Canadian roulette

auction1

NYC foreclosure auction vultures. Are we next?

Canada’s facing a mortgage tsunami.

In a few short years, just as the housing market starts to recover from the Great Recession, it could be felled all over again. It will be a unique made-in-Canada real estate disaster with the potential to be every bit as nasty as the subprime teaser loans that felled America.

We all know what happened there. People were enticed into buying houses by incredibly low mortgages rates, which central bankers crashed in the wake of Nine Eleven. Then as housing prices shot higher, lenders created a new class of mortgages with even-lower intro rates which would reset after a few years. That would mean higher payments, of course, but who cared so long as the market advanced? Rising prices just made mortgages dwindle.

Well, by the Spring of 2006 those mortgages were starting to come up for renewal, and lots of people found their homes dropping in value, not rising. They couldn’t refinance in order to blend a refi with the resetting mortgage. Defaults soared, then the foreclosures began. By the beginning of 2008, it was a national disaster.

As those low-rate mortgages turned into toxic assets, they poisoned the banks who trafficked in them, the stock market where the banks traded, global investors who bought securities backed by mortgages, and then the mighty US economy itself. The bedrock of wealth had been real estate and homeownership. No more.

Many smug and myopic Canadians believe this is a uniquely American problem. Little do they know.

The perfect storm for a mortgage crisis is brewing in Canada. Here’s why.

Unlike in the US, where resetting mortgages are an oddity, in Canada they’re routine. In the States, most homeowners have a 30-year home loan with a fixed rate for the entire time. In Canada, we play interest rate roulette. The normal fixed-rate mortgage term here is five years, and increasingly borrowers have opted for shorter periods of time, gambling that interest rates will be lower when the loan comes due.

But, no more.

The Bank of Canada rate is now at the lowest point in history – one half of one per cent. Bank prime rates are sitting at just 2.5%, and mortgages are being loaned out at a paltry 3%. It might be possible for rates to decline by another quarter point over the next few months, but already we’ve created the same situation here that existed for Americans taking subprime loans.

Rates can only move in one direction. Up. Over the course of the next five years, possibly way up. In fact, I’d say it’s a certainty.

Central banks around the world have been printing a flood of money to try and stall deflation and revive economic growth. Public debt has exploded, governments have plunged headlong into deficit spending, countries are buying back their own bonds with tax money and banks have been nationalized while the money supply increases. In this are sown the seeds of inflation, once economic expansion continues.

And what will these central banks do to dampen down inflation before it creates its own monster? You got it. Raise interest rates.

So, if 3% mortgages in 2009 become 11% mortgages in 2014 (that is the historic norm over the last few decades), just imagine the consequences for someone buying a house today. After all, a $400,000 mortgage at 3% costs less than $1,900 a month to carry and requires an income of $69,000. But the same loan at 11% has double the payments – $3,850 a month – and takes an income of $139,000 to carry.

So anyone buying a piece of property with a mortgage today had better plan on doubling their income over the next five years to avoid a mortgage bombshell at renewal time. Or hope the value of your property explodes higher, building new equity and allowing you to tap into it to keep your finances afloat.

The odds of either of those things happening, I’d say, are nil.

Fair warning. Interest rates have hit bottom. House prices have sunk. Affordability has surged. Far from having scored right now, new buyers and mortgage-takers have embarked on a gamble they likely cannot win.

A Canadian subprime moment.

121 comments ↓

#1 ts harpoon on 03.20.09 at 10:22 pm

Garth,

I don’t expect you to remeber my past postings, but you must know that my two RE experts here in Ottawa tell me that they are protected by a market comprised of “rock-solid” federal service workers…No need for Garth to visit Ottawa they say; soooo…In the meantime:

The Brokest Generation
“Our kids are the ultimate credit market, and the rest of us are all pre-approved!”
http://article.nationalreview.com/print/?q=ZmM4NDRiNzEwOGRkNzI2MTQwODdkMDU1Nzc5N2M1YmE=

Roubini: America One Big Ponzi Scheme
http://moneynews.newsmax.com/streettalk/american_ponzi_scheme/2009/03/19/193753.html

Financial fears grow: More consumers are just a paycheck or two away from ruin
http://www.marketwatch.com/news/story/Fears-grow-more-consumers-just/story.aspx?guid={504D22FD-CC66-4FC1-BF8D-2F199C2AD042}

World mints report soaring demand for gold coins
http://www.reuters.com/article/topNews/idUSTRE52C21520090313

#2 CalgaryRocks on 03.20.09 at 10:56 pm

Scotiabank has a 10 year @ 5.25% but Americans can get 30 years for 4.65%.

Maybe it’s time Canadians start their own tea party considering that they are constantly fleeced both by governments and corporations.

#3 Lucky on 03.20.09 at 10:58 pm

I remember asking a question about this at a “financial education seminar” in Sept of 08 in Victoria. I asked the presenter, a certified financial planner, what would happen if it came time to renew your mortgage and the value of your house had gone down and you were technically underwater (or at least sitting with a loan to value of 90%+). She told the group that the bank was likely to renew if you were current on your payments as it was not in the bank’s best interest to not renew. I think she got the point I was making but the rest of the sheep sure didn’t. We didn’t mention a HELOC. Don’t even go There.

#4 ts harpoon on 03.20.09 at 10:59 pm

Behold the “New Rules of Engagement” for 2009, year of wonder: 1. RECLAIM: A new socioquake transforms mainstream North America and the world as the pillars of society are questioned and rejected.
Look for: The Death of the Consumer, long live the Citizen. You will die, in other words.

#5 eddy on 03.20.09 at 11:03 pm

All true Garth. And sadly, so many buyers will ask the classic losers’ question “how much are the payments? well, I can handle that”
It’s a classic set up for a knock down. The government is in bed with the banks and the goal is to empty Canadians’ accounts. It might be prudent to abolish the CMHC mortgage insurance and return to 25% down.

“on a warm summers evenin’, on a train bound for nowhere”

#6 TokyoTuds on 03.20.09 at 11:04 pm

Garth,
Today you tell us that “Rates can only move in one direction. Up. Over the course of the next five years, possibly way up. In fact, I’d say it’s a certainty.” And on March 18th you told us that, “Interest rates will continue to race to zero and stay there.” Can you explain in more detail? These two statements seem to contradict each other.
Cheers,
TokyoTuds

No. Low rates for a year, then higher after that. Once the Great Recession starts to end, all the dynamics change. — Garth

#7 North Vancouver Citizen Jr. on 03.20.09 at 11:12 pm

….There is only one place that is safe from the world’s deflationary spiral, where sanity remains, where your personal “ohm” remains privately your own, where, with your dog, you can walk a different trail everyday of the month and not walk the same one twice…North & West Vancouver’s North Shore…two suburbs of the city of Vancouver BC, the next Financial/Trade/Leisure capital of North America.

