.15 at 12:20 am

Awesome read, thanks Garth.
I wish that I was 1/2 as smart as reading this blog makes me think I am.

#142 Ronaldo on 01.23.15 at 12:22 am

#95 Leo Tolstoy –

”Sorry to all the posters who are Debbie Downers on real estate. And also to those who also think the USD will decline. Sad year for all of you.”

It will be a sad year for the buyers this year who fall into the trap. What is so great about being the second most unaffordable country for real estate and going to get more so. You realtors are something else.

#143 Karma on 01.23.15 at 12:29 am

Poll by Bloomberg suggesting “Emerging Markets stocks and currencies are ripe for shorting”. Lol

http://www.bloomberg.com/news/2015-01-21/emerging-markets-currencies-look-ripe-to-short-sell-bloomberg-poll.html

#144 The confusers | Realties.ca on 01.23.15 at 12:30 am

[…] Source: http://www.greaterfool.ca/2015/01/22/the-confusers/ […]

#145 Karma on 01.23.15 at 12:33 am

Traders celebrate the death of King Abdullah of Saudi Arabia by pushing up oil prices.

http://www.bloomberg.com/news/2015-01-22/oil-surges-after-saudi-media-reports-king-abdullah-s-death.html

#146 Shawn Allen on 01.23.15 at 12:35 am

Congratulations to Alex the Landlord

Alex at 128 said:

If you look at my comment #124 in the previous article you posted, it demonstrates my ROI – those are REAL numbers! Now I agree that one is a home run, but I analyze every last unit/property and my lowest ROI is 13.15% cash on cash invested – this does not include equity build via mortgage pay-down OR value appreciation.

****************************************

Alex, my sincere congratulations.

It takes, among other things, self confidence, brains, and guts to do what you have done.
(accumulated and managed 200 “doors” of rental property in 4 years etc.)

Many will say you took on too much risk and debt.

Many will be envious.

Academics will say that what you have done might have worked in practice, but it will never work in theory.

Congratulations.

P.S. I don’t think you post here often … hmmm successful and does not spend all day on the internet, could this be cause and effect… nah…

#147 Karma on 01.23.15 at 12:35 am

As Mark has pointed out several times, creditworthiness is on the minds of bankers. Here’s an article about it…

http://www.businessweek.com/articles/2015-01-21/bankers-to-consumers-beware-the-wealth-gap#r=rss

#148 Oil Is Sticky on 01.23.15 at 12:39 am

#123 Coastal Cruiser on 01.22.15 at 11:16 pm
I work for the BC Provincial Government and part of my job is logging inspections. Here on southern Vancouver Island logging operations have slowed down significantly. 1 contractor in my hometown just had its workweek reduced to 4 days. Chinese log exports are down and export prices are down at least 20%. About 50% of Old Growth logging trucks are of the road. The only thing that’s doing well is cedar shingles and lumber shipped to the US which is going crazy.

—–

Too bad you were not inspecting “finished wood” or “finished steel instruments” or “finished high tech goods” then maybe Canada would not be falling apart. There is this little country holding up the EU called “Germany” that has ZERO resources. Maybe Crusty Clark and Harpo have heard of Germany. But this is Canada so probably not.

#149 Ronaldo on 01.23.15 at 12:47 am

#117 Mark –

”Bank stocks have, over the decade, roughly doubled. In fact, RBC went up 107% over the past 10 years. A 100% return.”

You need to recheck your numbers. RBC was up 225% from its low on Feb. 23/09 and 246% from its low in April of 06. CWB however, which I owned, was up 447% from its low on March 9/09. The other banks did similarly well. Not the 100% you claim. And that does not include the dividends paid in that time.

#150 Marco on 01.23.15 at 12:51 am

@ screwed

Why do the banks owe you? Why does every Canadian feel they have to own a house? Like its a birthright or right of passage. There is another option you can rent. I know in this country it is frowned upon, but in countries like Germany and Switzerland it’s the
norm. And now you are cashing out and probably going to make a profit so why are you crying about the big bad banks for? Meanwhile savers and the regular Joe are going to be paying for this debt binge of entitlement till the next election.
Cheers.

#151 Karl hungus on 01.23.15 at 12:55 am

Mark, the capacity utilization rate is higher now then it was in 2007, inflation is coming big time

#152 Andrew Woburn on 01.23.15 at 12:56 am

#4 Mark on 01.22.15 at 8:42 pm

Not to mention, there’s been a $5.1B default at Target, which is certain to hit the company’s creditors, including REITs, fairly hard. Any value left in the organization will probably end up in the hands of the DIP financiers.
———————-

I can’t dispute the impact of this default on many Canadian businesses but I did a quick and dirty sort of the creditors’ list you posted. Over $3 billion of the default was to the parent, Target US. Many of the creditors are foreign suppliers which softens the direct impact on the Canadian economy. The point is that, while the damage is bad enough, it is not a $5 billion direct hit on Canada.

Apart from the parent company, the losses exceeding $5 million consist of:

Canada Revenue Agency 12,036,613
CARAT CANADA 9,398,189
CPP INVESTMENT BOARD 8,372,934
Revenu Quebec 6,529,066
GLENTEL INC. 5,866,013
SOLUTIONS 2 GO INC. 5,051,846

Carat Canada is a media company, Glentel, a communications hardware provider and Solutions 2 Go is a distributor of video games. Carat and Glentel are multinationals who can probably take the hit. Solutions 2 Go is a Vancouver based national. Lets hope they squirreled away enough nuts to last through this financial winter. That said there are many smaller amounts owing to Canadian businesses for whom the losses will be either painful or catastrophic. Unfortunately there will be more jobs lost than those of Target employees.

Years ago I worked with a very successful credit manager, a surprisingly warm and friendly man. I asked him for his secret. He said he started cranking up the collection machinery three days after the first missed payment. He said defaults don’t improve with age. You can always keep talking but the faster you can move when you need to, the better the chance of collecting what’s there to get.

The other thought that occurs is that, if the directors of Target were personally liable to pay even only 1% of the default, would they have ever begun this project?

#153 Ronaldo on 01.23.15 at 1:11 am

#125 Craig76er –

”As various blog dogs have said, the BoC has seen the forward numbers and know what’s coming next. Hang on tight…”

You got that right. And if people thought the recent move by the Swiss Bank was something, just wait until the U.S. makes the next move.

#154 HAM is real in Vanity on 01.23.15 at 1:13 am

Just like most of you wouldn’t believe in a rate cut, most of you don’t believe in HAM.

Come to Vancouver and see to for yourself. The FIRST soon to be Asian majority city outside Asia!

And please with refrain from using the racist card (as Smoking Man says, you have been schooled too much), 我是中国人

#155 I wonder on 01.23.15 at 1:16 am

Or is Poloz an evil genius?

havent read all the comments, but maybe P wanted to
sink the loonie, giving more headroom to rasing the
rate next time.

#156 Ronaldo on 01.23.15 at 1:18 am

#133 Strathcona –

”Even Russia annexing another country, and bringing their bond yields over 17 percent, oil below $50, can’t unhinge this property market.”

All that needs to happen is for CMHC to drop the ceiling on insuring high ratio mortgages down from 1 million to say 750,000 and then watch what happens. Instant drought.

#157 Mark on 01.23.15 at 1:28 am

“What you fail to mention is that the loans were written with money from “thin air”. You mention that 15x leverage. It is book money to them. They don’t owe this money back to anyone. “

That’s not true. Every dime lent out by a Canadian bank was borrowed from either their depositors, the bond market, or their (common/preferred) shareholders. Canadian chartered banks are not in the counterfeiting nor the fraud or forgery businesses.

“The B/A spread moved immediately with the boc move so those businesses utilizing B/A rates on operating facilities or term facilities through swaps saved money”

Precisely. And bank lending to business that creates jobs, which in turn, creates income, is far more fundamentally sound than lending money to consumers directly to consume. What we are seeing is another step in the overall process of rebalancing the cost of credit between consumer borrowers, and business borrowers. Business has, over the past decade, faced an unduly high cost of credit — due to the unduly low cost of credit to consumers, and this has had a negative impact on job creation. The existence of CMHC subprime mortgage insurance, which alchemizes risky subprime mortgage credit, into risk-free government bonds, features prominently into why this occurred. Thankfully our politicians have finally seen the light and are refusing to increase the CMHC subprime mortgage guarantee authority beyond $600B.

#158 Mark on 01.23.15 at 1:33 am

“So the average urban working stiff will pay a 20% premium on imports so this housing bubble can stay propped up and some guy in Fort Mac can buy a shiny new pickup truck? “

I wouldn’t worry about the guys in Fort Mac buying any more shiny new pickup trucks. They’ll be lucky, with all of their debts and deflating housing prices and job prospects up there, even to be putting macaroni and cheese on their plates for dinner after everything is said and done for a while.

Besides, import demand is so weak that its hard to see the exporters even being able to pass on the pricing to the consumers. And transportation costs are falling substantially on account of falling fuel prices. There’s also a good body of evidence to suggest that the CAD$ selling is far, far over-done.

#159 EJ on 01.23.15 at 1:37 am

Those who believe rates will never rise will be in for a big surprise when it does eventually happen. THey won’t be warned of it, and they’ll never see it coming.

I firmly believe that all of these countries with central planning setups (CA, USA, EU, JP, etc) have sealed their own doom with this debt game they got involved in. Now there’s no orderly way out. Any hint of a rate raise “spooks the markets” and they get bullied back into low rates and QE by the very few that are benefiting from the current setup.

They keep hoping that the economy will recover on its own before they raise the rates, but that can’t happen given that it’s being depressed by their very actions. Therefore the status quo will continue right up until an unforeseen event occurs which forces them to raise rates, hard and fast. The resulting devastation will be legendary, and all the wrong people will be blamed.

#160 DisgustMadeMePost on 01.23.15 at 1:47 am

I often pour over the posts/comments on this blog as my bedtime reading..who needs espionage novels?? We have Harper and the BOC. Lots of twists and turns in the world of finance. Weird feeling though… watching from the outside but knowing you might be the victim that gets stabbed in the final chapter!
Well! The actions yesterday left me feeling disgusted and ashamed of the idiots we now have running this country. Irresponsible came to mind. Anything to cover up reality and maintain their cushy jobs!! Gahhhh!!

#161 AngryMan127 on 01.23.15 at 1:52 am

“Canada embraces debt and house lust as its economic salvation”

….ahhhhhhh….GT capitulation. Does this mean it’s the end?

