Captain Obvious

DOUG By Guest Blogger Doug Rowat

Interest rates are going higher in Canada.

The four interest rate increases from the US Federal Reserve in the past 2.5 years (with three of them coming in just the past nine months) and the heavily telegraphed rate increase from the Bank of Canada only a month ago, combined with its mostly glowing review of our economy, would be the first clues. But our May GDP number, which shot the lights out and flirted with a 5% y-o-y growth rate, removes any lingering doubt that the Bank of Canada isn’t going to raise once and then simply call it a day. Currently the market odds of another Bank of Canada rate increase at its January 2018 meeting sit at 83% and the Bank must be keenly aware that it needs to do some catch-up work to be better aligned with the US Fed (historically, their interest rate policies have moved almost exactly in lock-step).

And what typically happens during a Bank of Canada interest rate tightening cycle? Looking at the past four cycles, which we define as at least three rate increases uninterrupted by a rate cut, the Bank raises, on average, 5.5 times each cycle (see breakdown by cycle below). Therefore, in all likelihood, many more increases are to come.

  • 2010 = 3 rate hikes
  • 2004–2007 = 10
  • 2002–2003 = 5
  • 1999–2000 = 4
  • Average = 5.5

So, given the brave new interest-rate world we’re about to enter, I have three pieces of advice.

The First

For now, continue holding shorter duration Government of Canada bonds. Shorter duration bonds have less price sensitivity to rising rates and we don’t yet think we’re at an inflection point where it’s worth switching to longer duration bonds—we’re simply not being ‘paid’ enough to do so at the moment.

For example, let’s look at the yield spread between the Government of Canada 10-Year Bond and the Government of Canada 2-Year Bond. While there’s no absolute rule for when longer duration is more optimal, a yield spread of 150 bps or more often marks a compelling ‘switch zone’. In other words, when the Government of Canada 10-Year Bond is yielding 1.50% or more versus the 2-Year Bond, such spreads have historically proven to be reasonable points to transition from short duration to longer duration. Indeed, if you had purchased the iShares Core Canadian Long Term Bond Index ETF (XLB) in early 2010 (the recent highs of the yield spread) you would have outperformed the iShares Core Short Term Bond Index ETF (XSB) significantly over the following five years (an 8.9% annual total return versus 2.6%, respectively). The XLB, incidentally, has a duration of 14.8 years while the XSB is at only 2.8 years.

However, the yield spreads are still tight and now is not yet the time to switch. Stay short duration.

Gov’t of Canada 10-yr Bond minus Gov’t of Canada 2-yr Bond Yield

Source: Bloomberg. Chart measures yield spread in percentage points.
The Second

Diversify your bond holdings by going global. While you should have a core position in Government of Canada bonds, you should consider including a global bond holding as well. One of the advantages of global bond exposure is that it mitigates the risk of being exposed solely to North American central bank policies, which are now focused on tightening. Rising rates could put downward pressure on bond prices. When you own global bonds you’ll likely have exposure to bonds in countries where rates are being held flat or even being lowered. Europe, UK and many parts of Asia are good examples. Global bond ETFs also usually provide some exposure to emerging market bonds, which helps juice income flow, so you’d be surprised how attractive the yields are on many of these products.

The Third

Give some thought to the increased cost of servicing your debt. We can debate how many times the Bank of Canada will raise rates during this cycle, but let’s just take the historical average above. If the Bank raises six times (we’ll round up), where might the prime lending rate end up?

There has been a surprisingly consistent spread between the Bank of Canada benchmark overnight rate and the prime lending rate of between 200–220 bps over the past 10 years. Therefore if the Bank of Canada raises five more times at 25 bps each time, then the prime lending rate could reasonably be assumed to rise to between 4.00–4.20% (from 2.95% currently). In other words, the cost of servicing debt on, say, a line of credit could jump by more than 40%. Put in dollar terms, if you had a $100,000 line of credit pegged to prime then the cost of holding that line of credit could increase by as much as $1,250 per year. How might this additional expense affect your household budget? And imagine if you also had a $500,000 variable-rate mortgage? Variable-rate mortgages are, of course, primarily based on the prime rate. Grab a calculator. And some Advil.

The Bank of Canada isn’t finished having fun with your debt—in all its forms. But these suggestions and a bit of household budgeting might help soften the blow.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

 

80 comments ↓

#1 paracho on 08.12.17 at 3:06 pm

We are living in interesting times.
You are correct. The Canadian Central bank goes in lockstep with the US Fed . We will be paying more for our debts. Most mortgages are Variable rate and many many are over-indebted . .
Another primer for lower real estate values in the GTA and Vancouver over heated markets.

#2 For those about to flop... on 08.12.17 at 3:10 pm

Pink Lemonade stand in Vancouver.

This is yet another example of how the low end detached houses in Vancouver aren’t moving like they used to.

Picked up for 1.32in July 2016 they are doing the dance that an elderly neighbor of mine just endured.

On that note ,when I went to work yesterday I noticed a sold sticker on the sign after a second price reduction and so the realtor normally puts the sold price up on his website when all the ink is dry and so we will see it went for asking or someone got the discount they were waiting for.

If these guys get out of this one unscathed it will be Beef Wellington for dinner…

M43BC

3186 Wellington Avenue, Vancouver

Jun 7:$1,398,000
Aug 9: $1,299,000

Change: – 99000.00 -7%

https://www.zolo.ca/index.php?sarea=3186%20Wellington%20Avenue,%20Vancouver&filter=1

https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDAwMzRVQw==

#3 Ian on 08.12.17 at 3:23 pm

Pic gives new meaning to the term ‘overhead resistance’ lol!