…You heard it here first…

#8 Cal Capone on 03.20.09 at 11:15 pm

Garth, I agree with pretty much every post that you make. Such is the case as this posting, inflation will rise, rates will rise, and what is the difference of offering sub prime loans vs unprecedented low interest/mortgage rates. And lso agree with some of your more recent posts about the Canadian banks not failing, or that there will not be a technical depression.

However I am always left, after reading your posts, with the voice of Kevin O’Leary from BNN asking the same question “But how can I make money from it?”

If any of your future posts, or any other readers, could follow up and help answer that question, given future housing devaluation here in Canada, commodity inflation (mild or severe), the deep recession we are in, and that 2009 is turning out to be the year of job losses. It would be interesting to hear any comments on strategies to actually make some money rather than cash out and preserve capital (I am not saying that you only recommend that).

Also as an aside, I can’t believe that the average Canadian has absolutely no idea how many jobs have been lost here on a per capita basis, as we compare our gross job losses to the States, which had about 7 times the number of jobs we (Canada) lost in February, even though they have about 10 times the population.

#9 Larry on 03.20.09 at 11:18 pm

Actually i’ve seen 10 year fixed rate loans, but why do we not have fixed rates for the entire loan like in countries such as the US, France and Ireland. If you borrow the money today at today’s interest rate then that’s a done deal IMO.
If i bought a car today, i pay the price of today and will not be going back to the dealer in 5 years to renogiate the price or terms. BTW Garth inflation has already started gas prices are creeping back up and the cost of food especially good food is up almost 20%.

#10 Might As Well Be Concerned on 03.20.09 at 11:20 pm

I mentioned this aspect a few days ago. Plagiarism?

Not a new view.

I have observed that the Central Bank rates have been ratcheting down over an extended period of time. Yes, it goes up and down but the trendline has hit bottom now.

Now here’s the question. At this point can the Central Bank still be in control? Doesn’t look it. Even if we escape this problem in the short term, the only way to correct the economic problem requires a destruction of equity and raising interest rates that controls speculation and factors in real risk. The market has no longer been pricing risk because the Central Bank sought to remove it. They are now cornered. Cantral banks cannot create paradise and it certainly calls into question their policies.

#11 Happy Renter in North Van on 03.20.09 at 11:23 pm

Garth, I agree with your analysis… that’s why I railed against 0/40 mortgages to anyone who would listen… Under the old 25 year amortization, homeowner will typically experience 4 renewals… With 40 year amorts, you’re up to bat 7 times… More interest, longer risk to rising interest, nearly 2X renewal risk…

#12 RTbandit on 03.20.09 at 11:31 pm

Garth, you are incorrect….Bank’s offer 10 year fixed rate mortgages, which you can get for 5.25% right now…..that locks you in until 2019

Not recommended – a huge premium you do not need to pay. It is an unwise borrowing strategy except for cash-strapped first time buyers. — Garth

#13 Anon on 03.20.09 at 11:38 pm

With respect a comment from the last post:

#67 @Garth 2:

By no means am I hot or bothered. Nor am I in hysterics or manic.

But….

My whole point is that numbers should speak for themselves. Let me know what you disagree with:

a) GTA sales are down YOY
b) GTA prices are down YOY

In your last comment you refer to having “little faith in this rally”. What rally? Please refer to points a) and b).

How can you justify a “rally” when all measures continue to point down?

TREB spins the numbers. I perfectly understand the rates of decline have slowed. My point is that the most obvious observation to be made is that a rate of decline still exists. My sinking ship analogy is valid. Whether it is sinking at 10 feet per hour or at 5 feet per hour, the message should be that the boat is sinking. To say that it is sinking slower is missing the point.

“The ship is sunk for flippers. This much is true. But for regular-joe homeowners, it seems less dire.”

I will agree with this statement, but what of first time buyers? Why buy today what you can get for significantly less tomorrow? Is the fact that prices continue to fall YOY not relevant? Is this not something that should be communicated in plain english, rather than spun in an attempt to paint a nice, rosy picture for the first time buyers?

In your last statement you state that “on a month-to-month basis (prices) are in fact rising.” Your original comment states “Toronto prices are also rising month-to-month. They are not back to 2008 levels yet, but they are gaining and fast.”

Let us take a closer look. (But for the record, I believe one should compare apples to apples and oranges to oranges; ie. YOY not MOM.) But if you choose to go MOM, let us take a look at the 2009 mid-February average price. It was $364,748. At mid-March it was $365,499. This is a rise of $751. (Yeah…only three digits there.) That is a gain of 0.2 percent. Not 2 percent. ZERO POINT TWO! This is your definition of “fast”?

And lastly, in the March 2007 Market Watch publication, Ms. O’Neill of TREB offers us this little gem: “Any result over 8,000 (sales) must be considered a strong performance.” If one doubles the sales for mid-March, you would be just over 5,000 sales, nevermind approaching 8,000. While admittedly a very basic model, the law of supply and demand would suggest that where the demand is low, supply high, prices need to come down. And while Ms. O’Neill doesn’t offer any opinion, I wonder if 5,000 sales are at best, a weak performance.

By no means am I being “indignant”. I am conveying my point of view, which appears to be supported by the numbers, rather than a realtor’s wish for a strong spring.

Hopefully, this little interchange will not be construed as being anything but a rational position. I am certainly quite relaxed and rather enjoy this little back and forth banter. Please feel free to rebut any of my statements with facts and figures. (Or rant if you wish, I enjoy those posts as well.)

Enjoy.

(Truth will continue to hurt) :)

#14 Ted on 03.20.09 at 11:38 pm

What about locking in a 10 year term and buying right now? Starting with a low ball offer of course!

#15 Da HK Kid on 03.20.09 at 11:39 pm

Perfectly said. Canada is absolutely at a disadvantage in many ways with their almost variable mortgage loans.

If you are looking a purchasing any real-estate right now it’s because the magical house you see in your dreams has come on the market with a haircut of 30% off peak price.