#162 kommykim on 01.23.15 at 1:54 am

RE: #71 Retired Boomer – WI on 01.22.15 at 9:46 pm
Interesting (and yet strangely unsettling) day in the market. Nice market ‘pop’ erased all that RED for the new year and left a used Kia’s worth of profit.

What? You only made $500? ;-)

#163 1% on 01.23.15 at 2:07 am

I want to thank you Garth for guiding me onto a better financial path. I moved 90% of my cash and equities from CAD to USD about a little more than year ago when the loonie was near $0.96. It would take a Canadian sheeple to not see this coming. This morning, the loonie is close to $0.8060, once it breaks past a psychological barrier at 0.79s, it will keep going. Bankers hate to be surprised….

Despite his clear message, I think his critics are too stupid to read in plain english that Garth is not anti-real estate, he’s against a one asset investment strategy. And that only morons subsidise their tenants.

#164 Lillooet, BC on 01.23.15 at 2:33 am

The 1/4% drop in interest rates is pointless.

Instead, they should have raised it by 1/2% to cool off the real estate bubble in the big cities.

#165 Jimmy Sausage on 01.23.15 at 3:12 am

Go to http://www.usdebtclcok.org The US has never tapered. It’s the race to debase as all currencies chase each other to the bottom.
Raise interest rate just 1% in the west & it’s game over. The monetary heroin continues to be injected into the markets at a rapidly increasing pace having less and less of a lasting effect. Stock market will go first triggering the bond market bubble & real estate bubble. Dollar will be a safe haven until all the dumped USD’s come back home causing massive inflation. And gold & silver win the day. The Swiss are preparing the Chinese to have their yen backed by gold. He who holds the gold makes the rules. Always has & always will. But for now, enjoy making money in equities until it turns and then short the market just like Goldman Sachs & all the other Wall street cronies do in suit.

#166 prairie person on 01.23.15 at 3:27 am

there have been comments on the news and in the papers about how lower gasoline prices are going to free up a lot of money. I pulled up my gas bills for the year. I may be exceptional because I don’t commute but my gas bills except for three months in the summer are about sixty dollars a month. I don’t think saving twenty dollars is going to mean I’m rushing out to by a 5,000 TV. Commercials will benefit. Commuters will benefit but most ordinary folk aren’t going to see such a large difference in their monthly bills that they’re going to say, now we can afford to buy X. I think there’s a lot of whistling past the graveyard by the politicians.

#167 Greg on 01.23.15 at 4:10 am

Got a letter from my bank today… dropping line of credit (that i don’t use / didn’t ask for) 2%, down to 5%.
Arent they nice!

#168 Happy Renting on 01.23.15 at 4:12 am

#105 Mark on 01.22.15 at 10:42 pm

Thank you for your response, Mark. I asked because if consumers and businesses get the message that the economy’s in trouble, we may see the kind of amazing deals on “discretionary items” that were available during the GFC. If the same panic rolls around or everyone else is simply scared or tapped out, it will be an incredible time to have cash to spend.

And yeah, portfolio performance the past two days = wow. Sure takes the sting out of general economic worries!

#169 Ontario Moderate on 01.23.15 at 4:34 am

Federal election campaign already started in December. But real estate market was going to crash in February as inventory of unsold properties was quickly rising from September. Because February is the most important and decisive month on the real estate calendar it was imperative to stimulate economy just before start of the real estate season. So, timing was very crucial. It does not mean that crash is avoided. It only means that crash has been moved to a new date after federal election in June. It was supposed to be a soft landing in February as property price increases were to some extent compensated by double digit real inflation running high in the last four years. The prospect of soft landing is now greatly reduced. We going to be another Greece and we are going to have Conservatives for another four years. But it really does not matter much as we don’t have any alternative to current Conservative/Liberal religious system.

#170 jane24 on 01.23.15 at 5:00 am

I agree number 11 how strange it is that macro decisions made way above us can impact on minions like us. You are winning because you just happen to be trading in US$ for NZ$ for a house reno in New Zealand. We are suddenly winning because we are trading in GB£ for euros for a house renovation in Italy. Sometimes you do just get lucky without having done a thing yourself.

Probably justice from God for all the times you try your hardest and lose!!

#171 live within your means on 01.23.15 at 6:05 am

#120 Jim Bentein on 01.22.15 at 11:03 pm

About 15 years ago I followed a blog about people retiring around Lake Chapala in Mexico. Several people from Canada & the US retired there. Considered to be the the best climate in the world & inexpensive at the time. It’s still rated as the best in Mexico. Lots of sites online. At the time we thought about retiring there.

#172 Stan on 01.23.15 at 8:11 am

Just contacted my broker. We bought a house recently (moving out of our rental). They said that they would hnor the drop of .25 VRM as per our agreement. Our rate goes up and down withe BoC rate so I beg to differ with your assertion.

#173 Nobleton Bill on 01.23.15 at 8:20 am

“The cost of those is set in the bond market and then filtered through the major lenders, the banks.”

Can someone please point out which bonds the banks will must follow to assess Fixed rates (5yr/10yr)?

#174 fancy_pants on 01.23.15 at 8:57 am

I keep hearing “when rates normalize”. sure, and if wishes were horses, beggars would ride. Or we can all hold our breath again for 5 years and expect a different result.

#175 pbrasseur on 01.23.15 at 9:00 am

By the end of 2015, our dollar will be worth .62US$ – Apocalypse 2015

Won’t commit myself on the timeline but I’d say yes we are going there.

We live so much more above our means in this country, both at the public level and households, the economy has become a gigantic credit mirage, the correction can be nothing but formidable. Since the CAD is about the only room for maneuver we have left it should be hit pretty hard. In short (unless you own out of border assets) we are poorer than we think!

#176 Jeff in Moose Jaw on 01.23.15 at 9:06 am

Morning Garth
Morning Blog Dogs

Well, the BoC I say central planners of this nation, have lending rates at .75%, so a glass half full would say it can go to 1%. While a glass half empty would say it can go to .50%

What was the world like when lending rates were above emergency level? who financed anything? (being sarcastic).

#177 Bottoms_Up on 01.23.15 at 9:29 am

From RBC’s website (they are clearly making a distinction between the BoC prime rate and ‘their own’ prime):

“Today’s Royal Bank of Canada Prime Rate:
RBC Prime Rate 3.000%”

Interesting too that their posted variable rate is prime+1….meaning 4%. Are they expecting significant inflation?

#178 Tomas on 01.23.15 at 9:52 am

“I think Rob Carrick of the G&M said it very well. This should not be seen as an opportunity to take on more debt. It should be seen only as an extension of the window of opportunity to pay off the mortgage. Not an exact quotation but I think that’s close to
what he meant.”

Can someone explain to me why it would be a good time to pay off the mortgage? With rates so cheap, I would think it’s a good time to dump extra money into stocks and hard assets. Wouldn’t it make more sense to pay extra towards one’s mortgage when rates are higher and you’re trying to lessen future interest payments?

#179 Jeff in Moose Jaw on 01.23.15 at 10:04 am

Here is Peter Schiff talking about Canada and what our central planners just did:

https://www.youtube.com/watch?v=Dtskz6QWMgI

#180 Doug in Thailand on 01.23.15 at 10:05 am

I normally don’t follow this sad blog closely much less comment when on vacation, but when you mentioned Australia I felt the overwhelming urge to comment. From what I’ve heard Australia and New Zealand are also caught up in this housing bubble. After enjoying SCUBA diving here on Koh Tao, I went to a restaurant and struck up a conversation with a Kiwi bloke. We got talking about investing and he insisted that buying property in New Zealand was the ONLY safe investment for the same reasons I’ve read on this blog. I don’t know the market there but it sure sounds like a bubble to me. I couldn’t convince him about the wisdom of caution after a big run up in prices, so we changed the topic of discussion. It seems we Canadians aren’t the only delusional ones!!!!

#181 Daisy Mae on 01.23.15 at 10:06 am

#17 The Patient: “It’s one thing to go on about what’s wrong. Quite another to lead the way out.”

*********************

The feds didn’t listen to Garth re the infamous and ill-fated 40-year amortizations. They’re not going to listen to him now.

#182 Mark on 01.23.15 at 10:16 am

“You need to recheck your numbers. RBC was up 225% from its low on Feb. 23/09 and 246% from its low in April of 06. “

I went to finance.yahoo.com, and checked RY.TO for a 10-year chart.

http://yhoo.it/1yRG5nW

Your numbers aren’t referring to 10 years, they’re referring to other random intervals. And even if we use the numbers you state, the performance of the lenders has sucked compared to the return on leveraged home ownership.

On the topic of dividends, leveraged homeowners received dividends as well (ie: the tax-free dividend of imputed rent), so I ignored such in both instances.

#183 ShawnG in TO on 01.23.15 at 10:25 am

inflation numbers are in. headline number is 1.5% due to lower gas price. but core rate actually increased to 2.2%, and retail sales increased more than expected. once again, the rate cut is a big mistake. looks more like politically motivated.

#184 Mark on 01.23.15 at 10:26 am

Can someone please point out which bonds the banks will must follow to assess Fixed rates (5yr/10yr)?

You’d look at the 5-year GoC and 10-year GoC maturities on the yield curve to price those. However, one thing that is occurring is that the spread against the risk-free bonds is widening as the perception is that housing borrowers are less credit-worthy than they were in the past. The reason for which is obvious — jobs are getting far weaker, the economy is weakening, and equity is melting away due to falling housing prices.

#185 Bottoms_Up on 01.23.15 at 10:27 am

#46 Sheik Yerbouti on 01.22.15 at 9:20 pm
—————————————————–
Yes, $38,000 in sticks, of which $5,000 is tax and $20,000 is mark-up.

The owner probably paid at most $10,000 for those sticks, and they probably cost $2,500 to make (of which probably $500 of material and $2,000/labour/overhead).

So, $500 worth of sticks was stolen.

#186 Smoking Man on 01.23.15 at 10:32 am

#171 live within your means on 01.23.15 at 6:05 am
#120 Jim Bentein on 01.22.15 at 11:03 pm

About 15 years ago I followed a blog about people retiring around Lake Chapala in Mexico. Several people from Canada & the US retired there. Considered to be the the best climate in the world & inexpensive at the time. It’s still rated as the best in Mexico. Lots of sites online. At the time we thought about retiring there.
……..