#4 For those about to flop... on 08.12.17 at 3:24 pm

Pink Lemonade stand in Richmond.

These guys have a little more wriggle room than some of the other cases that I have presented on this beast of a blog today ,but they also tossed more coins into the fountain before they made their wish.

The main reason I am presenting this one is that even though it is a relatively new build and they bought way back in June 2015 for 2.72 getting their money back or taking a small profit has not been as easy as perhaps they thought it would be.

I think these guys might be alright ,but prices in that range are melting like a Glacier…

M43BC

7531 Glacier Crescent, Richmond

Jun 13:$3,990,000
Aug 9: $2,999,000
Change: – – 991000.00 -25%

https://www.zolo.ca/index.php?sarea=7531%20Glacier%20Crescent,%20Richmond&filter=1

https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDA1V1pUSg==

#5 For those about to flop... on 08.12.17 at 3:40 pm

Pink Lemonade in New Westminster

New West is starting to fade like a lot of other cities and with the seasonal slowdown approaching these guys could do worse than take the first decent offer to get their money back and get on with their lives after this speculation attempt doesn’t look like it went to plan.

On the hook for 1.07 with a matching assessment,might have to go halves in the expenses to get the deal done.

Never went to Dublin when I was living over that way ,but if you want to get drunk in similar environs sometimes it feels like there is as many Irish bars as realtors on the planet…

M43BC

2219 Dublin Street, New Westminster

May 4:$1,225,000
Aug 9: $1,188,000
Change: – 37000.00 -3%

https://www.zolo.ca/index.php?sarea=2219%20Dublin%20Street,%20New%20Westminster&filter=1

https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDAzVVdDRQ==

#6 crowdedelevatorfartz on 08.12.17 at 3:55 pm

A rate rise in Jan 2018….
What happened to the aforementioned and assumed Fall 2017 rate rise?

#7 SoggyShorts on 08.12.17 at 3:57 pm

Off topic a bit, but I’m wondering:

With possible increases to taxes on investments held in a business, should someone realize capital gains this year before the changes?

#8 Smoking Man on 08.12.17 at 4:16 pm

I don’t know Doug? Hope you’re right.

Pretty serious batman ears here.

http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/

#9 Irish Stew on 08.12.17 at 4:18 pm

Based on all of this doom and gloom, what is the safe debt to income ratio to be used for buying a home for someone to afford?

#10 tccontrarian on 08.12.17 at 4:25 pm

And don’t forget the Fourth (and probably most important piece of advice), straight from Ray Dalio:

“If you don’t own gold… you don’t know history or you don’t know the economics of it.”

TCC

#11 conan on 08.12.17 at 4:29 pm

I think the PTB want/need/desire 2 % inflation rate. Once we hit target, rate hikes will stop.

I am not mailing home the next rate increase just yet.

#12 APF on 08.12.17 at 4:55 pm

Does any blog dog have a good recommendation for a global bond etf?

#13 Triplenet on 08.12.17 at 5:25 pm

Ryan,
Doesn’t inflation enter into the BoC rate adjustment decision?

#14 Andrew Woburn on 08.12.17 at 5:27 pm

Ryan. Thanks for the global bond fund suggestion. That makes sense to me.

The general case for holding bond funds as a counterweight to stocks has been well and clearly made on this site many times and I get it. But the bottom line, especially in today’s interest environment, seems to be that you accept low returns and no growth on 40% of your portfolio just so you won’t panic and blow off your stocks in a downturn.

If you really believe you can tolerate this fluctuation risk
why put so much of your money into what amounts to an insurance policy with no growth potential? If you are unlikely to need large withdrawals from your portfolio, why not just focus on growing long term annual cash flows from REIT’s and blue chips with solid track records and prospects? If you buy Fortis at a 5% yield and and you can’t see any reason why it won’t keep paying throughout your retirement, who cares what the stock price is today especially as you are getting decent inflation protection that you won’t get with bonds? At the end of the day, bonds are repaid by stable, profitable businesses. Why not own the business, not the debt?

Obviously this approach won’t work for a fund manager who is judged on annual yield as opposed to cash flow, or for people who worry about day-to-day investment prices.

What am I missing?

#15 Andrew Woburn on 08.12.17 at 5:49 pm

#7 SoggyShorts on 08.12.17 at 3:57 pm

With possible increases to taxes on investments held in a business, should someone realize capital gains this year before the changes?
==============

Usually but not necessarily, as a matter of policy, major tax changes are applied after a particular date, usually the date of the announcement of the change or the beginning of a new tax year. In this case, the new rates likely won’t apply to prior gains but you can’t take that to bank until you see the fine print.

Garth seems to think the changes announced are a done deal and the public consultation process is window dressing. I would agree. My only counter is that there could be modifications depending on the ferocity of the blowback from gored taxpayers and we are not likely to see much reporting on this over the summer.

Depending on the nature and liquidity of the asset(s) you are concerned about, I wouldn’t be in a rush to pull the trigger at this point until we get more clarification. If you only face higher rate taxation on future gains, selling now is unlikely to make much sense.

#16 Ace Goodheart on 08.12.17 at 5:53 pm

Thanks Doug once again very useful advice and I don’t know why you keep giving it away for free.

Fortunately I have no debt but it is significant for those who do particularly mortgage borrowers with five year returns to be aware of the hazards of interest rate increases on their ability to qualify for renewal.

In plain text yes the bank will sell your house and evict you if you cannot qualify for renewal. This is regardless of whether or not you have made and are making your monthly payments.