But wait, it gets better, interest rates are at an all time low so you feel it’s finally your turn to WIN!

You still have your 6-digit income and even if your co-workers are nervous, you’re not because it couldn’t happen to you.

You look at the for sale signs on the street of the magical house and see many, it doesn’t bother you at all and your significant other doesn’t read the financials and been hoping to change your last name to Jones.

Your RE Agent is calling you every minute to view the house once again. The frequency doesnt make you go hummm?

You roll the dice because you like many have managed to sit on the sidelines with cash and now the magic carpet has rolled out from the magic house, out pops the banks and RE agents with the prize.

Your smarter than a bag of hammers so you go for the 3% 5yr with all your cash in equaling 15% down because the bank wont accept any less. YOU SIGN!

THEN….YOUR DONE!

The house devalues the 15% down, ouch! Potentially as all the other houses didnt sell and dragging your down to this level in 9-12 months. Your company downsizes because it’s the right thing to do, you dont get the axe but job share with your buddy and your income is reduced 25%…ouch!

“Don’t worry, we’ll be okay!” has replaced high frequency words in your vocab like “the”, “beer” and “hey you”.

You ride the storm, you live on a block with few neighbors, safety becomes an issue and you feel more safe in the city. Your home is now under water by 10% more and it’s 2011. Your garden looks great, must be all that flex time!

Renewal is coming in 2.5 years. Time has come, you’re house broke already, interest rates are 11-15%, you cant renew, your income slashes another 15% or no job now. No cash, no assets, no reserves, nice garden…hope there’s veggies in it!

You rolled that dice, the bank and RE agent blew on them too! You played yourself and got played brother and now your toast.

My two cents but why take the risk when you dont even have too!

Good on ya Garth!

#16 My_view on 03.20.09 at 11:45 pm

Great just friggin great, for now on why even talk about real estste. I t sucks now and forever. I will wait for the -40% correction!

#17 Republic_of_Western_Canada on 03.20.09 at 11:56 pm

“Rates can only move in one direction. Up. Over the course of the next five years, possibly way up. In fact, I’d say it’s a certainty.”

To what extent is the inverse relationship between house price vs mortgage interest rate similar to bond price and bond interest behaviour? What derivatives products exist that can be used to exploit this future scenario?

#18 Realtor on 03.20.09 at 11:56 pm

Hi Garth,

I didn’t realize that in the U.S. most homeowners have a 30-year home loan with a fixed rate for the entire time. Thanks for letting us know about that…..wouldn’t it be nice to have a 30 year home loan at 3% and not have to worry about what rates will do in 3-5 years?!

#19 Basil Fawlty on 03.21.09 at 12:00 am

“And what will these central banks do to dampen down inflation before it creates its own monster? You got it. Raise interest rates.”
Raising interest rates in an economy saturated in debt will obviously be a disaster of epic proportions. The government could also decide to save the economy by keeping interest rates low, through the continued purchase of bonds with newly created dollars. So the government may soon face a tough decision; to control inflation, or maintain the economy.
Of course, they could just discontinue the monetary inflation, but that would also kill the economy. Of course, they should just accept the fact that either now or later the bad debt must be purged from the system. This will create hard times, but the more they tinker through debt and money supply increases, the harder the eventual fall.

#20 Kim on 03.21.09 at 12:21 am

Since when were fixed rate mortgages a max of 5 years here in Canada? I am presently in a 10 year fixed rate.

#21 . . . fried eggs and spam . . . on 03.21.09 at 12:40 am

“. . . the next five years, possibly way up. In fact, I’d say it’s a certainty.”

Five years leads to 2014. Around 2015 or so, there will be a whole bunch of boomers who will put their one prized asset up for sale — their house, expecting it to sell for stratospheric profits, so they can pay off their mortgages, retire and live happily ever after in La-La Loonie Tunes Land.

Not Lotusland, ‘coz that’s where the 2010 Winter Olympics will have already broken the back of B.C. taxpayers. For less than a month’s worth of glitz, glamor and poppycock.

Coincidentally, 2015 is about the same time when CPP / OAS / GIS will — ! SHOCK OF SHOCKS ! — all of a sudden begin to have major shortfalls in their funding, because the next generation won’t be able to pick up the slack — unless their taxes are increased to about 75% of earnings.

I understand Petcetera — a fairly large pet chain store here — is on the verge of bankruptcy. Seems that not many people are buying pets now — there are other things to be concerned with.

“. . . those low-rate mortgages turned into toxic assets, they poisoned the banks who trafficked in them, . . .”

If US banks are presently going under, what of Cdn. banks who stand to take a beating from this?

There are loan-loss provisions in all banks, but how much in the way of losses can a bank take before it becomes insolvent, unable to pay all its’ creditors?

Sure would be nice to have a crystal ball, look five or ten years ahead and see what kind of lifestyle most Cdns. are living. Probably won’t be the same our parents lived, as they grew up paying all their bills off on time.

Five years ago in 2004, did anyone really see this debacle forming? If Madoff and other rich hucksters are being caught and jailed, there are probably a few ‘elites’ left who have become filthy rich off the backs of others.

Hell is too good a home for them.

#22 GenX-Y Corp Press Release on 03.21.09 at 12:42 am

Press release, March 20, 2009

Genetics X-Y Corp announces bold new corporate strategy.

Genetics X-Y Corporation would like to announce the results of their very productive planning session recently held in the secluded “GenX-Y campus near Vail Colorado.

As summarized by the President of GenX-Y, Mr. Ilike Toparty,

“Ladies, fine, lovely ladies, and gentlemen, if I can use that term loosely, investors, our wonderful partners in the banking industry, especially those with private jets and Super Bowl tickets, thank you and welcome.

“Recently great concern was raised in the media as to whether or not GenX-Y would be able to face the economic uncertainties that befall the company, and indeed the whole world economy, with our current offerings of genetically and synthetically enhanced reproductive products, given the current “anti-production” stance of our largest financier, BoA, otherwise known as Boomers of America Inc.

“Well, I must admit that we were inadvertently involved in many financial transactions with BoA, some of which I must admit we didn’t fully understand. Much follow up is found in our financial statements and the various requests for information that we have filed with BoA and Congress.

“As you may be aware, we have entered into various agreements with Boomers Of America that leave us liable for simply outstanding sums of money on a go forward basis. I don’t have to explain to any of you what those are.