You do know that, that place is ground zero for almost daily ufo sighting…

#187 Ray Vasquez on 01.23.15 at 10:37 am

To #119 Devore

Scams prey on the those that are not informed plus by them keeping GIC rates much lower than everyone else it lowers the higher paying GIC financial institutions from paying even more.

The elderly and some other Canadians are probably more at risk because they still believe in loyalty with a bank.

#188 Mark on 01.23.15 at 10:41 am

“They said that they would honor the drop of .25 VRM as per our agreement. Our rate goes up and down with the BoC rate so I beg to differ with your assertion.”

Do you have that in writing from the lender in a contract (ie: a mortgage that explicitly refers to the BoC overnight rate, rather than the bank made-up “Prime”), or is it just the mortgage broker making non-binding statements not binding on the actual lender?

#189 Hicksville Alberta on 01.23.15 at 10:43 am

In addition to the actual oilfield layoffs there is also oilfield workers hours for those still on payroll.
There are a whole lot of “employed” people in the patch getting little or no hours at all.
The oilpatch has literally ground to a halt and i believe this will be way worse than the 1980 crash inspired by Trudeau and his henchmen.

The stories i am hearing are truly awe inspiring.

#190 Daisy Mae on 01.23.15 at 10:49 am

#139 Allan: “Thank you Poloz, keep up the idiotic work.”

********************

Poloz was uncomfortable making his announcement because the ‘idiotic’ decision is Harpers’. LOL

#191 Marco on 01.23.15 at 10:51 am

What astounds me is that low interest are looked at as a good time to buy. To be damned with the inflated prices if I can get a 2% mortgage I’m all in. 5% down! Lovin it. Tag on an LOC no worries.
Who wants to be holding an underwater mortgage? Once prices go down there not going back up to these levels. Not in this economic environment. If you bought back between Woodstock and Expo 86 and a bit after you must feel like you are the chosen people. I can see why the boomers are happy. Harper’s electoral base.

#192 Ollie on 01.23.15 at 10:54 am

@Mark: “Every dime lent out by a Canadian bank was borrowed from either their depositors, the bond market, or their (common/preferred) shareholders. Canadian chartered banks are not in the counterfeiting nor the fraud or forgery businesses.”

Very crafty, Mark. It is true but put in a way that is hiding/twisting the general more important truth.

Look up what is the reserve limit in Canada. You would be surprised how “well” we fare: NO MINIMUM RESERVE. The bank has to maintain zero of the deposits available, it can lend out everything.

So, even if you state the truth that the bank lends out only what it has on deposits (liabilities) or has borrowed (liabilities also), the trick is that when it lends it out it also maintains the available amount as initial, effectively creating the lend out money out of thin air in the general market environment.

Here is an example for everyone else, because I am sure you know very well what is happening.

The central bank creates $100. It does this truly out of thin air and these money are different… you could say this is the only case when where money smell. They inject this 100 bucks in the system somehow. Maybe they buy bonds. (So they are not left empty handed after all the effort of printing a 100 bucks, ha ha). This $100 bucks lands in a private bank as capital. They can lend out 100 minus the minimum reserve, which in a half decent economy would be 10%. So they can lend out 90 bucks. In Canada they can lend out the whole 100… who cares, let it rip. Now these 90 or 100 bucks loan get used by whoever took out the loan and does something with them. maybe buy a house. So this 100 bucks ends up in someone else’s hands, consider it one person for simplicity. This new owner of the 100 bucks goes and deposits it in the private bank, same bank for simplicity. Now the bank has 200 deposits, or 190 deposits. Ta-daaaa! How come? Now the new 100 or 90 can be lent out also. Let’s say we’re half civilized (not Canada) and it’s 90. Now this hypothetical country has a total of 190 bucks, interest bearing, payable to the hard working bank, and it’s on the verge of getting 271 bucks by lending out 81, or 300 bucks in the case of Canada. There you go!
Now the private bank is collecting let’s say 5% interest on 200 bucks and its risk is zero, courtesy of CHMC. That’s equivalent to collecting 10% on the “true” 100 “smelly” bucks created officially. Do this again and again… In a non-zero minimum reserve banking you have a mathematical limit to which the annual gains can go.

Anyway, you must just love to be a banker.

#193 Ret on 01.23.15 at 10:56 am

A currency devaluation presented to the sheeple as a rate cut that strangely, will result in no rate cuts. The banks had to be in on this.

#194 Mark on 01.23.15 at 10:57 am

“The elderly and some other Canadians are probably more at risk because they still believe in loyalty with a bank.”

You hit the nail on the head. I’ve talked to quite a few financial advisors over the years, in a professional and personal capacity, and its quite amazing at the number of people, particularly the elderly, that insist on having their “money” with certain brand-name banks. As though they’re more reliable than the smaller banks. Even well within the CDIC insurance limits.

The end result is that the big banks, although not particularly efficient entities, enjoy an unduly low cost of capital, and hence, excess profitability. This is why they are able to crush new competitors to the marketplace with relative ease.

As I’ve written, the next leg of consolidation in the Canadian banking sector is likely the big chartered banks swallowing up a significant number of distressed credit unions. Lots of credit unions, from what I’ve seen, are way over-extended into residential and small business lending, and a sustained downturn in those sectors likely will place their portfolios into distress.

#195 Ronaldo on 01.23.15 at 10:59 am

#178 Tomas –

”Wouldn’t it make more sense to pay extra towards one’s mortgage when rates are higher and you’re trying to lessen future interest payments?”

If you took out a mortgage in 2008 when interest rates were 5% and you had a 400,000 mortgage your interest would be about 20,000 per year. This amount may have had you so strapped that you did not have any extra money to put towards your mortgage.

So then in 2009 the BOC dropped the rate to .25 by April that year which made variable rates as low as 2.25 and lower if you had a prime minus rate. This would have provided you with something like a 50% drop in interest and a great deal of extra cash to put down on your mortgage.

This would have been a sure thing whereas putting the extra into the markets would be somewhat of a gamble in my opinion. 5 years later you would have reduced your mortgage by a great deal which would then protect you from any increase coming your way.

What happened in most cases was the opposite where homeowners used the savings to buy “nice to have” items, reno’s, trucks with nuts, vacations and many even took out helocs on their home equity to do these things. The reason this country is so debt ridden today.

#196 Ray Skunk on 01.23.15 at 11:05 am

#178

Can someone explain to me why it would be a good time to pay off the mortgage? With rates so cheap, I would think it’s a good time to dump extra money into stocks and hard assets. Wouldn’t it make more sense to pay extra towards one’s mortgage when rates are higher and you’re trying to lessen future interest payments?

Consider you’re in Y1 of a 30yr mortgage and your payment is $2000/mo. Rate is cut and now the payment is $1800/mo (hypothetical numbers). You now have $200 free every month to throw into the mortgage as overpayment.

Imagine that the low rate environment lasts for two years. You’ve overpaid $4800 against your principal.

At the end of the two years rates go back to what they were. You have now set yourself up with $4800 off your principal for the remaining 28 years of compound interest. If rates swing the other way and go up, you’ve saved even more compounding on that $4800, and reduced your monthly payment overall, making you less stressed if rates continue to rise.

Would it make more sense to make extra payments when the rates are higher? Think practically… If rates are higher and your payment is greater, you have less disposable income. Where are you going to get the money from to make additional payments when your finances are stressed by the higher regular payments?

For many laymen/amateur investors it’s better to use this new found cash to pay the mortgage (a sure thing) than use it to invest (not always a guaranteed payoff, especially if you take your investment advice from [email protected]).

#197 aaron on 01.23.15 at 11:05 am

Your get that discount brokerages will lower their rates for market shares. The Banks will follow soon after that obviously.

Rates just low enough to stoke huge buying demand.

#198 Ray Skunk on 01.23.15 at 11:05 am

Ah crap, sorry for the bold on that one. Forgot to close the tag :(

Got it. — Garth

#199 Marco on 01.23.15 at 11:13 am

Reading the front page of the National Post today. Do the Conservatives own that page today? All about how Trudeau has no plan on the economy. Not experienced enough to lead, etc… They make it sound like its a one man show, and not a team game. Paul Martin remember him? This is going to turn into such a political game now before the election. Get the popcorn.

#200 Bullish_on_Gold on 01.23.15 at 11:15 am

DELETED

#201 Mark on 01.23.15 at 11:18 am

“For many laymen/amateur investors it’s better to use this new found cash to pay the mortgage (a sure thing) than use it to invest (not always a guaranteed payoff, especially if you take your investment advice from [email protected]).”

Excellent post. Another way of thinking of the whole invest vs. pay off mortgage decision is to think of mortgage repayment as purchasing bonds in a portfolio. After all, taking out a mortgage is selling a bond, so repaying a mortgage is effectively doing the opposite.

The whole concept is at the root of my belief that the CAD$ will surge sooner or later — with debt levels probably peaking in Canada, and the cost of credit rising based on credit-worthiness, there is likely to be a significant amount of consumer austerity in Canada, with a sharp reversal in the savings rate, and significant demand for CAD$ to repay debt. Essentially what we would expect during deflation. The BoC may have gotten lucky in the short term with the USD$ being so strong, but I doubt they’ll be so fortunate as the US economy decelerates.

#202 rosie "moving forward" in the knowledge that, "this won't end well" on 01.23.15 at 11:29 am

Bryce says the market always recovers.

http://calgary.ctvnews.ca/is-calgary-s-condo-market-cooling-down-1.2199837

#203 robert james on 01.23.15 at 11:30 am

http://www.calgaryherald.com/business/budging+mortgage+rates+Canada+banks/10754343/story.html

#204 rosie "moving forward" in the knowledge that, "this won't end well" on 01.23.15 at 11:32 am

We’ll have a better handle on this in 4 weeks.

http://calgaryherald.com/business/real-estate/calgary-mls-listings-soar-while-sales-plunge

#205 Ollie on 01.23.15 at 11:45 am

Please read, people. The School does not want us to know.
https://en.wikipedia.org/wiki/Fractional-reserve_banking
https://en.wikipedia.org/wiki/Reserve_requirement

Some quotes from even the establishment approved Wikipedia:
>>>
In 1935, economist Irving Fisher proposed a system of 100% reserve banking as a means of reversing the deflation of the Great depression. He wrote: “100 per cent banking […] would give the Federal Reserve absolute control over the money supply. Recall that under the present fractional-reserve system of depository institutions, the money supply is determined in the short run by such non-policy variables as the currency/deposit ratio of the public and the excess reserve ratio of depository institutions.
<<>>
Murray N Rothbard, of the Austrian School, also criticised fractional-reserve banking extensively. This was not only for his recognition of its supposed flaws with regard to money creation, but also as he considered it a form of fraud.
<<>>
Canada, the UK, New Zealand, Australia and Sweden have no reserve requirements.
<<<

Funny how the last one shows a weirdly identical list of countries with run away mad and self destructing , soul sucking, housing markets.