A mortgage is a demand loan with a five year grace period. The balance is due and payable at the end of the five year term.

If that balance is like 1.5 mil and rates are going up then you might have a problem……..

#17 steerage steward on 08.12.17 at 6:03 pm

Off topic but entertaining non the less.

https://m.youtube.com/watch?v=-ukFAvYP3UU

https://m.youtube.com/watch?v=-ukFAvYP3UU

#18 Doug Rowat on 08.12.17 at 6:18 pm

#14 Andrew Woburn on 08.12.17 at 5:27 pm

The general case for holding bond funds as a counterweight to stocks has been well and clearly made on this site many times and I get it. But the bottom line, especially in today’s interest environment, seems to be that you accept low returns and no growth on 40% of your portfolio just so you won’t panic and blow off your stocks in a downturn.

But people do panic. If only I could show you the emails from clients. Truth is, all you should own are US small cap equities. But then you’d also have to be Bishop from Aliens.

–Doug

#19 Danny on 08.12.17 at 6:49 pm

#8 Smoking Man
Thanks for the Bank of Canada…reference.
This is what I like about Garth’s comment section.
Still your support of Mad man Trump and family makes my uncertainty tentacles very nervous.
Although maybe I should agree with many knowledgeable people who say Donald is just an “every day actor “…as we now know twice a day he gets a folder to tell him how is base is reacting to his short sentences.
Would be healthy for all of us on this planet if he would realize the election is over and start governing for all…isn’t that why he and his family are drawing government cheques……with great benefits?
Thanks Smoking man…keep giving us useful references.
That’s how we improve our knowledge.

#20 Yanniel on 08.12.17 at 6:57 pm

Nice piece Doug.

Could you please mention an example of a global bond ETF. What percentage of the portfolio should this be? What’s left for Canadian Government and Corporate Bonds?

Also, if you are so kind: Ryan mentioned in one of his initial Saturday editions that you guys favorite Real Return Bonds. Is this still the case? Was Ryan referring to Canadian RRB or American Inflation protection bonds?

Your wisdom is very much appreciated!

Yanniel.

#21 Penny Henny on 08.12.17 at 6:58 pm

Today’s picture.
Problems of a basement dweller.

#22 -=jwk=- on 08.12.17 at 7:07 pm

@ woburn
What am I missing?

You are missing time. if you invest 100%in stocks and there is a major crash and:

You are 35 – you’ll recover
Your 65- you just blew your retirement

any decent advisor will put you heavy into stock when young and then slow move to more bonds to lower risk as you get older. There are even Target etf funds that target a date range to retire and automatically adjust as the years go by

#23 ANON on 08.12.17 at 7:15 pm

[…] continue holding shorter duration Government of Canada bonds.
[…] the cost of servicing debt on, say, a line of credit could jump by more than 40%.

Dunno why, but that sounds a bit doom-ish right there, along with the 10Y-2Y chart. Those are the first two items on the procedure for battening down the hatches.

#24 Sarah on 08.12.17 at 7:17 pm

I sure hope they are going higher.

#25 For those about to flop... on 08.12.17 at 7:18 pm

I presented this case last week and it went pretty much as soon as they did the reduction.

Haven’t had much realtor help lately in my relentless push to try and report sales in real time but maybe one is sitting in the sun somewhere and had a weak moment and decides to tell me how much it went for.

A Pink Draw or a Lobster claw…

M43BC

401 2189 W 42nd Avenue, Vancouver paid 900 ass 911 sold on Aug 4

May 17:$988,000
Aug 2: $968,000
Change: – 20000.00 -2%

https://www.zolo.ca/vancouver-real-estate/2189-w-42nd-avenue/401

https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDAwMFM3VQ==

#26 Doug Rowat on 08.12.17 at 7:35 pm

#20 Yanniel on 08.12.17 at 6:57 pm

…if you are so kind: Ryan mentioned in one of his initial Saturday editions that you guys favorite Real Return Bonds. Is this still the case? Was Ryan referring to Canadian RRB or American Inflation protection bonds?

Your wisdom is very much appreciated!

Yanniel.

Actually, we’ve eliminated our real return bond ETF holding. It was volatile, underperformed over the long term and we recognized that we couldn’t accurately time every peak and valley in Canadian inflation.

–Doug

#27 G1 on 08.12.17 at 8:01 pm

There will not be anywhere close to 5 rate increase as by mid 2018 Canada, US and most of EU will be back to recession and rate cuts plus QE to infinity will be back on the table. As about a third of the GDP is tied to housing/construction which is already much weaker in Q3 vs. Q2 it will not take long for the economy to unravel. Debt levels are unsustainable, retail and auto sales are already falling and wages are flat. The next crisis will be worse than 2008.

In 2000 there was a stock bubble (tech) burst
In 2008 there was a stock and housing bubble (US)burst
In 2018 there will be a stock, housing and bond bubble burst and the trifecta will be very damaging.

Think about it, historically there have always been recessions every 4-8 years and now the 8th year since 2009 is about to end.

#28 will on 08.12.17 at 8:36 pm

No mention of high yield bonds. Is this rate environment a good or bad one for high yield bonds?

#29 Returns Reaper on 08.12.17 at 9:09 pm

Doug, interesting comments with respect to global bonds. I get many aspects of how they could help a portfolio. But what about the forex risks associated with them? Should they be hedged away? My thinking is they shouldn’t – over the long term forex fluctuations are a zero sum game, and the additional costs aren’t worth it given the relatively low returns.