“We have come up with a 2-fold approach. First, we will use the courts and tax law to our favor for the immediate period covering the next 15- 20 years to delay implementation of these unfair and in our view illegal contracts by insisting that tax rates remain equally applied across all companies. This of course is unlikely to be highly successful as most Supreme Court justices are former BoA employees.

“But we have a new, high potential strategy guaranteed to ensure the success of our customers and the company, if we have a little research and development success.

“We are going to focus on developing with our vast genetic and synthetic experience, life elongating technologies. That’s right folks, instead of letting BoA die and leave us with their obligations, we are going to find new and innovative ways to keep them alive as long as it takes, and I mean as long as it takes, such that they are a working and viable company until they have paid off their own debts.

“Ladies and gentlemen, our success has always come from thinking outside the box. We’ve done it again. We are going to keep Boomer of America alive and working through genetic technology, supplemented by the usual synthetic hip replacements and appearance enhancements, thereby avoiding our own counterparty risk.

“It’s a bold strategy, and I think unique. We are going to subsidize our greatest dead beat counterparty, but we are using a new and original strategy. Instead of letting BoA die and thus threaten our own financial success, we will keep them alive indefinitely, working, slaving if you will, eternally if necessary, until their balance sheet is solid and the company can be appropriately resolved.

“Thank you, and good night.”

#23 hobbygirl on 03.21.09 at 12:45 am

If you want to predict what the future holds, just look at where I live in Thunder Bay. We’ve been in a downward spiral for the past 15 years due to a collapsed forestry industry while the rest of the country has been booming. As a result of the mass exodus you can buy a newer home for the price of a new vehicle and people here are happy to make less money because it means they are working (likely in retail).

What’s weird is the incredible expansion of retail outlets in spite of our mass exodus. We had fewer stores here when times were good twenty years ago than we do now! To make matters worse our last pulp and paper mill Abitibi Bowater is teetering on bankruptcy protection and our city is on the edge of mass pandemonium.

Many people I knew who moved out west to find greener pastures found the pasture overgrazed, and not green, but brown. These people and have returned home because it’s suddenly ‘better’ here than ‘there’. There are no more boom areas to run to anymore.

Buckle down everyone, its going to be a bumpy ride.

#24 Gonzo on 03.21.09 at 12:52 am

Garth,
I think you’re bang on about this one. The really scary thing is that the real-estate collapse in the U.S., and the decline here happened have happened despite record-low interest rates. Keeping rates low and printing money into the system is only going to make things worse. This is not a “credit crisis” it’s a saving’s crisis. The inability of us to borrow money is because we’re broke. “Loosening” the credit market’s through stupidley low interest rates will just allow more people to buy the things they won’t be able to afford once interest rates rise.

#25 Taxpayer like you on 03.21.09 at 1:11 am

Garth says ” The maximum fixed-rate mortgage term
here is five years”

My Credit union will do 10 years. Local broker can get 20 year money. Higher rates though of course.

The link provided to the Vancouver Province article re foreclosure in Pt Alberni BC was good. A relatively modest $140K outstanding, a reset at about 8%, but the original subprime creditor wont renew. This is the part that makes no sense. If no renewal, there is no re-set, and owner is free to get money elsewhere at market rate.

From lenders perspective, why not re-negotiate with better rate? Does a US sub-prime lender really want to own a house in Pt Alberni? I guess every case is different, but wouldnt this be preferred as a general policy rather than having thousands of foreclosures
depressing the market even further?

#26 Calgary 2009 on 03.21.09 at 1:23 am

So what you say here is that the deflationary recession will turn into an inflationary recession. What these two have in common? “recession” is the word they share. Is it better to have an inflationary recession cause it can be contained? But then that’s still a recession, isn’t it?

Capitalism is nothing but a long term ponzi sceme, in order to work, it needs more people to join or/and have existing players spend more to sustain it. Of course is only going to work for so long, just like any ponzi scheme and most likely the colapse is going to be avoided this time, however should this happen again, that’s going to be the end of it.

American capitalism has been the roulette most of the world has played since the end of the first world war, however as of lately the american roulette looks so much more like the russian rulette, you can only make it so many times ……

#27 dd on 03.21.09 at 1:51 am

Great future reflection

#28 Too Old Bob$ on 03.21.09 at 2:16 am

“And what will these central banks do to dampen down inflation before it creates its own monster? You got it. Raise interest rates”

OMG! deja vu, Where did I hear this comment before?

Sounds like 1981 all over again, but with higher mortgages. Of course it won’t get to 18%, will it?

Downsize, payoff, win the lottery, just do something to get rid of the debt.

#29 Yet Another Albertan on 03.21.09 at 2:30 am

Garth,
I have a fixed term rate of 10 years, so you can lock in for that long. I completely agree with your mortgage interest roulette comment. Please note that you may be able to “port” (take your mortgage to another property if you sell your current one) your mortgage so don’t be scared to lock in for the longer term. Its your insurance against interest rate rises. In Canada you bear the interest rate risk, whereas in the US you don’t.

#30 gold bug on 03.21.09 at 2:50 am

So the central bank’s answer to a burst debt bubble is to create another debt bubble.

That’s just great.

#31 rant in Calgary on 03.21.09 at 3:17 am

Welcome back Garth.

#32 Barb the proofreader on 03.21.09 at 4:04 am

Perfect logic Garth. Can’t disagree with you.

#33 frugalistas.blogspot.com on 03.21.09 at 4:57 am

Garth, you’ve indicated that rates would be low, yet in this blog you’ve reversed course.

Why the flip all of a sudden?

No flip. Low rates for at least a year, then they will rise inevitably within five. — Garth

#34 Mike (authentic) on 03.21.09 at 5:35 am

Garth, you nailed it right on the head!

Lots of new buyers out there are being fooled into buying without thinking about interest rates in 3-5 years from now. Many I’d gamble are taking variable rate mortgages rather than setting in on a long 10 year fixed one. (CIBC is offering a 10yr fixed at an amazing 5.25% http://www.cibc.com/ca/rates/index.html )

Pumping more money into the economy and forcing it down the mouths of those already overly indebted won’t work. The patient needs excercise and a healty diet to get better, not more double debt-cheeseburgers.

