“I was cleaning out some of my dad’s papers,” Audry wrote me this week, “and I found this. Imagine.”
Imagine indeed. It’s the receipt for a $5,000 term deposit from 1981 that her father arranged with one of the big banks. The length of time the money was tied up for was a mere 59 days. And the rate of return? Grab something. It was 14.5%.
Now let’s remember that the inflation rate in 1981 was 11.3%, and in August of that year the five-year residential mortgage rate topped out at 21.75%. Today, of course, inflation is just under 2% and a fiver can be yours for about 2.5%. Term deposits? A 59-day note at BMO these days will pay you two-tenths of one per cent interest. Can anyone still count that low?
So, as noted here a few days ago, ours is a world which seduces borrowers and bitch-slaps savers. Those who eschew any investment with market risk and opt for the predictability of interest-bearing assets better have a big pile of money, or else risk running out. On the flip side, in 1981 when savers were making almost 15% for just breathing, people renewing residential mortgages were facing a massive personal crisis. Many banks suspended long-term home loans and would only go variable (also in the 20% range), while real estate prices were going nowhere.
In 1981 the average Toronto house price was $90,200, and sales volumes plunged. The market recovered as mortgage rates declined to a more affordable 14%, and the average price peaked at $273,600 in 1989. Then, thanks to a deteriorating economy and mounting job stress, prices started to head down, bottoming in 1996 at $198,100. From peak to trough took seven years and shaved 27.6% off the average price – not that far off the 32% decline which collapsed the US middle class ten years ago.
By the way, it took until 2002 for prices to regain the level they achieved in 1989 – thirteen years. If you add inflation into the calcs, a buyer in 1989 did not get her money back until waiting more than sixteen years. During that same time, you might be interesting in knowing, the Toronto Stock Exchange’s main index increased 163%.
The past is no road map for the future, of course, but it’s instructive nonetheless. A couple of decades ago people with cash or liquid, invested assets were the cocks of the walk. Homeowners were shackled with often-illiquid and steadily depreciating, costly assets. The real estate and housing boom of the late 1980s in most Canadian cities was replaced not with a crash, nor a bust nor a cataclysmic economic event, but rather with a relentless melt.
Rising interest rates didn’t trigger the bust, since the cost of a mortgage fell steadily – from 14% down to 7% – during the period that houses were unloved. And still real estate lost almost a third of its value from the speculative, house-horny peak of the late Eighties. The reason was simple: recession.
Today Canada is in the grip of an oil collapse, as you know. Job loss seems epidemic. What started in Fort Mac spread to Calgary, the Martitimes, southern Ontario suppliers and now Bay Street financials. Our economy will be lucky to expand by 1% this year, and may slide back into negative growth for many months. The new government in Ottawa is about to plunge us into deficit financing and the Bank of Canada cut rates twice in the last 13 months to stave off an even bigger backslide.
Despite this, Canadians have been seduced by cheap money, increasing debt to 170% of income and pushing the price of houses in Toronto and Vancouver into territory that five years ago would have seemed breathless. Like hormonal teenagers, homebuyers now think they’re invincible, untouchable, incapable of injury because “houses always go up,” or “the government would never let bad stuff happen.”
So here’s a prediction for you: as far as savers go, 1981 will never return. Not in this lifetime, anyway. But for the house-crazed masses, a darker day likely lies around the bend. The past has a way of returning. If you don’t remember it, at least learn it.