But I’m interested to know what your thoughts are on the subject.

#30 Tony on 08.12.17 at 9:25 pm

The business cycle has been completely destroyed and anything you read from the past does not apply to today. I don’t see interest rates going any higher in America and rates will either go one quarter of a percent higher or one half of a percent higher in Canada. The boost in the minimum wage will kill the GDP rates in both America and in Canada. I’d be a big buyer of long term bonds in Canada around October of this year if the stock market doesn’t meltdown first.

#31 Jacques Strappe on 08.12.17 at 9:33 pm

#15 Andrew Woburn on 08.12.17 at 5:49 pm

If you buy Fortis at a 5% yield and and you can’t see any reason why it won’t keep paying throughout your retirement, who cares what the stock price is today especially as you are getting decent inflation protection that you won’t get with bonds?
————————————–

I’ve held Fortis for over 20 years and its my favourite stock. Reliable, consistent, growing divs typically yielding 3.5%. I can’t think of a reason not to like Fortis, except perhaps in a rising interest rate environment utilities tend to lose favour vis-a-vis fixed income? If anyone has any particular thoughts on this stock or utilities at this juncture I’d be interested.

#32 Tony on 08.12.17 at 9:33 pm

Re: #28 will on 08.12.17 at 8:36 pm

That would all depend on Trump and his corporate tax cuts. That would be the first main variable assuming it’s American high yields bonds.

#33 David McDonald on 08.12.17 at 9:37 pm

Good advice as usual although I am not sure Mr. Market agrees. The Canadian dollar was less bullish and the bond fund ZAG turned up last week. Isn’t that a bet against more rate hikes?

#34 ImGonnaBeSick on 08.12.17 at 9:56 pm

I would say IGOV, BWZ, or BWX would be decent internatonal short term bond ETFs (ex-US). MERs are 0.35-0.5 and the yields aren’t great, but it’s better than cash, and have had a decent return YTD. I’m sure there are some CAD-hedged ones, but these are a few of the more popular ones. CLF is a Canadian laddered 1-5yr Gov Bond. I’d consider ZFS, because I like the BMO ETFs. I hold ZPR and ZHP for my preferreds.

#35 AR on 08.12.17 at 10:18 pm

Sitting here surrounded by thick, black smoke and awaiting evacuation orders, I wonder if we/you shouldn’t be spending more time analyzing the costs and effects of climate change rather than the the effects of interest rates.

Not kidding. This isn’t going away. Here are some starting points:

Timber lost
Tourism $ lost
Jobs lost
Lives lost
Futures lost

Futures lost.

#36 Smoking Man on 08.12.17 at 10:18 pm

#21 Penny Henny on 08.12.17 at 6:58 pm
Today’s picture.
Problems of a basement dweller
….

A Soros educated millenial.

#37 mouldyinYVR on 08.12.17 at 10:23 pm

https://tradingeconomics.com/canada/bank-lending-rate
…interesting to see historical lending rates among G20 countries 1960 – 2017
“Bank Lending Rate in Canada increased to 2.95 percent in August from 2.70 percent in July of 2017. Bank Lending Rate in Canada averaged 7.39 percent from 1960 until 2017, reaching an all time high of 22.75 percent in August of 1981 and a record low of 2.25 percent in April of 2009.”

#38 mouldyinYVR on 08.12.17 at 10:27 pm

http://globalnews.ca/news/3455634/foreclosures-in-alberta-up-about-25-annually-for-past-2-years/
…scary in Alberta…
“More and more Albertans have or are in danger of losing their homes to the bank……

Foreclosures are on the rise, up by about 25 per cent annually over the past two years……a total of 5,746 properties were foreclosed on between April 1, 2016 and March 31, 2017. ….. 2,277 were in Calgary and 2,523 in Edmonton.”

#39 Smoking Man on 08.12.17 at 10:33 pm

#19 Danny on 08.12.17 at 6:49 pm
#8 Smoking Man
Thanks for the Bank of Canada…reference.
This is what I like about Garth’s comment section.
Still your support of Mad man Trump and family makes my uncertainty tentacles very nervous.
Although maybe I should agree with many knowledgeable people who say Donald is just an “every day actor “…as we now know twice a day he gets a folder to tell him how is base is reacting to his short sentences.

A drunk acid induced post explaning why I’m fond of Trump will not do it justice.

I’m sort of having depraved thoughts of me and the gogo dancers at Stir night club right now.

Tomorrow I’ll dilever a classic smoking man beauty.

#40 LG on 08.12.17 at 10:36 pm

FAP listed on TSX. Aberdeen Asia Pacific Investment Mgmt…yield 8.3%, pays monthly, up 6.0% ytd. Invests in foreign bonds outside Cda.

#41 LG on 08.12.17 at 10:37 pm

Like BMO etf’s also.

#42 Doug Rowat on 08.12.17 at 10:59 pm

#29 Returns Reaper on 08.12.17 at 9:09 pm

Doug, interesting comments with respect to global bonds. I get many aspects of how they could help a portfolio. But what about the forex risks associated with them? Should they be hedged away? My thinking is they shouldn’t – over the long term forex fluctuations are a zero sum game, and the additional costs aren’t worth it given the relatively low returns.

Well said. We wrote last year about the nearly impossible task of trying to accurately anticipate currency direction.

http://www.turnerinvestments.ca/pdfs/Currency-Conundrums-JUNE2016-final.pdf

–Doug

#43 Markus on 08.12.17 at 11:11 pm

I still don’t see them raising again, they need to and I hope they do but I don’t see it happening. Poloz is just too useless and weak.

