Entries Tagged 'Book Updates' ↓

On the edge

LADDER modified

Karma, part deux:

Let’s recap, shall we? The Fed is widely expected to signal the end of Cheap Money in three weeks. Already fixed-rate mortgages are getting more expensive. Banks, led by TD this week, are launching an awareness campaign so the house-horny zombies we live among will be schooled on what’s coming. And out shiny new finance minister, Bill Morneau – having told us last week the Cons left his cupboard bare – has nothing to say about what could be the greatest threat to our economy.

Let’s face it. We’re on our own. There’s no life preserver Ottawa can throw to homeowners about to go underwater. There’ll be no 40-year amortizations, interest buy-downs, foreclosure moratorium, reduced downpayments or rate holiday. The very politicians who aided and abetted this mess are unable to fix it – since the Bank of Canada has already slashed the cost of money and the feds are broke.

That’s Karma One.

The second part is equally bleak so, for God’s sake, do not let your kids read this.

Turns out at least four of the ten people you hang with or are related to, are idiots. Sadly, this might include you. So not only are 70% of Canadian real estate markets now slagging or falling with the cost of mortgages about to rise in the next few months (by almost 1%, according to the bank), but a huge number of us are already screwed. Thus, the combination of falling equity and rising rates for those with a one-asset strategy could become insurmountable.

New evidence comes via a big survey of people making $50,000 or more done by Manulife. When it comes to personal finances, many are hooped. Why?

  • Half of Canadians ‘struggle’ to maintain a balance of $1,000 in savings. A thousand bucks. Seriously.
  • Almost 40%, at least once in the past year, had to borrow money from family, tap credit cards or sell something to pay their usual bills.
  • One in six had to cash in taxable RRSPs or visit a payday loan vulture to make ends meet.

These are fresh stats. Add them to the file telling us over 90% of people have not maxed out their TFSAs, that RRSP contributions have dropped off a cliff and half of everybody believes they couldn’t survive one missed paycheque. Meanwhile new mortgage debt topped $75 billion in the last year and we just hit another debt-to-income record.

Manulife’s CEO Rick Lunny (I know the guy and he’s cool) doesn’t mince words when it comes to an explanation. The cause is houses, he says. “It does appear there are a lot of people living on the edge,” because homeownership has turned into a cult, and insane prices have saddled families with more debt – and overhead – than ever in the past. Meanwhile the real estate bubble has been unsupported by economic fundamentals, which means we’ve spent more without earning more. So we borrowed the difference.

This might make some sense when rates are low and falling and you’re job’s secure. But Elvis has left the building. We’re decidedly on the path to higher interest rates. Meanwhile the commodity rout ripples out across the country from poor Alberta – where a socialist government decided to raise taxes on individuals, corporations and now carbon. Now every day seems to bring news of more job losses, as much in Ontario and BC as the oil patch.

Well, the 1%ers who hang around here probably think they’re fine. But Karma being the bitch she is, this will end up biting everyone. The events above (higher rates, slow growth, job stress) pretty much assure a real estate correction. Given that vast numbers of people are unprepared, and have made such dumbass decisions, we should expect economic consequences – and then political ones.

Some simple actions will help. Hedge against the dollar by keeping about 20% of your investment assets in US$-denominated securities. We’re going lower. Hedge against the economy by having two-thirds of your growth assets in US or international stuff. Hedge against company risk by investing through index ETFs, and not individual stocks. Hedge against higher personal tax rates by maxing out both your RRSP and TFSA, remembering that the former is for tax-shifting, not retirement funding. Hedge against voracious politicians with family income-splitting, funding kids’ tax-free accounts, a spousal RRSP or joint investment account. Hedge against volatility with a balanced and globally-diversified portfolio, keeping 40% in fixed-income. And hedge against Canada by reducing your real estate exposure.

Or, don’t. Spend everything. Save nothing. Borrow big. You’ll be in great company.

The odds


A month ago the odds of a US interest rate hike were 27%. On Wednesday they were 74%. By this time two weeks hence, you can probably make ‘em 100%. On December 16th, barring a global military conflict or Janet Yellin being abducted by Nectonites, we’ll be launched into a  new era.

So pity the poor Millennials, average age 26. These moist creatures have grown up on house porn, come into real estate puberty and been infused with their MLS value system during the period when mortgages were the cheapest ever. The last time a rate hike occurred was when they were bumpy teens listening to 50 Cent and Snoop Dogg (my fav).

In fact a whole generation of people, now bigger than the awesome Boomers (33% of the population vs 31%) have never actually known what it feels like when the cost of money goes up, instead of down. Moreover, they don’t believe it’s possible. Ever. After all, how could a poor 22-year-old then qualify to buy a $500,000 condo? It’s the end of life as we know it. #sucks.

As this pathetic blog has tried to make clear, rates will rise and they won’t stop for a while. The increases will be steady, slow and methodical. The Fed will go maybe five or seven times before it pauses, with the ultimate goal of adding about 2% to the cost of borrowing over the next twenty or thirty months.

That doesn’t sound like a lot – until you realize it could double mortgages. As also warned, this is not a US-only thing. Bond markets are joined at the hip, so yield increases there mean the same here, and the Bank of Canada has a 93% record of following the Fed. So, yeah, gonna happen. Tell your daughter.

We already have evidence. Quietly, lenders are getting their ducks in a row with five-year fixed loan rates now ahead about a quarter of a point, in advance of next month’s event, and following the pop in bond yields. It’s hard to over-emphasize the sea change at hand. Lending costs cratered twice this year as the Bank of Canada cut its trend-setting rate twice, in January and again in July. For a time you could score a 1.89% mortgage – ridiculous when inflation was running at 2%. And all of this helped goose the housing market in the Bubble Cities, while throwing gas on the fires of human house lust.

So what can we now reasonably expect?

Sit down. Hug your dog. Have a scotch. The TD Bank (they grant mortgages, remember?) thinks fixed-rate home loans will increase by up to three-quarters of a percentage point over the months to come. So, goodbye to the twos and hello to the threes. This first-stage move will dampen sales by between 10% and 15%, says the bank, and the impact will be most pronounced in (a) YVR and (b) 416.

Exactly. The two cities where the locals think they’re immune, because everybody on the planet wants to move there. Fact is, markets that go vertical (just like tech stocks, or Psy) are the ones that inevitably blow up first. Buyers over-extend themselves snapping up slanty Leslieville semis, soulless condos or beater houses on the wrong (east) side of town, and are then most affected by rate hikes and jitters. All it takes for things to descend is the meme to spread that real estate means risk.

In case you failed to notice, there’s also been an uptick in variable-rate mortgages – even though the Bank of Canada has not hiked rates (and economic David Madani thinks another cut is coming in 2016). This results from lenders having to goose deposit returns to attract silly folks who want GICs, and also in anticipation of the beginning of the end of cheap money.

Of course, people being as delusional as they are, when the reality of higher mortgages spreads there’ll be a rush to buy and ‘beat the increase.’ Such a fitting end: fools panicking to pay top dollar for inflated assets with an increased debt load instead of waiting and going in lower with less debt – all to save half a point for a maximum of 60 months. Sigh.

But, the kids aren’t buying it. Cheap, available money is an entitlement to them, just like iPhones or work/life balance (that’s so cute). They truly believe “the government won’t allow” rates to rise, as if Justin had something to do with it. Debt-pickled homeowners have swallowed massive risk which can only be contained if mortgages stay cheap and houses keep on appreciating. Neither will happen.

Well, in three weeks we’ll know. But I wouldn’t bet against the inevitable. Look where it got Stephen Harper.