#206 blobby on 01.23.15 at 11:47 am

I have a theory – Could Mr H have “influenced” the BoC on this one?

Lower rates temporarily (just until election) – to lower value of the dollar on purpose.. To help oil companies sell product.. Thus getting the Albertan voters back on side before the election?

#207 Ronaldo on 01.23.15 at 11:50 am

A good interview with Jim Rickards on the economies around the world and his take on the Fed raising interest rates.

http://www.sovereignman.com/expat/powerful-investment-wisdom-from-jim-rickards-the-economy-is-on-a-knifes-edge-2-15997/?inf_contact_key=e29407551173198d5422c3668f11f2b952faedf7b2a9a1df5c05a883e39deaa0

#208 45north on 01.23.15 at 11:59 am

RayofLight: (RayoFlight): The King of Saudi Arabia, the one that started the oil price wars, died to-day (GBHS). There is a real possibility the new heir to the thrown will reverse this policy and adjust production to support oil prices.

how would you know? I mean the Shaw of Kuwait and I once went to the same summer camp in Muskoka but we have drifted apart since then.

Harbour : Saudi Arabia’s King Abdullah Is Dead, Succeeded by Prince Salman

I do like the fact that you actually said what you meant. It’s fine to post a link but also have to make the point yourself.

Mark: Did home owners/borrowers really think they could use someone else’s money (the bank’s) to create a windfall for themselves by merely owning a house?

yeah they really did

No Canada No: Renting 2br house for 1650 with everything almost brand new. This is Philly, PA. Prices for everything seems cheaper by 1/4, at least.

4bd is 500k – that in neighbourhood where police arrive in 4 min if you park a van

that got my attention

#209 Mike in the Okanagan on 01.23.15 at 12:05 pm

The BoC rate cut just illustrates how hard it is to predict the future. Real estate in Canada does look overvalued particularly in comparison to the US. Will it tank? Who knows.

I flew into Calgary on Monday. The taxi driver said this was his first day. He was working the oil patch until he didn’t get called back in December.

We live in interesting times.

#210 Mortdecai on 01.23.15 at 12:28 pm

#186 Smoking Man on 01.23.15 at 10:32 am

#171 live within your means on 01.23.15 at 6:05 am
#120 Jim Bentein on 01.22.15 at 11:03 pm

About 15 years ago I followed a blog about people retiring around Lake Chapala in Mexico. Several people from Canada & the US retired there. Considered to be the the best climate in the world & inexpensive at the time. It’s still rated as the best in Mexico. Lots of sites online. At the time we thought about retiring there.
……..

You do know that, that place is ground zero for almost daily ufo sighting…
……………………………………………………………..
Smoking Man found in Lake Chapala dressed for casino life.

http://www.salesblend.com/2014/buyer-persona/

#211 Ollie on 01.23.15 at 12:35 pm

How does deflation appear?

When money is created from fractional reserve multiplication almost every dollar in existence is borrowed, it depends for its existence on someone somewhere being able to service a debt. This is walking a tight rope by many many people holding hands. One loses balance, all will do. Loaned out amounts starts to default. Poof. Just another promise not fulfilled.

That effectively erases chunks of money out of existence. Now the dibs on deposits are the same, but they cannot be honored unless new credit is given out in the hope the end receiver will deposit it back for the disgruntled bank customer to receive his colored piece of paper.

You will say, I don’t care, I rent, I have no debt, I HAVE money in the bank. Yeah? Think again. Read the small print. Those 100 you “have” in the bank are not yours anymore the moment you got in bed with the banker. You effectively signed them out to the bank with a waiver. If the bank is in trouble, liquidating your account into your pocket comes from CDIC. Which is also fractional. It’s an insurance fund made for the first who panics. Good luck with that when everyone else is in line with you. It’s called a “bank run”.

When people half wake up and realize something is not just quite right with the symbol of their years of work? Bummer. This is the oldest bamboozling in the books, not just still going on, but getting worse. The bank has your deposit as non senior… They are not mandated to pay it back to you in ANY way. The only thing holding them back from just laughing in your face at the teller booth is the thought of tomorrow. There are rare days in history when it seems there will be no tomorrow. Then all bets are off and you go back empty handed, no matter the disgrace the bank has to suffer. Don’t worry, they can take it. What is left for the bank? The collateral assets. Your house. Your car. You get the pixels surviving a power outage. Figure out.

No Canadian bank is in trouble or will be during your lifetime. You just wasted a lot of words. — Garth

#212 nobleton bill on 01.23.15 at 12:36 pm

184 Mark on 01.23.15 at 10:26 am

Thanks…..can you send me a link please?

#213 BLM on 01.23.15 at 12:39 pm

Probably not in the right forum for this but here we go.

Open and liquid real estate markets like Toronto and Vancouver should be viewed holistically from a global perspective.

It is reasonable to assume that the vast majority of properties being bought in these two markets, at these prices, today are NOT highly leveraged.

The buyers who can only afford to put down 5%-15% have largely been kept out since the CMHC was barred from guaranteeing covered bonds that included these loans in them. Those who did take out 5% down mortgages are already 4-5 years into their payments with the value of their properties having grown over this time.

In that sense, disaster is not imminent.

Many of the local buyers today are downsizers who are cash wealthy and upgraders who have done well over the last decade. They also includes developers who are cash rich from the boom, the smart money being repatriated from US denominated investments and the fabled HAM. The list goes on.

The collective view, based on what the markets are telling us today, is that property remains a fair investment for the lowly-leveraged end user and a good hedge for the lowly-leveraged investor.

What’s fueling high property prices now is not the same poison that fueled US property prices before 2008.

We, as part of the developed global economy, are in effect going through chemo with fiscal tightening and taking morphine with quantitative easing. The markets are saying failing is not an option. If it does, well, all bets are off and it doesn’t matter where you have your money invested.

Those who fight the front line by investing (which is what low interest rates are meant to effect) and make it out of this alive will be stronger in the end financially. Those who do not partake in this battle against this cancer that we call a recession will just as likely wither away come a depression.

That is why the wealthy are horny (to borrow a line from Gareth) for fixed income assets such as real estate even if it means breaking even or taking up a slight negative yield. They rather protect the purchasing power of their wealth rather than simply the nominal value.

We can argue that the prevailing values of real estate are not affordable for those who do not own property yet but that is ultimately a result of the policies radiating out of the US Federal Reserve.

So, as a contrarian on this blog, I’d like to throw a voice in to say that property remains a reasonable purchase to live in or to rent out for lowly-leveraged buyers (and you folks are out there, horny or not).

#214 Blacksheep on 01.23.15 at 12:44 pm

Mark,

“@Mark: “Every dime lent out by a Canadian bank was borrowed from either their depositors, the bond market, or their (common/preferred) shareholders. Canadian chartered banks are not in the counterfeiting nor the fraud or forgery businesses.”
—————————————————
I discussed this topic with yourself and Shawn many times before.

I was under the belief, that Canada’s banking system, must function, similarly to the UK’s.

A quote from the front page of BoE doc. linked below:

“Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

Could you explain how the BoE language seems to 100 % contradict, what your above statement claims?

Please and Thank you.

BoE link:

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

#215 screwed on 01.23.15 at 12:51 pm

Incredible how many bankers and banking shills are posting on here. As if their banker was their saviour or something? Is the banking cult a religion in Canada?

Silly peons feel they need to protect their banker’s bottom line just because they can own shares in the banks.

I thought the US was bad with their banking scandals and abuses of the financial sector. I guess Canadians are really just a nice bunch of people who won’t even bother to make a stink.

A VRM is a variable rate mortgage product. A CL is a credit line which is also variable and based on each bank’s prime rate. That prime rate is supposed to go up or down in tandem with the BoC’s rate. That is NOT just my impression, many Canadians bought into the VRM product fully aware that they’re taking a gamble on rates when rates go up BUT also benefiting in the unlikely event that rates may go down.

CIBC, RBC, BMO, NS and even TD – the next move is up to you.

This thing will blow up and get so much traction on social media across Canada, the banks will have a hard time controlling the fallout.

Let me be clear! The banks have increased their margins since Wednesday by a quarter point on 30% of all mortgages in Canada which are VRMs.
30% of all Canadian mortgagees who will ask the same question to their banker:

WHERE IS MY MONEY?

#216 Herf on 01.23.15 at 1:02 pm

Coincident with this posts header photograph:

http://www.canada.com/news/world/Germany+upholds+right+standing+splash+floor/10754481/story.html

From the article:

‘While accepting expert testimony that urine had damaged the marble, Judge Stefan Hank ruled the man’s method was within cultural norms, saying that “despite the increasing domestication of men in this context, urinating standing up is still common practice.”’

“Domestication of men”? For doing what is natural? Good grief! More aptly named the “wussification or feminization of men”!

At least some of the male population haven’t caved into being “domesticated”. The article ends with:

“It being Germany, there is a word for men who like to pee sitting down — “Sitzpinkler” — which is often used as an insult.”

(Rightfully so!).

Forgive my ignorance, but what ding-bat would put marble floors in the bathroom, particularly around the toilet? Next thing you know, they’ll be installing stainless steel toilets (for those cold winter morning sit-down sessions).

#217 ALBERTASTROPHE on 01.23.15 at 1:03 pm

We are Wabush.

What is happening there is exactly what is coming to Alberta.

http://www.cbc.ca/thecurrent/episode/2015/01/23/iron-ore-goes-bust-in-labrador-west-once-booming-in-production/

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/wabush-woes-labrador-mining-town-reels-from-a-china-slowdown/article21836552/

#218 TurnerNation on 01.23.15 at 1:06 pm

Well at least we can blame the aussie housing situation on stunningly high levels of illiteracy. And those cold lonely nights in that country’s interior region. (There’s a reason those kangaroos learned to box humans.)

Eagerly awaiting ozy’s next kando report.