Canada will continue telling itself its economy is strong and leading the world and people will continue amassing insane debt. Go to the mall and look at them, they can’t stop they are obsessed with buying crap.

#44 Smoking Man on 08.13.17 at 12:07 am

Me what a great spot

https://youtu.be/d_6hXZvYdj0

#45 Ponzius Pilatus on 08.13.17 at 1:18 am

Garth, I’m glad you survived a cyber death threat.
But, be beware of death by boredom, caused by the posts of your side show bobs.

#46 Oopswediditagain on 08.13.17 at 1:38 am

Markus: “Canada will continue telling itself its economy is strong and leading the world and people will continue amassing insane debt.”

Actually Markus, they won’t. I think Garth has really understated the new regulations that OSFI is bringing in this fall. This is a housing market killer and there isn’t going to be a delay or any changes to the legislation either.

The dog and pony show requesting submissions is simply another Government agency going through the motions.

OSFI isn’t bringing regulations in to cool the housing market. Quite possibly they don’t give a flying fig about the housing market except to the point where it compromises the integrity of the banks that they oversee.

These new regs are to protect the banks interests and if Toronto continues its nosedive it will simply validate the introduction of the new regulations.

They have seen the end run on their previous legislation and they have grave concerns about the lending institutions lack of possible prudent residential mortgage underwriting.

They aren’t trying to slow a market that is already stratospheric, they are ensuring the banks have controls in place for the inevitable.

“In addition, FRFIs should have the necessary action plans in place to determine the best course of action upon borrower default. Such action plans should cover:
• The likely recourses/options available to the FRFI upon default in all relevant
jurisdictions;
• The identification of the parties against whom these recourses may be exercised; and
• A strategy for exercising these options in a manner that is prudentially sound.”

http://www.osfi-bsif.gc.ca/Eng/Pages/default.aspx

The Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of the Government of Canada, established in 1987 to contribute to the safety and soundness of the Canadian financial system.

#47 Cloudy on 08.13.17 at 2:24 am

Hi Doug and thanks for another informative post. You mention Canadian tightening cycles and a strong case for (in the near term) more small rate increases. How about the US Fed? Any opinion on the case for their rate direction and timing? It sounds like they have gone dovish which will take the pressure of us to make any meaningful increase to rates.

#48 Mark on 08.13.17 at 3:39 am

With the economy clearly in deflation at this point?

Good freakin’ luck with that theory.

#49 FLHTK on 08.13.17 at 5:34 am

Good read. Service debt first before interest goes up. Then invest. Gotcha!

#50 Ian on 08.13.17 at 6:33 am

Great analysis Doug. It will be very interesting to see how that XLB and XSB do over the next nine months. Personally I would not touch either in a rising rate environment.

Mark…a) the US Fed is not using data currently, if they were they wouldn’t be raising, and b) inflation is so underreported it’s not even funny. I told you both these things months ago. You don’t listen.

#51 Ian on 08.13.17 at 6:45 am

http://www.businessinsider.com/inflation-is-underreported-by-governments-2016-12

https://www.bls.gov/cpi/quality-adjustment.htm

http://www.forbes.com/sites/davidmarotta/2013/04/16/big-mac-index-shows-official-cpi-underreports-inflation/

#52 Of Human Bondage on 08.13.17 at 6:46 am

Doug, I’m so glad to see that your discussion of bonds was based on financial concepts (bond duration, interest rate price sensitivities, global diversification, etc.) and not on interstellar “historical accidents” (axial tilts, orbital eccentricities, trade winds convergence, “[a]ll investing is passive”, etc.). (See comment #149 from the previous day’s blog).

(I really have to stop reading the comments, but it’s rather like trying to look away from a car accident.)

Anyway, Doug, do you think it’s worthwhile to immunize one’s bond portfolio against interest rate changes?
https://en.m.wikipedia.org/wiki/Immunization_(finance)

Today’s quote of the day from Forbes: “People are often more willing to act based on little or no data than to use data that is a challenge to assemble.”
— Robert J. Shiller, American economist

#53 Ontario's Left Coast on 08.13.17 at 8:19 am

https://www.thestar.com/business/2017/08/12/home-sellers-struggling-with-closing-complications-after-big-chill-hits-market.html

I can’t help but laugh at the sheer surprise of the blindfolded masses when the euphoria wears off…

#54 att on 08.13.17 at 8:28 am

I doubt that global bonds will change your portfolio return if you are weighted 30% bonds, 70% stocks… but this blog piece should be heeded by seniors who (should) have a much higher weighting in bonds. Canadian Couch Potato did an excellent piece on this topic a few years ago and included the scenario of rising rates. It would be foolish to run out and buy global bonds without considering the cost benefit analysis

#55 Dharma Bum on 08.13.17 at 8:43 am

#45 Ponzius Pilatus

“Garth, I’m glad you survived a cyber death threat.
But, be beware of death by boredom, caused by the posts of your side show bobs.”
——————————————————————–

YAAAAAAAWWWWWWWWWWWWWNNNNNNNNN……..

https://www.youtube.com/watch?v=PXB-5MbKBgs

#56 Dan.t on 08.13.17 at 9:15 am

I would love for rates to rise 2% next meeting but have a feeling nothing will happen for a while. Just like with the supposed mortgage rules OSFI is talking about applying.

I bet the real estate board will lobby and beg and do everything to ensure it doesn’t go through, just like politicians and government don’t want to be seen as a catalyst for what ultimately needs to happen…

mainly a house getting back to being a house and not a commodity to be sold worldwide and that has an added benefit for Canadians of being used like an ATM machine at 1.99% and a tax favorable speculative investment.