Mike

#35 polecat on 03.21.09 at 5:49 am

Garth,can you or someone here explain this.My credit card was maxed,I’ve been paying it off like a fiend and put just over 10 000 in the bank.Turn around and they upped my limit from 9000 to 14000.Are they just trying to get me to spend more?Seems like it.Forget that,I’ll keep it for booking flights or hotels but no more buying stuff that should be paid with cash.Thank’s to all here for your insights,I feel strangely confident and glad I kept renting,cheers…

#36 ca on 03.21.09 at 7:18 am

Along the same lines:

http://www.minyanville.com/articles/Fed-mortgage-rates-estate-treasuries-refinance/index/a/21722

#37 john m on 03.21.09 at 7:40 am

Great post Garth ,i remember the 80’s in Windsor when interest rates doubled.Its inevitable that rates will go up and even without the recession (depression) so many people are way in over their heads with very little income left after their mortgage payments at todays rates. Very scary thought!!

#38 miketheengineer on 03.21.09 at 7:43 am

Garth et al.

Toronto and GTA RE markets.

It is really hard to guess the future of RE in GTA. New people arrive here every day from just about everywhere on the globe, all looking for the good life. We do live like kings here. Just ask any of the new people here, they will tell you what it is like in their country, and sometimes the stories are not so nice. In GTA with the new arrivals, there should be demand for entry level places, even now. I don’t see that tapering off too much, especially semi’s and entry level detached, anything without condo fees. These new people can afford a certain mortgage based on income, as prices drop in GTA, some of those people will jump on the RE bandwagon. Those are the guys who may get caught in 2014 or whenever when the interest rates rise, similar to what happened in the 1980’s. It sucks, but this is life in Canada. Garth is correct in the wait advice, especially if first time buyer or you have cash. Most don’t. I wish I could sell, but my mortgage is less than rent for me, so I choose to stay. My dream is to move to the country and get off the grid.

Oh, reminder to stock up on Food, canned and dry goods. If we all stock up, next winter when the unemployment rate reaches it’s all time high, we can donate generously to the food bank. Already some cities are struggling to cope with demand. Next year will be a big struggle for lots of people. If everyone eats, we all can continue through this crisis.

Help your fellow Canadians. Give to your local food bank.

#39 Les on 03.21.09 at 7:49 am

Would you clarify?

Is this what you are saying?

There is the current set of conditions that will cause house prices to decline further and a second, longer term set of conditions, that should also cause one to be further cautious about prices paid now for real estate?

Fergus Flyer

#40 CalgaryRocks on 03.21.09 at 8:00 am

Capitalism is nothing but a long term ponzi sceme, in order to work, it needs more people to join or/and have existing players spend more to sustain it. Of course is only going to work for so long, just like any ponzi scheme and most likely the colapse is going to be avoided this time, however should this happen again, that’s going to be the end of it.

Except that the economies that are falling the fastest would be Karl Marx’s wet dream. The ponzi scheme is socialism but the reason for this crisis is economic facism by a bunch of greedy jerks that need to be paid million dollar bonuses to do their job AFTER they burned down the house. Nothing to do with capitalism.

#41 Ben on 03.21.09 at 8:42 am

I agree with the concept for this article. There are a lot of first timers heating up the market right now, and I’m not sure they’ve put a lot of thought into the possibilities of tomorrow.

Not entirely clear on what is implied to be the best strategy. Variable rates enticing right now, but we are warned they may jump before our term is up. 5-year rates enticing as well at around 4% (with a bit of negotiation), and seems to be implied as the best current strategy. 10-year @ 5.25% is commented to be too much, too large a premium. This would imply that the rate in 10 years is foreseen to be around 7%, not 11%. Little bit contradictory, at first glance. (Don’t have time to break out the mortgage calculation spreadsheets right now though to do proper arithmetic…)

We have all heard the 2001 study from Moshe where it was found that 9 times out of 10, mortgagers were better off with variable rates from 1950 to 2000. However, given that interest rates are currently at all-time lows (probability of A given B, for the statisticians among you), one has to think that the historical study might not apply to the situation today, and this might be one of those times where a fixed rate might be better. Moshe has come out and implied this in a bit of a wishy-washy way, although not strongly, as nobody in the business of predicting mortgage rates will commit one way or another. At the end of the day, one person’s guess is as good anothers.

Anyhow, good article from Garth – a subject with real potential to cause pain tomorrow to some slightly naive homebuyers today.

In fairness to Garth

#42 Mel Eager on 03.21.09 at 8:48 am

I just renewed my mortgage with a variable rate mortgage at Prime + 0.80, so my mortgage rate right now is 3.3%

I turned down 4.29% 5 year fixed so I will effectively save 1% for at least a year.

When should I pull the trigger and lock in though?

Thanks,
Mel.

Ask me in a year. — Garth

#43 Madame Guillotine on 03.21.09 at 9:11 am

An economist’s guess is liable to be
as good as anybody else’s.
Will Rogers

#44 pbrasseur on 03.21.09 at 9:30 am

Great post Garth!

Looks like you’ve been reflecting to try to make sense of the current situation in which Canadian home prices are holding relatively well (for the moment).

I believe as you do that they are being held by the unusualy low interest rates which happened just at the right moment, when the decline was starting. Not only this is unsustainable as rates will go up eventually, but it brings in even more victims to be affected by the inevitable collapse. True that buying based on current rates is for many the equivalent of a ticking time bomb.

Bottom line is canadian home prices will come down because they make no sense from both economic and demographic perspectives.

Frankly I don’t know which scenario is preferable or likely, a quick debacle or a long slow decline?

A quick debacle would have big immediate impact on the economy but would allow/force people to react and adapt sooner to the necessities of their retirement. A slow decline or stagnation could be more damaging in the long run. People who rely on their homes to finance their retirement would find at the last minute it can’t be done.

I wish I had the answers but I don’t, just like the rest of you ;

#45 Jelly on 03.21.09 at 9:47 am

Regarding better deals in the US.
Canadians never get as good opportunities as the US for making money. Sometimes it is a royal pain in the ass as a business owner. I am sure if you talked to the bank they would try telling you they are more conservative for our own good. Hmmm, interesting how screwed up our economy will get in comparison to the US.
Are we really supposed to believe we are immune just because governments do not give us as many incentives to encourage business?
It is annoying that in the US right now you can get 0% credit cards that I could make a lot of money with.
Best offer in Canada? I am not sure but it sure as hell isn’t 0%.

#46 dd on 03.21.09 at 10:00 am

#7 North Vancouver Citizen Jr.