#219 TurnerNation on 01.23.15 at 1:07 pm

Btw ‘T’ in last night’s comments by me is not Timberlake. It was the red Twerp.

#220 JG on 01.23.15 at 1:09 pm

178: “Can someone explain to me why it would be a good time to pay off the mortgage? With rates so cheap, I would think it’s a good time to dump extra money into stocks and hard assets. Wouldn’t it make more sense to pay extra towards one’s mortgage when rates are higher and you’re trying to lessen future interest payments?”

I’m with you. Why pay off extra principle on a mortgage with a 3.X% rate when you could be getting a better return on investments?
Plowing down your mortgage principle in a low rate environment is just asking to worsen the one asset strategy employed by the majority of Canadians.

#221 Vamanos Pest on 01.23.15 at 1:14 pm

#201 Mark

Enjoyed some of your comments today. Just want to refine how one should think about debt repayment in terms of investment. It can certainly be thought of as a bond, as you suggest, however, it would be a very special bond in that the returns are:

-guaranteed (there’s no risk in debt repayment while bonds carry a risk of default)

-tax free (bond income is interest and therefore taxed at marginal rates)

That still doesn’t mean debt repayment will always win (vs maintaining the debt and investing), but these features of debt repayment should be considered if one is otherwise looking at debt repayment as an equivalent investment in bonds.

#222 Shawn Allen on 01.23.15 at 1:16 pm

Bank Bashing and Fractional Reserve Reactionaries

Ollie at 192 warns:

Look up what is the reserve limit in Canada. You would be surprised how “well” we fare: NO MINIMUM RESERVE. The bank has to maintain zero of the deposits available, it can lend out everything.

And at 205 implores us to get educated on the fractional reserve menace

****************************************
So the bank’s don’t have a regulator telling them how much cash to keep on hand (on reserve)?

I guess this explains why when you go to make a withdrawal at the bank machine it often says, sorry, out of cash. And this is why sometimes the banks can’t honor your cheques and your money transfers because they are out of cash? Oh wait that NEVER happens. It seems they are smart enough to keep enough cash on reserve without a government regulation for that.

Bashing fractional reserve banking which has been part of the incredible explosion of prosperity and living standards for hundreds of years strikes me as strange.

I’d spend more time trying to accumulate wealth and money to have on deposit at the banks (it’s government insured anyhow up to $100k per account) than I would worrying about the mechanics of how banks lend out money.

I’d also spend time thinking about whether bank shares are good investments.

The banking system in Canada works extremely well especially for those who use it wisely. We can’t protect those who abuse borrowing any more than we can protect those who abuse food.

#223 Tomas on 01.23.15 at 1:20 pm

#195 Ronaldo
“This would have been a sure thing whereas putting the extra into the markets would be somewhat of a gamble in my opinion. 5 years later you would have reduced your mortgage by a great deal which would then protect you from any increase coming your way.”

#196 Ray Skunk
“At the end of the two years rates go back to what they were. You have now set yourself up with $4800 off your principal for the remaining 28 years of compound interest. If rates swing the other way and go up, you’ve saved even more compounding on that $4800, and reduced your monthly payment overall, making you less stressed if rates continue to rise.”

Thank-you for both your insights. I can see how with a principal residence this makes total sense.

What about if you own rental property where the interest is tax deductible, but you also have a lot of cash on the sidelines? I’m thinking in that case, you are probably best off investing the cash rather than paying down the mortgages. By putting interest paid to your mortgage against your taxes, you are essentially getting a 30% boost(ballpark percentage) to whatever amount you decide to instead invest.

I’ve got rental property and a bunch of cash earning nothing in Tangerine. Originally, I wanted to buy more rental properties, and thus preserving cash was key. But now I think house prices are just too high and destined to fall or stagnate within 5-7 years, and so I have no idea what to do with my banked cash.

#224 Blacksheep on 01.23.15 at 1:43 pm

Ollie #205,

“economist Irving Fisher proposed a system of 100% reserve banking as a means of reversing the deflation of the Great depression. He wrote: “100 per cent banking […] would give the Federal Reserve absolute control over the money supply. Recall that under the present fractional-reserve system of depository institutions, the money supply is determined in the short run by such non-policy variables as the currency/deposit ratio of the public and the excess reserve ratio of depository institutions.”
————————————————
Mr Fisher may have proposed the theory in 1935, but according this 2014 paper released from the BoE, fractional reserve banking is not required for commercial banks to create deposits, at all.

Quote, BoE:

“Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves.”

“While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality”

BoE link:

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

#225 Dub on 01.23.15 at 1:47 pm

http://www.huffingtonpost.ca/2015/01/21/target-ceo-severance-canadian-workers_n_6517272.html

#226 Dub on 01.23.15 at 1:53 pm

http://www.payscale.com/data-packages/ceo-income-2013/fortune-100

#227 Victor V on 01.23.15 at 1:53 pm

Union pay cuts may be next on the agenda for Alberta’s cash-strapped government

http://news.nationalpost.com/2015/01/23/don-braid-union-pay-cuts-may-be-next-on-the-agenda-for-albertas-cash-strapped-government/

#228 Rob on 01.23.15 at 1:57 pm

I’m a real estate agent and I rent. Enough said.

#229 Calgary on 01.23.15 at 2:00 pm

Hi, I can confirm almost double the number of listings in Calgary this month.
However the prices have not done down since sellers are holding on hoping somebody would pay up.
For houses in good condition this does happen and my conservative bids have been rejected or surpassed. For houses in below average condition I am seeing a slow decrease in prices ($5k at a time) which however still keeps them overvalued by a lot (say $30-40k).
So Calgary market is still overvalued and you would have to overpay if you want a house.
I am trying to remain conservative in my bids.. for now.

#230 Alex on 01.23.15 at 2:08 pm

Has anyone considered this possibility?

Why is it that the “oil” powers that be do not adjust production to sustain higher oil prices? Are they not devaluing themselves in the process of non-reaction? Being a skeptic (far from a conspiracy theorist) I think that there is a move to depress oil prices to the point where emerging oil “players” can not further make capital investments, perhaps even go bankrupt or simply devalue to the point where they become rather inexpensive takeover targets ????
Just a thought.

#231 Practical Advice on 01.23.15 at 2:12 pm

Great blog.

But don’t waste your time on it like you did the last 5 years. It is one opinion in a sea of opinions. Hope many of you learned this lesson this week.

Advice, read the blog but don’t bet your life on it.

#232 Ollie on 01.23.15 at 2:13 pm

Oh, LOL. My puny posts did one thing right. Revealed the banker shills on the forum.

BTW, Garth, why don’t you publish my previous post? At least say: DELETED. Did I call names? What did I do?

Oh, I see.

#233 Mark on 01.23.15 at 2:14 pm

““Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

That quote is correct, from the BoE, and doesn’t contradict my understanding of the banking system.

However, it is not a ‘given’ that the money that a bank borrows, and lends out, will end up being re-deposited in the same bank. It can go into a mattress. It can go overseas. Each individual bank must compete in the marketplace for depositors, and pay a rate of interest on deposits in accordance with the principles of supply and demand.

A bank that does not act prudently and ends up with a shortfall in assets relative to deposits, suffers significant leveraged losses, and faces the spectre of existing depositors losing confidence in the institution. Otherwise known as a bank run.

Other posters (ie: Shawn et al) have covered what happens during deflation, and that is, bad loans were made in the past. Such loans obviously fail to perform. Such failure to perform destroys bank capital. Against a reduced capital base, the bank can lend even less. Asset prices fall due to systemic lower levels of lending in the economy. And defaults continue to accelerate. Deflation in a nutshell. And very dangerous to the stability of the system if allowed to persist. The significant probability of such is why the BoC felt it prudent to lower the policy target rate to ensure that the banking systems’ capital base does not suffer meaningful impairment.

#234 screwed on 01.23.15 at 2:17 pm

#222 @Shawn Allen

Bashing fractional reserve banking which has been part of the incredible explosion of prosperity and living standards for hundreds of years strikes me as strange.

**************

Do you want a side of CDOs with that?

#235 Marco on 01.23.15 at 2:22 pm

@blobby

I think your theory has weight. Alberta is too big to fail for the Conservatives.
Reading the various articles on the Calgary condo market,
“First time home buyer, Anna Husted, is one of those entry-level buyers and says for her it’s the right time to buy.”
‘“I’m feeling really excited about being a first time home buyer and getting my first condo so it’s just kind of coincidence that I’ve been buying at this time with the falling oil prices and the rise in listings, I guess, so it’s a good thing for me, because there’s lots of places on the market and prices are down,”’ said Husted.
She should probably wait a few more minutes to buy.

#236 Industrial Guy on 01.23.15 at 2:30 pm

U.S. crude stockpiles are at their highest level in eight decades.

News from the U.S. Energy Information Administration. Crude inventories rose by 10.1 million barrels on the week ended Jan. 16.

Analysts had expected an increase of 2.5 million barrels. Where are we going to store all this oil if inventories keep rising? Got a swimming pool you’re not using right now?

It could be a record breaking “driving season” this year. Anyone an expert in hotel stocks???

#237 Blacksheep on 01.23.15 at 2:43 pm

Shawn # 214,

“Bashing fractional reserve banking which has been part of the incredible explosion of prosperity and living standards for hundreds of years strikes me as strange.”
————————————————-
When Critical thinkers figure out what’s really going on, it is a natural progression to initially, bash commercial bank money creation, because they (thinkers) become aware they have been systematically deceived, their entire adult life.

You, just today seem to have personally reached the point at which your denial that commercial bank money creation actually exists, has ended and has shifted to a: “It’s beneficial for society” platform.

And I completely agree.

I wrote this up to work out this ‘commercial bank money creation’, for my self.
This helped me reason out and accept how the banks function:
———————————————————–
Bob a buyer, wants to purchase a house from Joe, a seller.

Bob offers Joe, his personal IOU, as payment for Joe’s home to be repaid over the next 20 years. If Joe, was Bob’s very wealthy brother in law, this deal might just fly. But since the Bob, is a Stanger to Joe, Joe is simply not comfortable accepting his IOU.

Bob needs a commercial bank to accept his IOU, (based on Bob’s good credit) in order to purchase Joe’s house. Bob has a solid credit history so the bank is comfortable giving him credit over the required 20 year period. That’s what they do.