Would not surprise me to see rates stay put a while longer and OSFI wimp out. Same with NDP tough talk in BC or are they still studying the housing crisis situation?

Believe me, I would love rates to rise ASAP and love to hear all the debt piggies squeal, “but everyone said they would never raise rates”, and then maybe the debt pigs would see the correlation between record debt levels, 1.99% mortgages and insane high house/condo/apartment prices.

Real estate is all that matters in Canada and too many vested interests in keeping it propped up. Affordable housing is totally overrated and we can ‘t ever mess with peoples hard earned equity…

you know like the 60 year old couple who bought in Burnaby 26 years ago, you know, because they needed to place to live and worked really really hard to have their house appreciate 1200% …we can’t have them not be able to cash out 1.6 million tax free when they decide to sell.

Messing with real estate has been taboo for 16 years. Look at Christy Clarks program to tackle affordability…make new buyers start life with 2 mortgages. Nice!

Or all the fraud that goes unpunished and loop holes that get abused, noting happens. Or the “shyster realtor” got someone into a bidding war with themself and the house horny buyer outbid himself and a phantom by 90,000 and nothing happens.. that is just good honourable business… just like real estate board lying and publishing paid for puff pieces as “news” and hiding all the stats from the public.

http://www.thestar.com/life/homes/2012/07/04/stiffer_bidding_war_rules_sought_as_buyer_offers_90000_over_asking_with_no_rival_bids.html

The whole mess is a result of interest rates staying artificially low for way way to long, and government giving incentives to buy 1 asset class only. So now it’s gonna be Jan 2018 before that massive 0.25% rate increase happens?

#57 Dissident on 08.13.17 at 9:39 am

Its funny to watch the RE speculators try and unload their hauls:

If you look on MLS, you will see the new tower that is not even built yet at Bloor & Islington, has 4 suites posted for sale. The inconsistency of the prices makes me laugh. One 2 bed 2 bath condo suite is trying to sell at $615K and another identical one is trying to sell for $770K. Literally pulling these prices outta their butts. Then there are two others in the same $700K range. Haha, seriously?

I can’t wait until the Fall selling season.

#58 crowdedelevatorfartz on 08.13.17 at 9:56 am

@#21 Penny Henny
“Today’s picture.
Problems of a basement dweller”
++++++

Or
Problems of a tall home moaner.

#59 crowdedelevatorfartz on 08.13.17 at 10:27 am

@#56 Dan.t

Total agreement.
From the “self regulated” Real Estate Monopoly and their blatant pumping of this overpriced debacle.
To the media which were well paid to “pump it up”
Followed by spineless politicians that watched this financial train wreck game of musical chairs…. hoping that they wont be stuck with the voters wrath when the music stops and they are forced by macroeconomic pressure to finally …finally ……raise rates…
God help the last elected leader left standing(People without spines can stand? Who knew!) who is the one everyone blames for this decades long ponzi coming to an end…..Do baby Trudeau’s cry? It IS 2017 after all and it might earn him “empathy votes”.

Bring on a rate rise this Fall as was previously stated several weeks ago. ( “80% chance of a rate rise by Nov.”)…..and then another……and another…..if thats what it takes.

Bring in VERIFIABLE statistics, not these self serving “frankenstats” shat out periodically by the Real Estate industry when the market slows…. to drum up more rubes afraid of the “yellow peril” or FOMO.
Bring on real, enforcable, punitive Laws dealing with the blatant scams of the real estate industry.
And for God’s sake make the punishment fit the CRIME.
No more Fines, community hours, another refresher course in “ethics”(“What do you call an ethical realtor? Unemployed! Bwahahahahahaha!) and a slap on the hand.
They have RUINED peoples lives for decades. Throw these scum in prison with murderers and rapists where they belong. Where they can regal they bunkmates with stories of some of their high living escapades before its “lights out” and a whole new chapter of their life begins.

#60 Doug Rowat on 08.13.17 at 10:28 am

#47 Cloudy on 08.13.17 at 2:24 am

Hi Doug and thanks for another informative post. You mention Canadian tightening cycles and a strong case for (in the near term) more small rate increases. How about the US Fed?

Obviously it’s a fluid situation, especially with Trump’s unorthodox (to put it mildly) foreign policy, but the historical average for rate increases during a tightening cycle for the Fed is actually 10. The Fed is unlikely to stop at only 4.

–Doug

#61 TurnerNation on 08.13.17 at 10:32 am

#35 AR – climate change or you want to analyse man- made forest fires? Are you walking out or using burning ‘evil’ fossile fuels to evacuate?
Why not pay another 25% of your income in taxes to make the problem go away.

Proof the elites are running a green washing scam/protection racket on us:

1. Bottles water. Run by the cartels – Coke, Pepsi, Nestle etc. These should be BANNED. Super wastrful and permanent waste.. Content water unregulated, worse than tap water. Who knows what chemicals leach into from plastic. Care to guess how many millions of empties Canada/US generate daily?

2. Disposable coffee cups. A coffee shop on every corner. No municipality in Canada can recycle them.
Government is scared to stand up to cartel – SBUX, Timmies – and demand a recycleable product.
Care to guess how many millions of empties Canada/US generate daily?

3. Electric cars. Our elite rulers pass 1001 new laws against us..but not a SINGLE law requiring developer cartel to install charging stations into every condo. Let’s say 40 story tower, 500 units. If only 5% get Teslas…how to charge. Why not mandate solar arrays on rooftops there too. Closed loop. .Nope we ain’t getting that fist world technology. Only taxes.