….There is only one place that is safe from the world’s deflationary spiral …North & West Vancouver’s North Shore…

Honey what was that noise? A tree falling in the forest? No dear, that is just the peaceful sound of falling house prices on the North Shore.

#47 jess on 03.21.09 at 10:06 am

the bottom of the iceberg

consulting fees …persuasion fees——-bribes

The TI Bribe Payers Index evaluates the supply side of corruption – the likelihood of firms from the world’s industrialised countries to bribe abroad.

http://www.transparency.org/policy_research/surveys_indices/bpi

http://www.pbs.org/frontlineworld/stories/bribe/2009/03/sweden-uncovering-the-secret-deals.html

#48 dd on 03.21.09 at 10:12 am

#17 Republic_of_Western_Canada

“To what extent is the inverse relationship between house price vs mortgage interest rate similar to bond price and bond interest behaviour?”

The more expensive the debt is the less the asset will be over time. That is why rates are near zero. The gov is trying to get everyone to lever-up once again.

#49 dd on 03.21.09 at 10:16 am

#16 My_view
… why even talk about real estste. I t sucks now and forever. ”

never say never

#50 North Vancouver Citizen Jr. on 03.21.09 at 10:20 am

“”No flip. Low rates for at least a year, then they will rise inevitably within five. — Garth””

…..Like a beautiful landscape painting….illustrating a devastated background including California, Arizona, Nevada, Florida, New York State, Mass, Conneticut, Ohio, Michigan, Quebec and Ontario.

Whilst leaving only the beautiful Pacific Northwest led by Vancouver BC, the next Financial, Trade, Leisure capital of North America.

Honest injun.

#51 dd on 03.21.09 at 10:25 am

#25 Taxpayer

“Does a US sub-prime lender really want to own a house in Pt Alberni?”

If the banker knew the local area, clients, and economy we wouldn’t be in this mess. The fastfood approach to money lending doesn’t work. Back to the days to banking relationships.

#52 Wealthy Renter on 03.21.09 at 10:32 am

It is really hard to guess the future of RE in GTA. New people arrive here every day from just about everywhere on the globe, all looking for the good life. We do live like kings here. Just ask any of the new people here, they will tell you what it is like in their country, and sometimes the stories are not so nice. In GTA with the new arrivals, there should be demand for entry level places, even now. I don’t see that tapering off too much, especially semi’s and entry level detached, anything without condo fees.

Mike, define too much? In 2008, home sales in the GTA fell ~22% from 2008 levels, and sales in the first quarter of 2009 are down ~34% from the same period 2008. The much discussed GTA crash of 89/90 resulted yearly decline of 33%.

Your immigrant argument is a strong one, but it is uncertain how well it will hold in a recession. The GTA has had a massive influx of immigrants for my entire lifetime, and real estate has still crashed in the past. An immigrant’s ability to buy a home is determined by the ability to get a job. In southern Ontario, that outlook will be bleak for at least a few years.

My wife and I could list about 50 top quality, doctoral and post-doctoral educated scientists (many of whom have jobs in Canada,) who have packed up the family and moved back to China for much better opportunities back home. We just had dinner with American friends (a couple) that work for Wyeth (bought by Pfizer.) There will be thousands of layoffs, and they will probably get caught up in the restructuring. These folks are the best and brightest development scientists we know, and they have decided to move back to China (along with their expertise) for better jobs and a more secure future.

I would bet that thousands of our best and brightest immigrants are thinking the same thing. The supply of wealthy immigrant homebuyers could dry up.

#53 ThumbsUp on 03.21.09 at 10:37 am

‘I have tremendous faith … it will get done’ – David Dodge interview

Q: In Canada, what does this mean? Tighter controls from CMHC over mortgages, and a national securities regulator?

A: I don’t use the word securities regulator. I think that’s misleading because it kind of says you just do what securities regulators have always done. I don’t think that’s the way forward. The way forward is somehow that whatever the securities oversight agency is, it’s not only going to have to be concerned with trying to dot the ‘i’s and crossing the ‘t’s in a prospectus, but basically be sure that all parts of the market are operating according to some basic principles for the way markets ought to operate.

http://business.theglobeandmail.com/servlet/story/RTGAM.20090320.wdodge0320/BNStory/Business/home

Mr. Dodge got my vote.

#5 eddy
Agreed, get rid of CMHC already, the Canadian version of AIG – Garbage Insurance Underwriter, the hand in taxpayers pocket and grabbing our balls (looking at mine)

#54 Ron on 03.21.09 at 10:43 am

25 years mortgage terms used to be standard in Canada. My first two mortgages were 25 years terms at a fixed interest rate. We need to get back there.

I don’t understand your comment that “resetting mortgages is an oddity” in the US. We visit my US-inlaws frequently and what I’ve noticed are the headlines like “Is it Reffie time?” Reffie means re-finance. it is a tradition down there that whenever home values increase and interest rates drop, homeowners refinance to grab the extra equity so they can deduct it from their income taxes. granted, in the current environment, this isn’t likely today but that’s not my point…it used to be extremely common.

best.

Refi is the American borrower’s choice. In Canada the bank tells you when to refinance. — Garth

#55 jess on 03.21.09 at 10:43 am

innovation indeed they must have had tinnitus!

yield hunters ?
http://www.ft.com/cms/s/0/0d55351a-0ce4-11de-a555-0000779fd2ac,dwp_uuid=ae1104cc-f82e-11dd-aae8-000077b07658.html?nclick_check=1

#56 North Vancouver Citizen Jr. on 03.21.09 at 10:43 am

#124 Pat G…..thanks

“””Yes, China and other countries have been invited by the Harper government to invest in Canada with fewer regulations and with the level of investment raised from $295,000. to one billion dollars before any review is required to determine if the investment is in Canada’s interest. this is how he plans to stimulate the economy.
– And not just that, the threshold would rise over four years.

He also said they’d remove the present cap of 49% ownership in the uranium sector to allow majority ownership but only for countries that give Canada commensurate rights and benefits and that would pass a new national security test.

Read all about it here “””

http://www.theglobeandmail.com/servlet/story/RTGAM.20080912.welxnharper0912/BNStory/politics

…What did I tell ya’all !!!….Vancouver/Hongcouver,(name makes no difference to me), the next Financial/Trade/Leisure capital of North America.

You heard on this blog site first.

