Mortgage rates will be puffing again in a few days. As I said. This comes atop hikes announced last week and the one before. There are more to come. The days of the 2.89% Big Bank five-year fixed loan are kaput. You will never see them again.
On Wednesday the yield on five-year Canada bonds spiked, as did US Treasuries. Bond prices fell and bond mutual fund owners were stung. That was no surprise. When bond prices crested about a year ago, investors piled on. In both Canada and the US retail investors pushed bond fund sales to the top of the chart, doing what they always do – chasing yesterday’s winner.
Now bodies are piling up at the exits. Last week alone sheeple cashed in $13.46 billion worth of bond funds in the States. It was the biggest exodus since (you guessed it) the final weeks of 2008. Some things are so predictable.
Why’s this happening? What comes next?
The US renaissance I’ve been telling you about for the past year (house sales, car sales, new jobs, energy rebirth) is now hot enough that Washington can dial back the stimulus spending. So the central bank will probably taper down its bond-buying program within six months (the news came Wednesday). In other words, that gush of money which has created a big demand for bonds, upping their prices and crashing their yields, will soon dry up.
Lots of consequences. Interest rates will go bloat as bonds deflate. That’ll attract money into bonds from stocks, which will temporarily puddle. Mortgages, funded in the bond market, will swell further. When it’s clear US growth will continue without stimulus, equity markets will rebound. But the outcome will suck in Canada.
Unlike America – and as BeeMo’s top economist confirmed in a Toronto speech this week – we’re going to get rising interest rates, but without more jobs or higher wages. “For a number of years Canada was outpacing the U.S., and now we’re in a situation where there’s just a lot more pent-up demand in the U.S. than there is in Canada,” said Douglas Porter. “Our consumer has tapped out, there’s not a lot of room for domestic spending to grow, and we think that the tables have turned and that’s going to be the story for the next number of years.”
Porter told a hushed room that the Bank of Canada will be hiking its trendsetting rate by a half point next summer, perhaps a full year before Americans follow suit. But between now and then, it will be the bond market, recovering from four years of crazed over-stimulation, that ups mortgages and hoops housing.
And it will. Despite what you are now being told.
A Globe column just published argues that higher mortgage rates are to real estate what Axe is to babes. But it’s a fail. Without the inflation, jobs and salary gains a growing economy brings, higher loan costs only make housing more unaffordable. And in a country with a weird 70% home ownership rate and record mortgage debt, higher rates whack the biggest pool of buyers left – the cashless virgins.
And here’s Toronto mortgage broker Dave Larock blogging away with this premise: “Rising interest rates generally occur in a healthy economic environment where future price inflation is expected, making them a by-product of positive economic momentum. While it certainly is true that higher rates increase borrowing costs, this generally happens in periods with rising incomes, higher levels of employment and increasing consumer confidence. To take our contrarian thinking to its logical conclusion, we should all be rooting for higher interest rates. Seriously.”
Poor Dave. Should get out more. Seriously. While the Dow is up 16% this year, the TSX is ahead 0%. While real estate here is 1% higher, US prices increased 11% in12 months. While our Alberta oil gluts and prices fall, the US is again exporting the stuff. There’s virtually no growth in Canada, little inflation and wage gains are less than the cost of living. We already have house prices 150% of those to the south, where there’s ten times the population. And higher mortgages will be good? And did I mention 63,000 new condos coming to Toronto? Or the real estate rot already festering in BC and the Maritimes?
There’s no doubt what’s coming. It won’t be a crash. No TV reporters shoving mics in the faces of the middle-class homeless. No foreclosure sales on the courthouse steps. No streetscapes of boarded-up McMansions with fading For Sale signs and weeds full of used needles. No drama or viz. Just a steady, protracted, relentless slide backwards to reality.
A house isn’t a right. Kids don’t deserve homes nicer than their parents. You should need money to buy something. Wealth is earned, not borrowed. The goal of life is not stuff.
We lost our way, thinking otherwise.
Not long now.