4. Public transit: T2 just cancelled the Monthly transit pass tax credit. WTF how is this an incentive?
– Toronto population has exploded over past 30 years. NO new investment in subways in Toronto downtown core. All those PHd city planners – exist for sunshine list gain only, legal graft.

5. Stop swiffering, start cleaning. We are sold on using one-time disposable items.

I could go on. Your thinking of thinking seeks to further enslave human kind. Who are you working for? Which sunshine list are you on?

This is a greenwashing protection racket. It’s 2017 and we are still stuck with 50-year old technology.

#62 Sir James on 08.13.17 at 11:13 am

Bitcoin = $5000

#63 TurnerNation on 08.13.17 at 11:37 am

A shout out to the TFW (temp foreign workers) which toiled and picked the fresh fruit I today enjoyed.
Kanadians kids think this work is not good enough for them. Rather they sit in Starbucks on wifi checking latest T2 selfies while discussing implanted talking points of G Warming and SJWism
Overhead the TFWs transit in avec burned fossils.

Nothing to see here citizen move along now.

#64 oopswediditagain on 08.13.17 at 11:47 am

Dan T. “I bet the real estate board will lobby and beg and do everything to ensure it doesn’t go through …”<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<

Ahhh, Danny, you are a poor little bear that has been picked on by the "bull"ies for the last 8 yrs. Let me help you out because obviously you are too distraught to really understand OSFI's mandate.

The Real Estate Boards lobbying OSFI is akin to Kim Jun Un lobbying Trump for a couple of spare nukes.

Fortunately, today is Doug Rowat day on the blog. Perhaps you can weigh in here Doug and help the blog dawgs understand what OSFI cares about.

Believe me, they don't give a rat's ass about the bleating of the people or the FIRE industry. They are only concerned that the banking system doesn't end up like the U.S.A fiasco during the GFC.

#65 Wack on 08.13.17 at 12:51 pm

As rates rise, eatery’s will be the ones hurting, as family’s will have to start cooking at home again.
Happens every time

#66 Doghouse Dweller on 08.13.17 at 12:57 pm

#61 TurnerNation
Proof the elites are running a green washing scam/protection racket on us:
“““““““““““““““““““““““““““““““““““““““““`
We have car idling laws on the books. Yet the drive through line ups litter the country dumping tons of crap into the air the rest of us are breathing. It`s obvious, they won`t even enforce current laws , they just wan`t to collect carbon taxes.

#67 conan on 08.13.17 at 1:06 pm

TurnerNation on 08.13.17 at 10:32 am

“This is a greenwashing protection racket.”

They have to start somewhere and oil is on the menu, errrrr, radar.

1) The oil industry makes those plastic bottles.

2) Until we have that magic cup its good for the softwood industry. Trees regrow, they are the most recyclable product in the world.

3) Electric cars, whatever. Northern climates will not be able to use them. Oil is a safe industry for the next 50 years. It is going to be a slow phase out.

4) It may lead to more bicyclists , everyone else will keep busing, or buy a car. The used car market might get a boost.

5) Makes sense

There is a limit on what the Earth can handle. Look what happens to us when our temperature goes above 98.6 degrees.

#68 A Reply to #61 TurnerNation on 08.13.17 at 1:24 pm

You’ve made excellent points.

The business plans of so many profitable companies relate to the production of convenient, disposable products so as to have regular, reliable income streams, preferably with growth. Which, of course, is the antithesis of the environmental mantra of “reducing, reusing, and recycling.”

Perhaps we consumers can fight back against this trend in the following ways:
(1) Brew our own coffee/tea, bring it to work in Thermos bottles, and then post these actions on social media;
(2) Make more use of public transit—I agree with you that canceling the public transit amount (line 364) makes no sense, but I still ride the bus;
(3) Demand solar panels on electric cars (Ford already has a concept car);
https://content.sierraclub.org/evguide/blog/2014/01/why-solar-panels-roof-electric-car-may-not-be-pie-sky
(4) Bike to work (but only along bike paths); and
(5) Stop Swiffering, as you rightly point out! :)

#69 Harold on 08.13.17 at 1:29 pm

My neighbour sold their home to a buyer from Guangdong March 24 2017 of this year for 2,265,000 ($277,000 more than asking) with a $115,000 deposit and an August 2, 2017 closing date which has been extended to Sept 2, 2017 to allow the seller to finish building his new home. Current market value is around $1,750,000. Anyone’s guess whether the buyer will walk away from a $115,000 deposit.

#70 For those about to flop... on 08.13.17 at 2:07 pm

Pink Lemonade stand in Port Coquitlam.

These guys are borderline Pink Lemonade,but as promised I want to show as much of a spread of the market as possible.They are on the hook for 720,with a current assessment closer to their new ask.

They probably thought this place was going to fly of the shelf considering Port Coquitlam is up close to 40% average selling price, and probably originally thought the selling price might have a 9 at the front of it.

This reduction could spark some competition ,but as often discussed on here recently if this was a 799k condo the kids would put down the sand shovels and be throwing money at it.

Too many kids play outside in the sun and the sand dreaming of granite and stainless steel without sunglasses and it has impaired their long term vision…

M43BC

2157 Pitt River Rd ,Port Coquitlam.

Apr 24:$849,000
Aug 8: $799,000
Change: – 50,000 -6%

https://www.zolo.ca/index.php?sarea=2157%20Pitt%20River%20Road,%20Port%20Coquitlam&filter=1

https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDAzVVo4UA==

#71 For those about to flop... on 08.13.17 at 2:26 pm

Pink Lemonade stand in West Vancouver.