#57 rationalnational on 03.21.09 at 10:44 am

Uh, here we are again, talking “cyclically” about the future of North American markets. Japan went through a similar event, albeit less intense than what we face now (commercial vs residential RE bubble). You hear them talk about the lost decade of stagflation. Zombie banks. Lowered interest rates trying to stimulate activity. Sound familiar? Now consider this:

In 1991 Japan’s discount rate was 6%
In 1992 it was 3.25
In 1993/4 it was 1.75
From 1995 – 2000 it was .5
From 2000 – TODAY it is .10

Two lessons:
1) There has been NO recovery in the GDP of Japan. There will be NO recovery in the GDP of north america either. You add up all the supposed economic activity over the past 10 years here and compare it to the amount of debt everyone took on and they are roughly equal. It was a mirage. There are little to now savings with which to build a new foundation, we are simply not competitive with the rest of the world any longer in enough ways to make a difference. When you consider this, real GDP over the past 20 years has been flat. All of the up/downside has been a function of unsustainable economic policies (bubble blowing).

2) Interest rates can stay low much longer than we expect. The latest move into quantitative easing is DESIGNED to keep rates low. Other countries will follow – especially the BoC. This is the Japanese play book, only for a much larger problem.

This is a race to the bottom for western currencies The competing forces of deflation and inflation will co-exist. Economic stimulus only works if the patient is willing to take the medicine. Unfortunately we’ve all overdosed so the new approach is to devalue currency to try to prop up asset prices and keep people in positive equity and keep some semblance of performance. This is propping up nominal prices – using the “invisible” tax of inflation.

Measure value in terms of buying power. How many finished goods does Canada export? How much do we import? Check the labels on almost anything you own. How many are from western countries? Do you think prices for imports are going to increase or decrease?

Learn the new rules, play the new game.

#58 bobs your uncle on 03.21.09 at 11:00 am

Good post garth. I agree 100% that interest rate increases will be needed to snuff out high inflation and that will further kill off many mortgage holders.

The problem is that a lot of US currency, due to its reserve status, is held off shore.

Bernanke has studied this problem years ago, he devoted a lot of time looking at the Great Depression. In my opinion things are much different than the 1930’s and it will be like generals fighting WW2 based on the experience of WW1. Huge learning curve coming up with a lot at stake.

#59 Herb on 03.21.09 at 11:04 am

#40 Calgary Rocks,

“Nothing to do with capitalism.” Au contraire, mon ami, it is capitalism pure, laissez-faire, untrammeled by law, regulation, ethics or morality. Marx’s “wet dream” indeed!

Only a neandercon would try to tie this can to socialism or even fascism. In a way, the wingnut logic is correct, of course. Capitalism simply was not free enough, being encumbered by the fact that it is pursued by mere mortals.

#60 Renta on 03.21.09 at 11:09 am

As much as I can see where you’re going, I CAN’T see double digits happening in interest rates. I seriously don’t think the government would allow this, and could you imagine what that would do to Canadian home owners? I spoke to my dad this morning and he said that he’s had various mortgages his entire life and has never paid more than 8% ever. You renew at the right time when things are low and coast over the bumps.

Garth, tell me this. When was the last time that mortgages reached 10 or 11%?

#61 dekethegeek on 03.21.09 at 11:12 am

#7 North Van Citizen Jr AKA REAL ESTATE EXPERT
Your back ! A little holiday? Or were you brushing up on “new” material? Methinks not ! Since your still parroting the BC Govt “mindspeak” The BE$T PLACE ON EARTH .
Yes fellow Blog heads, If you want to pay 75$ you get the extra priviledge of driving around with an official Olympic license plate declaring BC(VANCOUVER) as ” THE BEST PLACE ON EARTH” ….yup. A little chest thumping feels good,never mind that everyone else finds it incredebley annoying
This type of self promotion is juvenile at best and setting us up for some really great mocking when our “Lifestyle” (increasing unemployment, crashing real estate prices, torrential rain during the entire 2 weeks of the winter Olympic show, inadequate infrastructure for visitors, protesters rioting with the security a la Sgt.Pepper at APEC ’97)
Its gonna be a gong show out here next year in Feb. with or with the financial meltdown Garth is predicting.
Dont forget North Van Jr. “you heard it HERE first” :)-

#62 lgre on 03.21.09 at 11:15 am

like I said before, this will be a slow but bumpy ride. Alot of people dont know what inflation is and most importantly what needs to be done to try to calm it. This is why they are enticed by low rates..buying property on interests rates is very stupid, there are consequences for current low rates in the future..unfortunately the greater fools dont understand it.

The big RE problem in Canada will start sometime in the next several years. This is just the pre party. Many people cant wrap their little brains around a possible double digit mortgage rate..it will come again..

#63 rory on 03.21.09 at 11:45 am

http://theautomaticearth.blogspot.com/

A great video on hedge funds and naked short selling on how it got us into this economic mess.

These blog guys say we are having a political crisis, which explains a lot as to why no one saw this crisis coming, nor done anything constructive to fix it, and why no one has been prosecuted for it.

So maybe there really are half a dozen guys that really do pull the strings …if that is true then, obviously, the rules need to change before we all can gain confidence in the system.

Unfortunately it looks like the US has to take the lead.

As before the same tired bunch of foxes that got us here are still guarding the chicken coop – unregulated hedge funds.

A little simplified but the housing crisis just led to the opportunity to take down financials – whadda think?

#64 Grantmi on 03.21.09 at 11:49 am

Up is Down,,, and Down is up

Weird times!

I was heading across the Peace Arch border for my weekly tank fill of CHEAP USA gas. ($0.70 liter converted – $1.00 here)

and I couldn’t help notice that Corus is doing public service notice radio ads on their own station CKNW about – “What a GREAT time to buy Real Estate!”

What’s up by that???

Now on Michael Campbell’s – Money Talks (Hosted by Michael Levey today) almost all the spot ads are about real estate.. buy, buy, buy!! lol

I mentioned a few days ago about seeing a RE sign advertising a “Foreclosure Sale” just across the border on the CANADIAN soil!!!

Can’t happen here.. nope.. not in Canada!

http://i43.tinypic.com/2vmdft5.jpg

Please stay behind the yellow tape please!!!

#65 jwkimb on 03.21.09 at 11:51 am

Garth said “The normal fixed-rate mortgage term here is five years, and increasingly borrowers have opted for shorter periods of time, gambling that interest rates will be lower when the loan comes due.”