Bob then gives a mortgage to the bank (signs document) and the bank “credits” his account for the required sum to buy Joe’s house. No cash was created, only credit.

The newly created loan, is an Asset to the bank.
The newly created deposit, is a Liability to the bank

The newly created loan, is a Liability to Bob
The newly created deposit, is an Asset to Bob.

All the commercail bank has done is taken Bob’s IOU and put a “Legal tender $ stamp” on it.

Joe is now comfortable in accepting Bob’s IOU, because it has the Government guaranteed “Legal tender $ stamp” on it and Joe knows he can spend this form credit money anywhere.

#238 Oil Is Sticky on 01.23.15 at 2:50 pm

#183 ShawnG in TO on 01.23.15 at 10:25 am
inflation numbers are in. headline number is 1.5% due to lower gas price. but core rate actually increased to 2.2%, and retail sales increased more than expected. once again, the rate cut is a big mistake. looks more like politically motivated.

——

You believe those numbers?

#239 Oil Is Sticky on 01.23.15 at 2:54 pm

#234 screwed on 01.23.15 at 2:17 pm
#222 @Shawn Allen

Bashing fractional reserve banking which has been part of the incredible explosion of prosperity and living standards for hundreds of years strikes me as strange.

**************

Do you want a side of CDOs with that?

——-

The problem with what Shawn says is true to an extent but its more like a drug addict. The high is awesome. Then you come down. Printing money out of thin air, fractional banking CDOs, MBSs etc etc have led to perceived prosperity – but now the high is over. It’s actually more like kicking the can down the road for decades. Maybe 100 years if you believe in the Jeckyl Island book. But now that road is finally coming to a dead end.

#240 Marco on 01.23.15 at 2:54 pm

@screwed

Don’t worry once one blinks the rest will surely follow. Besides interest rates are probably going to go down to UK levels soon of .05. So it’s a win win for you. You will have to change your screen name to “blessed”
No shill here. As Thomas Jeffersons quote goes…

#241 Marco on 01.23.15 at 2:59 pm

Correction, meant to say cut to .50%

#242 Rational Optimist on 01.23.15 at 3:08 pm

238 Oil Is Sticky on 01.23.15 at 2:50 pm

“You believe those numbers?”

You believe inflation is even lower than that?

I’m with ShawnG. We have inflation- some. Within their band, anyway. Why cut if that’s true, unless of course inflation-control is less than one hundred percent of what the Bank of Canada does?

#243 Blacksheep on 01.23.15 at 3:08 pm

Mark # 233,

“That quote is correct, from the BoE ”
————————————————–
Anything you typed after you’re above sentence, was irrelevant distraction.

Please try to focus on ‘Commercial bank money creation’ only. Not reserve banking or reserve ratios.

This is the opening statements from the Bank of England’s doc. Please read carefully:

• This article explains how the majority of money in the modern economy is CREATED by commercial banks making loans.

• Money CREATION in practice differs from some popular misconceptions — banks DO NOT act simply as intermediaries, lending out deposits that savers place with them, and NOR DO they ‘multiply up’ central bank money to CREATE new loans and deposits.

• The amount of money CREATED in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by SETTING INTEREST RATES. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

#244 Holy Crap Wheres The Tylenol on 01.23.15 at 3:13 pm

#236 Industrial Guy on 01.23.15 at 2:30 pm
U.S. crude stockpiles are at their highest level in eight decades.
News from the U.S. Energy Information Administration. Crude inventories rose by 10.1 million barrels on the week ended Jan. 16.
Analysts had expected an increase of 2.5 million barrels. Where are we going to store all this oil if inventories keep rising? Got a swimming pool you’re not using right now?
It could be a record breaking “driving season” this year. Anyone an expert in hotel stocks???
_____________________________________________

As soon as America starts their engines come Memorial Day, the flood gates shall open!
Reserves will quickly go to production and oil / gas will go north! Just an astute observation from past experiences of watching the same old same. Oil goes down America gets going, oil goes up America still goes but a little less further in travel.

#245 eco_bach on 01.23.15 at 3:18 pm

Deal of the week. Only $750,000 for a 1 bedroom condo! And I’m guessing many people think it’s a bargain. http://goo.gl/K7hpZz

#246 Victor V on 01.23.15 at 3:19 pm

https://ca.finance.yahoo.com/news/target-canada-workers-feel-left-100000646.html

Sarah says it wasn’t until at least an hour after learning the news that management started informing employees that Target was closing its 133 Canadian stores and letting go its approximately 17,600 workers.

Target’s Hausman told CBC News that it broke the news to workers at about the same time it released details to the media.

“That day was probably a day I’ll never forget,” says Sarah. “You couldn’t go anywhere without seeing a team member absolutely in tears or in shambles, [saying] what am I going to do now?”

“We live in a city where unemployment is skyrocketing. There’s no jobs here. So everybody is panicking,” adds the single mother.

Sarah’s colleague, Rachel — again not her real name — is also the sole breadwinner in her family. When she started working at Target almost two years ago, she was close to declaring bankruptcy.

“What’s going to happen?” she asks. “Am I going to end up not being able to pay my rent and not being being able to feed my kid?”

#247 None on 01.23.15 at 3:21 pm

#174 Sheane Wallace on 01.21.15 at 10:54 pm
and when they announce expropriation of your registered accounts nobody would have seen that coming either.

==========

You cray.

#248 Holy Crap Wheres The Tylenol on 01.23.15 at 3:22 pm

King Salman has ascended to the throne as De-facto leader of Oil Central however he himself is not in the best of health. It has been rumored he already has signs of dementia. This has the musings of a short term coverup until the real string pullers can step in and take over. Oil will definitely go back to $100 ++ in the next 12 months!

http://www.bbc.com/news/world-middle-east-30945324

#249 eco_bach on 01.23.15 at 3:22 pm

whoops! actually that’s a 2 bedroom?

#250 xdisciple on 01.23.15 at 3:27 pm

There is no need for commercial banks, period. Why do these companies have first dibs on the money created by the central bank? Because they’re special? Royalty?

Incidentally, the central bank in Canada (and in the US) is composed of the very same commercial bank owners, so that itself is clearly a fraud.

Money must be created out of thin air by someone in any monetary system, in our case, it is created by the central bank. What is stopping you or me from accessing first dibs on that money? Yes, a “charter”. In other words, a monopoly.

The reason that Garth and Shawn (and Mark for that matter) do not engage in the minutiae of how commercial banks are given a monopoly (“THE SPREAD”) on money created by the central bank is because the entire system rests upon this carefully constructed, financially-parasitic way of life. It is irrelevant what happens to the money after it passes through the parasite filter, except that it affects us when we NEED money.

The only reason we would NEED money is if we don’t have it in the first place. Shawn likes to mumble on about how life is so good now compared to the stone age, but that would imply that we have less of a need for money. Clearly, that is not the case. And the reason is because the parasite financial class get first dibs on it, thereby impoverishing the rest of us in each generation perpetually. The gadgets we play with today are the leftover ones from yesterday the elites have long since thrown away.

And so the rat race continues on to acquire money instead of acquiring other more important things, like virtue, peace, justice, wisdom, purity of thought, higher technology, higher spiritual awareness, better rocket ships, or even eternal life, etc…

They cannot see (or wish for the rest of us not to see) that money itself does not exist, except as a “promise to pay”. It’s all a widely circulated perception shared and ferociously defended by those it benefits the most: those who hold bank shares and/or are employed directly or indirectly by the FIRE industry.

A computer spreadsheet could do Poloz’s job. Input the economic data, adjust the variables, and voila, we have a number increase or decrease for the overnight lending rate (monopoly rate given to the special charter companies that are referred to as commercial banks). Instead we have scripted headlines to create drama, give a few royal elite actors some ‘respected’ jobs and political theatre to feed the popular media.

Deflation is here, not just in oil, but in virtually all commodities and there are several factors: technology, green movement, a change of generations with different priorities. The iPhone alone has decimated mountains of industries producing thousands of different gadgets that are no longer needed, employing millions of workers who are no longer needed. Basically, much of what Canada produces in raw materials is simply not needed anymore, and if it is, other nations have it cheaper anyway. Except maybe fresh water.

We need leaders who have the vision to understand the new reality and forge ahead to a better future rather than repeat the past. Instead, we will get royal actors who will continue the charade for their own benefit.

BTW, Kevin Vickers has been positively biometrically identified as Prince Henrik of Denmark. Alex Jones has been identified as Prince Gustav of Sayn-Wittgenstein Berleberg. And I hope you’ve paid attention to the long list of others we’ve identified. If not, you know where to find out. – XD

Go away, nutbar. — Garth

#251 DisgustMadeMePost on 01.23.15 at 3:30 pm

#179– thanks for the Schiff link, I found that informative.

House was sold in divorce a couple years ago and I’ve been waiting, money invested, to buy when prices ease. Whenever I discuss the situation with my investment fellow, there is discussion about interest rates and how they HAVE to be raised at sone point because if not raised, the BOC will have no ammunition for future stimulus needs. SO, being that we are now at 0.75% and the nasty times have barely begun, what tools will be available to the BOC when it gets REALLY ugly?

I ask this on all sincerity.

#252 Holy Crap Wheres The Tylenol on 01.23.15 at 3:30 pm

Maybe this is the year I jump ship. The wife has been hounding me to retire and let one of the kids take over the company. She has had a taste of Bahama life and is seriously thinking about doing it after our Christmas vacation there. I’m not talking a huge home down there but something perhaps akin to a nice town-home on or near the beach. Well if I’m going to punch out of this crazy market I guess now is as good a time as any. Checked last night with a friend who is a realtor and he strongly believes there are idiots out there that will cough up $1.4-1.5 M for my 1970’s ranch home with a 200 foot deep lot. Oh I may miss Oakville but sure enough not the QEW, 401, Gardiner, DVP…………. and so on. Not to mention the crappy winters. Food for thought, I will have to see if shes still serious after the winter solstice!

#253 screwed on 01.23.15 at 3:33 pm

#248
oil price cannot go back to $100 USD

1) Putin is still Russia’s President
2) Euro is in the crapper
3) Iran, Iraq and Lybia production increasing

but keep on dreaming…

#254 Shawn Allen on 01.23.15 at 3:38 pm

Blacksheep on Banks

Blacksheep at 237…

********************************
Good post, remarkably we are in agreement.

I never ever said that the commercial fractional banking system did not create money. It does.

As you explain banks do it together with their customers.