The next two cases I would like to present to the jury to show things in Greater Vancouver aren’t like the good Ol days for speculators are from different ends of the spectrum.

Let’s start with the heavy hitter who forked out 5.12 for this place in September 2016.

The assessment comes in at 4.88 and they are not the only case I have in this street with another case with another similar purchase price but dreaming of days gone by with an asking price up in the 8 million range.

In some ways the old Vancouver is back,the rain is back and so are the dreamers…

M43BC

645 King Georges Way, West Vancouver

May 4:$5,988,888
Aug 8: $5,000,000
Change: -988,888 -17%

https://www.zolo.ca/index.php?sarea=645%20King%20Georges%20Way,%20West%20Vancouver&filter=1

https://evaluebc.bcassessment.ca/Property.aspx?_oa=QTAwMDAyOUFUVA==

#72 For those about to flop... on 08.13.17 at 2:50 pm

Pink Lemonade stand in Richmond.

Just like realtors build up relationships with regular clients,I too have built up a relationship with this complex in Richmond.

Already with 4 CONFIRMED PINK SNOW cases on the books seemingly anytime I look I spot another speculator in trouble and this is only 1 phase of a 3 phase complex and many more on the production line in the city.

These guys paid 806k in Feb 2015 and the assessment has yet to catch up at 787 ,just like the other 4 cases that ended up taking a loss.

Currently asking 860k.

Not only do these cases take a loss they become comps,I doubt the owner of another condo in the high end market was thrilled to see the other day their competition take a 300k plus loss by selling for 3million when they both originally tried for something nearly touching 4.

That case is now a locked in comp 500k less than what they are currently asking.

Perhaps no summer communal Bbq out that way,every man for himself.

Steak and sausages into the lifeboat first…

M43BC

6011-5511 HOLLYBRIDGE WAY ,RICHMOND.

https://www.zolo.ca/richmond-real-estate/5511-hollybridge-way/6011

https://evaluebc.bcassessment.ca/property.aspx?_oa=RDAwMDBOQjRWQg==

#73 Perspective on 08.13.17 at 2:56 pm

Hey Flop,

You are the only post I routinely read. I scan the posts for yours and read them.

Thank you very much I very much enjoy them.

#74 Andrew Woburn on 08.13.17 at 3:14 pm

#22 -=jwk=- on 08.12.17 at 7:07 pm
You are missing time. if you invest 100%in stocks and there is a major crash and:

You are 35 – you’ll recover
Your 65- you just blew your retirement
=======================

You only lose when you sell. If companies like Fortis, BCE and the Royal Bank have to seriously cut their dividends in the mid or long term, we’re all in a lot of trouble including bond holders.

I agree it is a matter of personal risk appetite, but as Garth says, the real risk in retirement is running out of cash flow. I just don’t see how having 40% or 50% of my portfolio barely coping with inflation is helping me. Some in preferreds and some in global bonds makes sense to me. I just don’t see the long term risk in real companies that own prime dirt and established international businesses if you can still get paid through the market downturns.

#75 Triplenet on 08.13.17 at 4:03 pm

#72 for those about to flop

Assessment values should NEVER be included in any real estate analysis – unless you are not looking for precise impirical data. Which begs the question….wtf are you trying to do or solve or establish.
Assessment values are NOT market values.
If you truly knew how assessed values are calculated you would roll your eyes and play bingo for your retirement. Assessment values are for a different purpose and represent nothing to do with current analysis or anything important.
It was designed that way.

Today, inflation is the more important issue to analyse.
No inflation – no BoC increase.

#76 Tony on 08.13.17 at 4:12 pm

Things have gotten so bad in Edmonton, Alberta they’re trying to sell off thirds of homes!!

https://www.realtor.ca/Residential/Single-Family/18461311/1607-106-ST-NW-Edmonton-Alberta-T6J5M1-BearspawEdmo

#77 GAV on 08.13.17 at 4:46 pm

Doug,

What about short term laddered corporate bond funds?

Thanks

#78 Oft deleted much maligned but always brutally honest stock picker on 08.14.17 at 1:42 am

The ‘news’ in Vancouver is that prices continue to rise. Why do criminals fronting a Ponzi scheme get arrested while the RE BOARDS get to run around like crack heads?

Meanwhile….a crash in RE will likely mean an upward bias to the equity market……good for me. I’m buying select companies every day….all except a couple pay healthy divvies……growth while it lasts and dividends that never change regardless of share price…..back to the pool.

#79 BC_Doc on 08.14.17 at 1:48 am

Late to the Saturday comments here but my thoughts:

I take my risk on the equity side of my asset allocation, not the fixed income side so I don’t hold global bonds as I don’t want the currency risk. For FI, I want boring and stable– products like GICs, VAB, VSB, and savings account equivalents like RBF-2010 at Royal Bank Direct Investments which currently pays 0.75 interest fits the bill.

BC Doc

#80 cephalopods on 08.14.17 at 10:55 am

Toronto has more housing than the real estate industry is telling you.

Between 2011 and 2016, the number of households in Toronto rose to 2.14 million, an addition of about 146,200, according to the census data. That compares to 175,825 new homes built over that period. In other words, supply of new houses exceeded real household demand by almost 30,000 over those five years.

Only exception is detached homes where supply grew by 13% vs 19% for household formation.

https://www.bloomberg.com/news/articles/2017-08-14/toronto-has-more-housing-than-you-thought-canada-eco-watch