What I said was there is NOTHING nefarious about it. And it is beneficial. It’s also no secret.

What you (at least now) understand is that when banks create deposits, the deposit belongs to a bank customer, it does not create for its own account. The bank does not create wealth for itself out of thin air.

After a loan and deposit is simultaneously created the net worth of the bank and its customer Bob, in your example, are both unchanged. (Over the years, of course the bank profits from the loan to Bob, but the instant the loan is created the Bank has earned nothing)

Banking facilitates commerce and transactions as you illustrated.

As Mark has said banks provide a service and earn a profit doing it. And in our economy it is a VITAL service.

Banking is all about Trust as you also explained.

Modeling things in simple real world terms as Blacksheep has done is always a useful exercise.

Damn this addictive blog, I am wasting my day off…

#255 None on 01.23.15 at 3:45 pm

#371 Debtfree on 01.22.15 at 5:08 pm
Winnipeg is number one . Congrats . You must be so proud of yourselves . So glad I never have to work or live there ever again . 29 years since I’ve been there . Not long enough .

===========

Blah blah blah, I’m the best, you’re not. Get a life man.

#256 Dazed and Confused on 01.23.15 at 3:46 pm

“No existing variable-rate mortgage customers will see a discount. ”

I’m confused… Why wouldn’t existing variable mortgage holders receive a discount? If I have signed a variable mortgage of Prime – 0.65 already. And the Banks eventually decide to reduce Prime as a lot of people are predicting come spring, why wouldn’t I receive a discount?

Because they haven’t. Besides, if they do move their primes, your payments will not decrease. — Garth

#257 Country Girl on 01.23.15 at 4:02 pm

89 Smoking Man on 01.22.15 at 10:07 pm

Right on the mark Smoking Man. And, in a few years the 1% won’t need the 99% because they’ll have programmable robots.

#258 bdy sktrn on 01.23.15 at 4:17 pm

Oil will definitely go back to $100 ++ in the next 12 months!
———————
the saudi prince bin talid? said never again for 100.

in looking for 75-80, which would be a hell of a move from here

still looks weak in 45’s but i’m starting to think 30’s may not happen

#259 Leo Tolstoy on 01.23.15 at 4:17 pm

#214 Blacksheep on 01.23.15 at 12:44 pm

[email protected]: “Every dime lent out by a Canadian bank was borrowed from either their depositors, the bond market, or their (common/preferred) shareholders. Canadian chartered banks are not in the counterfeiting nor the fraud or forgery businesses.”
—————————————————

Could you explain how the BoE language seems to 100 % contradict, what your above statement claims?

He can’t because he doesn’t understand the fractional reserve banking system. Mark was completely confused when discussing similar topics on Red Flag Deals (Mark77). Until he got banned.

In general he creates his own economic and banking system in his head and then regurgitates it as reality.

#260 Nemesis on 01.23.15 at 4:19 pm

#FreakyFridayPotPourri’O… #Mischief…

#There’sGotToBeAnAcronym,Right?…

[AlJazeera] – China’s home invasion: As thousands of Chinese are hunting for their dream homes abroad, we investigate the impact of their shopping spree.

http://www.aljazeera.com/programmes/101east/2015/01/china-home-invasion-2015120131711553892.html

#”TheSting”

[SCMP] – Looks just like the real thing: bogus bank in China scams people of over 200 million yuan: The ‘bank’ was designed like a real one, boasting LED screens and counter staff

…”A fake bank in China that looked exactly like a real bank managed to scam people of almost 200 million yuan (HK$253 million) worth of deposits in just a year, Xinhua reported on Thursday.

The “bank”, in Nanjing’s Pukou district in Jiangsu province, promised customers 2 per cent interest a week for their deposits. Almost 200 people were conned.”…

http://www.scmp.com/news/china/article/1689855/looks-just-real-thing-bogus-bank-china-scams-people-over-200-million-yuan

#Tigers&Flies…

[BloomBerg] – ‘I Will Not Give Up’ Says Chinese Mother Who Can’t Find Anyone to Bribe for Daughter’s Schooling

…”Chen Jin, the mother in Shijiazhuang, says she won’t rest until she finds an official willing to take money so she can get her daughter into her preferred school.

“I don’t believe those school officials could keep the door closed forever,” she said. “They can’t maintain their lifestyle if they forgo the money.” …

http://www.bloomberg.com/news/2015-01-22/no-one-willing-to-take-mother-s-16-000-as-graft-fear-hits-china.html

#IfYouThoughtThoseWereBizarre/Provocative… #Clearly,YouHaven’tSeen… #Canada’sContributionTo… #MissUniverse2015

http://i.imgur.com/rb5vf7T.jpg

#261 Don on 01.23.15 at 4:22 pm

News from E-Ville, with full credit to Edmonton’s honest Realtor/bloggers: “Sales are down 30% year over year while listings are up 45%, if demand doesn’t pick up we could see prices on the decline.”

http://edmontonrealestateblog.com/2015/01/weekly-market-update-2315.html

#262 Shawn Allen on 01.23.15 at 4:34 pm

Bank Monopoly or even Oligopoly?

Someone above said banks are a monopoly.

They are often called an oligopoly.

Certainty there is no monopoly as there are Five mega banks in Canada

Oligopoly? Well what about the other 10 or more smaller schedule 1 chartered banks in the the market?

What about the branches of foreign banks that we have such as HSBC

Then there are all those credit unions.

Really can anyone name an industry that has MORE competitors than the banks?

And the banks provide a pure commodity service.

The reality of what explains banks relatively high profits is that once we settle in with one bank it’s a major pain to switch. We put up with service charges because it’s just too painful to switch for the best deal every month.

With groceries and most retail goods we can shop around with ultimate ease.

Anyhow the point is the banks are about the farthest thing we have from a monopoly in this country. And calling them oligopolies does not change the fact that there is PLENTY of competition in banking.

#263 BCD on 01.23.15 at 4:37 pm

Locking in at Credit Union on the GIC escalator. 1.8% 1.95% and 2.5% in third year. BOC sent a strong signal–party at any cost and as long as possible. Say hello to negative interest rates in the future. All the money left is being teased into real estate and the stock market–good luck to you speculators. When negative rates arrive I will be burying money in the back yard. At least we have plastic currency now which will stand up to the elements well. You think I am joking?

#264 Nemesis on 01.23.15 at 4:38 pm

#ObituaryAddendum,Or… #BC’sMoversNoLongerShakin’…

[CBC] – Williams Moving and Storage filing for bankruptcy after 86 years: One of B.C.’s oldest moving companies has closed its doors

http://www.cbc.ca/news/canada/british-columbia/williams-moving-and-storage-filing-for-bankruptcy-after-86-years-1.2928099

#265 aL pacino on 01.23.15 at 4:38 pm

Hey Mark, as far as your cdn loonie predictions…
What planet did you say you were from ?

#266 saskatoon on 01.23.15 at 4:41 pm

#254 Shawn Allen

if i loan someone money i don’t have…it is fraud.

when the “banking system” does it…commerce is “being facilitated”.

the fractional reserve system is inherently fraudulent.

disagreement = stockholm syndrome

“…a psychological phenomenon in which hostages express empathy and sympathy and have positive feelings toward their captors, sometimes to the point of defending and identifying with the captors. These feelings are generally considered irrational in light of the danger or risk endured by the victims, who essentially mistake a lack of abuse from their captors for an act of kindness.”

#267 Blacksheep on 01.23.15 at 4:43 pm

Shawn # 254,

“It’s also no secret.”
———————————-
Come on Shawn….we were making progress.

If I sit down with anyone of the local, big six bank managers to discuss ‘commercial bank money creation’, they will stare blankly at me like I’m speaking Swahili.

Shit…even our resident smart guy Mark, is still in denial.

Makes you wonder how he was ever sharp enough to accurately predict a rate drop.

Unless…..

#268 Smoking Man on 01.23.15 at 4:44 pm

Holy Crap Wheres The Tylenol

That’s going to be the call sign on the F35 in my novel .. It’s perfect.

You made my book…

Oh by the way LaughingCon, your character is called Charles Ashman.

#269 Mark on 01.23.15 at 4:50 pm

“He can’t because he doesn’t understand the fractional reserve banking system. Mark was completely confused when discussing similar topics on Red Flag Deals (Mark77). Until he got banned.”

I understand the fractional reserve banking system perfectly fine. And I only departed RFD on account of the trolling by the likes of Donnie740, Anikiri, and a few others who are still up to their existing nonsense and are being owned on a regular basis by those who mostly are carrying on with my line of reasoning concerning the contemporary RE market. Additionally, gomyone has a lot of egg on his face at this point for his ardent claims, to the point of calling me an idiot, that the BoC’s next policy move would be to hike interest rates. As usual, proven wrong.

#270 Boomer on 01.23.15 at 4:51 pm

Thank you Harper for bringing some stability to future direction. I’m 55 and was planning to retire this year at the ‘height of the bubble’. Now I’ll wait till I’m 60 and collect a full government pension and then sell as prices are not coming down. At that time, I’ll sell my house in Oakville. I had bought 2 years ago in Fort Myers Florida as Garth said so don’t need the money for that. The money from the sale of my house will be the icing on the cake; maybe leave it to my 2 kids or maybe not :)

Harper for another term!

#271 Mark on 01.23.15 at 4:53 pm

“Hey Mark, as far as your cdn loonie predictions…
What planet did you say you were from ?”

I laid out the argument as to why significant debt repayment by Canadians will cause consumer consumption in Canada to crater and demand for the CAD$ to soar domestically. In the short term, hedge funds and other currency speculators can move a small, relatively illiquid currency like the CAD$ around quite a bit, as they have. But in the end, fundamentals win out. The recent Swiss event is yet another example of how violent the moves can be when currency speculators are heavily involved in a market opposite of what the fundamentals would ordinarily dictate.

#272 Shawn Allen on 01.23.15 at 4:58 pm

Who Cares?

Blacksheep says:

If I sit down with anyone of the local, big six bank managers to discuss ‘commercial bank money creation’, they will stare blankly at me like I’m speaking Swahili.

*******************************************
That’s because it is irrelevant to bank managers.

They just want to do their jobs and get paid.

Understanding bank money creation is an academic exercise but of no practical use to most people including even most bank staff.

Of course they have no time to argue with idiots who want to say that the bank should not charge interest on a loan created from thin air.

Their attitude is look dude, I approved you for a loan at X%, do you want it or not?, if not get out of here and stop wasting my time babbling about the evils of fractional reserve banking.

A car salesman does not need to be able to understand how a combustion works at the molecular level, or at all. And he does not need to know anything about how a car is produced. And a bank loan officer does not need to understand a single iota about the theories of modern money creation.

If you wish to study it fine. If you wish to scare monger about it, that is your right but you are wrong and most people will rightly ignore you and go about their business.

It’s better to be like our friend Alex the landlord above who is using the banks money to make his own money.

#273 honeybooboo on 01.23.15 at 4:59 pm

#267 Smoking Man on 01.23.15 at 4:44 pm
Holy Crap Wheres The Tylenol

That’s going to be the call sign on the F35 in my novel .. It’s perfect.

You made my book…

Oh by the way LaughingCon, your character is called Charles Ashman.
+++++++++++++++++++++++++++++++++++
Mark should be a character.
His name can be “Burgers”

#274 Shawn Allen on 01.23.15 at 5:02 pm

Okay, enough wasting time, I hereby swear and pledge to cease posting on this blog until at least April 1.

April Fool’s day, a good day to come back.

#275 Mark on 01.23.15 at 5:02 pm

“If I sit down with anyone of the local, big six bank managers to discuss ‘commercial bank money creation’, they will stare blankly at me like I’m speaking Swahili.”

Actually they’d probably wonder what sort of dream world you live in, as those bank managers have to spend roughly half their efforts acquiring the money to actually lend out, and the other half their effort actually lending the money. So if you could present a way that they could only do half the work, and make the same pay, well, that would be very well received.

Fact is, banks cannot lend what they cannot borrow. Chartered banks do not create money. Assets must always equal liabilities. And “banks” do not have a monopoly on acting as leveraged investors in the economy. In fact, individuals who borrow to invest (ie: take out a mortgage to buy a house) actually engage in exactly the same fundamental activity as the banks, albeit on a different scale and with less diversification.

#276 Balmuto on 01.23.15 at 5:07 pm

Re #256

“I’m confused… Why wouldn’t existing variable mortgage holders receive a discount? If I have signed a variable mortgage of Prime – 0.65 already. And the Banks eventually decide to reduce Prime as a lot of people are predicting come spring, why wouldn’t I receive a discount?’

Yeah, I’m confused too, Garth. If prime goes down 25 bps (from 3% to 2.75%), then in the above example the all-in rate has to go to 2.10%. If the bank keeps it at 2.35%, then effectively they’ve changed terms of the loan to Prime – 0.40. And I don’t think they can do that. The rate is variable, but the spread is fixed.

First, no prime has dropped, so no mortgage rate decrease. Second, your payments don’t fall when rates reduce because the amortization is adjusted. — Garth

#277 delusional People from Alberta on 01.23.15 at 5:13 pm

For those who do not understand reality here it is again.
U.S. crude stockpiles are at their highest level in eight decades.

U.S. crude stockpiles are at their highest level in eight decades.

Oil is NOT going about $55-60 for YEARS!

Read it again if you don’t get it you will be bankrupt in no time

#278 Victor V on 01.23.15 at 5:36 pm

#256 & #276

Here is an illustration from CIBC to clarify for you:

Pay a set monthly mortgage payment. If the CIBC Prime rate goes down, more of your payment goes to the principal, if the rate rises, more of your payment goes to interest.

https://www.cibc.com/ca/mortgages/var-rate-open-mortg.html

Exactly. VRM payments do not decrease with a rate cut. — Garth

#279 Happy Renting on 01.23.15 at 5:39 pm

#178 Tomas on 01.23.15 at 9:52 am

When I hear the advice “use this low interest rate period to pay down your debt” what I hear in the background is “instead of taking on more debt because it’s cheap”.

Paying down your mortgage or investing in a balanced portfolio are both good choices (which is better depends on your circumstances.) Adding more lifestyle expenses to your LOC or credit cards is a horrible idea. But we know what most financial poodles will do. They’ll see the ability to borrow more and the money (debt, really) will burn a hole in their pockets. Face —> palm.

#280 BoC rate cut a bad thing on 01.23.15 at 5:45 pm

Despite all the mortgage brokers and realtors who spend hours on this blog daily with their propaganda the fact is this rate cut will hurt every Canadian. The benefits are mainly for the bankrupt oil campanies but everyone else will face higher prices on Everything. Canadian dollar going down is a bad thing. Think of all those who invested in Canada seeing their investment get a 20% haircut and the bleeding will not stop all thanks no Harper the oil man who doesn’t give a poop about anyone else. Once he loses he will sit on many boards of companies and make millions. Harper looks even more crazy without his toupee on

#281 bdy sktrn on 01.23.15 at 5:48 pm

#277 delusional People from Alberta on 01.23.15 at 5:13 pm
For those who do not understand reality here it is again.
U.S. crude stockpiles are at their highest level in eight decades.

U.S. crude stockpiles are at their highest level in eight decades.

Oil is NOT going about $55-60 for YEARS
—————————–
perhaps that is a ‘true’ price, reflecting supply/demand balance.
mix in the speculators (as usual) and overshoot happens. 80 oil in under 18months.

#282 Mark on 01.23.15 at 5:48 pm

“Exactly. VRM payments do not decrease with a rate cut.”

Not directly, but buried in many VRM’s (and even fixed mortgages) is a clause that allows banks to accelerate the required repayments into principal if, in the bank’s opinion, the value of the collateral (ie: the house) is no longer sufficient to back the loan.

This is another potential area where the banks will be able to “scam” people, especially when interest rates inevitably do rise (which they will, eventually) and housing prices fall. Banks who are “locked” into rates lower than current market rates may very well invoke (or threaten to invoke) such clauses to obtain early repayment or more favourable terms.

Basically, its a sort of “heads, I win, tails, you lose” sort of proposition when dealing with the Canadian banks. Which is why their stocks are so awesome to own.

#283 bdy sktrn on 01.23.15 at 5:56 pm

from the 30’s in feb09 , oil recovered to 80 by the end of the year – 10 months.

granted , that was not a supply issue.

rather than SA/opec tightening, the hand of the market will remove supply given time and a low price.

the cure for low prices is low prices.

#284 jean on 01.23.15 at 6:02 pm

A bit premature, no?

“…If banks don’t come to the conclusion that they need to cut their lending rates, observers say the Bank of Canada may act again and slash overnight interest rates further.
“I think what you might see, if the banks don’t pass on this cut, is the Bank of Canada will just lower rates again in the spring to force them to do it,” said one banking source…”

http://business.financialpost.com/2015/01/23/bank-of-canada-could-press-countrys-top-lenders-to-follow-rate-cut/

#285 Blacksheep on 01.23.15 at 6:13 pm

Mark,

You clearly are unable to critique post # 243.

I understand it’s pretty hard to argue with the Bank of England.

#286 Blacksheep on 01.23.15 at 6:24 pm

Shawn,

If it is “no secret” why would the bank managers response not simply be, “Yes..commercial money creation, what would you like to know, sir?”

What..it’s above his pay grade? He runs the friggen bank?

Save the bullshit for someone who believes it.

#287 eric on 01.23.15 at 6:32 pm

Because they haven’t. Besides, if they do move their primes, your payments will not decrease. — Garth

You pay your principal off faster. The is the main point.

At nine bucks a week on $200,000. Funny. — Garth

#288 Vincenzo Alighieri on 01.23.15 at 7:31 pm

Well, I’m not sure I follow half of the reasoning of most on this blog, but it seems no one has suggested the option that lowering rates is a way to actually deflate the housing bubble.

Since Garth has repeatedly reported the stat that something like 70% of Canadian households can’t miss one paycheque or they will not make their mortgage payments, will not the rising cost of commodities as the loonie tanks put pressure on households to afford everything they need to live? And when they can’t, they’ll have to sell, won’t they?

This will be especially true is they continue to lower interest rates. Since the housing market is already declining almost all over Canada even with rock bottom rates (because the pool of potential buyers is almost exhausted already), it doesn’t seem like there will really be enough people to keep this party going.

#289 TurnerNation on 01.23.15 at 7:51 pm

There’s two main schools of investment thought.

-Bikes, Babes and Balanced Portfolios
-Batman’s camel tow.

I employ both, to encourage returns. Rebalance regularly.

“For the past 1 year 13.7%”

#290 B.O.B. on 01.23.15 at 11:06 pm

Could your intuition been right all along? Perhaps the BOC decreased the overnight rate for the purpose of reducing the need for a prime rate increase. This would allow lenders to cover loan losses and maintain profitability through margin gain.
Imagine the shock if the headline had read “Big 5 raise prime to 3.25%”.

#291 Victor V on 01.24.15 at 7:07 pm

https://ca.finance.yahoo.com/news/finance-minister-oliver-says-wont-meddle-banks-decisions-190556386.html

OTTAWA – Federal Finance Minister Joe Oliver says he has no intention of pushing Canadian banks to follow the Bank of Canada’s lead and drop their rates.

The central bank unexpectedly cut its trend-setting interest rate Wednesday to 0.75 per cent in response to the oil-price collapse.

Financial experts have said borrowers shouldn’t automatically expect Canada’s big banks to cut their prime rates just because the central bank decided to do so.

For his part, Oliver says he won’t interfere with internal decisions of commercial banks.

He also says he has no current plans to introduce new rules for residential mortgages.

Oliver’s approach differs from that of his predecessor, Jim Flaherty, who called the Bank of Montreal in 2013 to express his disapproval of its decision to offer a special low rate.

“I do not intend to interfere with the day-to-day operations of the banks,” Oliver said in a statement Friday.

#292 Victor V on 01.24.15 at 7:12 pm

http://www.theglobeandmail.com/news/alberta/alberta-premier-prentice-hints-at-snap-election-for-spring/article22616537/

“We are in the most challenging financial and economic circumstances we’ve seen in our province in a generation,” Mr. Prentice said.

Planning for a provincial budget in late March or early April, Mr. Prentice said the Alberta budget has “a structural problem as far as the eye can see.” He has previously stated that province is facing an $18-billion deficit over the next three years.

To begin fixing the problem, he’s promised “the most important budget we’ve seen in a generation.” The document will include a five-year spending plan that the Premier said will change the size of Alberta’s government, the wages it pays employees, the taxes it charges residents and the deficits it will run.

“It will repair the problems we have in our public finances over the next five years,” he said.