And he was right – normal here is 5 years because that gives you the best rate. Those posting about their ten year terms – sorry to to say you are locked into too high a rate! Yes, it is possible to get ten year but the rate is higher….hence most go for the 5. That means most people buying today have to renew in 5 years…when the home value is down.

As for the US market, 30 year amortization and rate lock is the norm. 15 year is also available, but usually a higher rate. There is NO prepayment penalty. Ever. I usually took the 30 year rate, than simply made the 15 year payment equivalent – thus paying it down earlier.

Another US feature is mortgage insurance premium (for less than 20% down) is paid monthly – not lump sum like Canada. So if you put 15% down, in a few years you could claim you had 20% equity and the monthly mortgage insurance would be removed. In Canada it is added on top of your mortgage at the start, as lump sum so you wind up paying mortgage interest on it forever. Sucks.

I sold everything in the US in summer of 2005, except my condo in Myrtle Beach (sentimental reasons :) and did very very well. I should have sold the beach condo as well – could have bought it a foreclosure auction for peanuts today.

I am currently shopping in the <350k range in GTA for a house. newly married with baby plans for next year – the 550sf bachelor condo we are in now isn’t going to work. We will do 10-20% down. Buy at 3% what I can only afford at 8% . I have the financial discipline to make the 8% payment anyway, so today it buys down the principal and in a few years will seem ‘normal’ as interest rates catch up. We gotta live somewhere, and I really really hate renting. I like being the landlord much better!

#66 Got A Watch on 03.21.09 at 11:58 am

I have an old-time ARM with a Manulife-CIBC joint venture called First Line Mortgages. It’s rated at CIBC Prime – 0.6%, so my rate is now 1.9% – woohoo. I renewed last summer for 5 years, they left the contract language the same as before, or I would not be getting 1.9% now. Lucky me.

I can see one more interest rate reduction of 0.25% and that will be the absolute bottom of interest rates – zero is a pretty firm bottom.

My mortgage broker tells me the best rate he can do now is about 3.1% – 3.3% with all possible reductions and special offers in.

If I go to lock in, I would be at 3.3% right now, from memory. I will have to review my contract language again. I will lock in when I see interest rates rising, which I do not expect for a long while yet.

The economic recovery will be very fragile, if the BoC raises interest rates in a year or two it might choke off that recovery. Governments will be trying to raise taxes to offset sinking revenues, at the same time.

Thus we will have the setup for the repeat of 1937. The Depression was easing at that point, but the Government raised taxes and removed stimulation, and the economy crashed, again. The second Depression of GD1, so to speak, caused by Government incompetence.

Knowing this, I can see politicians not wanting to see higher interest rates for many years. So a struggle could erupt between Central Bankers, always overly paranoid about inflation, and Governments, more concerned with growing the economy and willing to tolerate some inflation. Just what we won’t need at that point.

#67 dekethegeek on 03.21.09 at 12:06 pm

Munch ?
Where are you ?
I need the daily Jo’Burg fix man. I’m hooked ! Drop one of your excellent South African non western hemisphere insightful observations on us. We need the slap in the face. Keep up the good work.
P.S. I think Zuma “beat the rap” because he hired O.J. Simpsons lawyers.
P.P.S. How’s the border with Zimbabwe these days ? Crazy lunatic Mugabe running the entire country to ruin and South Africa gets to feed the lot! Trouble in Paradise.
Good luck.

#68 LS on 03.21.09 at 12:17 pm

Garth, you said that 10 year lock ins are:
“Not recommended – a huge premium you do not need to pay. It is an unwise borrowing strategy except for cash-strapped first time buyers. — Garth”

But I don’t understand that.. Sure you pay a premium over the shorter terms, but at least you know what you’ll be paying, and if you don’t overstretch yourself and are dedicated with pouring money in, you can pay off that house in 10 years.

I don’t understand why you’re against 10 year terms.. Like you said, if you lock in for 5 years you might have to renew at 10-15%… I guess I should actually do the math to figure out what would be cheaper, but it seems risky when the rates are going to go up for sure.

#69 dbg on 03.21.09 at 12:27 pm

Why higher rates?
Inflation doesn’t dictate that we have higher rates does it?
The BOC has been cutting rates to keep inflation in check for the last decade.
What is the impetus for the rate climb………Garth?
I can only see another round of deflation once some of the commercial real estate comes unwound in the states and abroad.
Deleveraging everywhere for miles and miles.

#70 American Expat & Future Canuck on 03.21.09 at 12:29 pm

“Up in Smoke: The Deposit Vanishes” (http://www.nytimes.com/2009/03/22/realestate/22cov.html?_r=1 )… This is an interesting article from the NY Times this morning. It paints a scenario similar to the one that Garth alluded to in this post. Looks like some of the people in the NYC area can’t close because the mortgages they lined up before the credit crisis took hold have evaporated and they can no longer get financing under their old terms. The banks are now forcing some buyers to either cough up extra money to add to their original down payment or forfeit their original deposit. And we are not talking about 20k or 30k in deposits here but more like 150k-300k in deposits…poof…gone… up in smoke with just one ring of the phone. It will take many of these families another decade or 2 to save that kind of money again. Makes you wonder if the lower interest policy being promoted by the Bank of Canada today is simply plating the seed for the next mortgage/interest rate crisis …1980-style. I wonder how many Canadian families, who are being lured by the illusion of affordability, prop up by artificially low rates will be out on their behinds in a few years when interest goes back up. It is really sad and scary to think about.

#71 dbg on 03.21.09 at 12:39 pm

North Vancouver Citizen jr

Garth can’t you do something about this person? Is this blog and Ad board for ridiculous self promotion.
Why the same shameless tripe.

#72 Flip on 03.21.09 at 12:41 pm

re: Mel Eager: “I just renewed my mortgage with a variable rate mortgage at Prime + 0.80, so my mortgage rate right now is 3.3%”

3.3% is the posted “deal” on ING Canada’s website. If your credit is somewhat solid, your local bank should be able to beat that by at least a quarter percentage point (folks that bought my house last month got prime plus .5%)

BTW – ING’s website has a good mortgage calculator that lets you figure out the effects of interest for each pay period and will help calculating when locking-in will make sense (or knowing when you should have…)

5.25% 10-year locked-in seems to be available at some the Canadian majors right now (CIBC, TD etc…)

#73 Bill-Muskoka (NAM) on 03.21.09 at 12:44 pm

Garth,

Just last week I said fixed rates are a better than VRM’s, and you disagreed. Yet, now you are forecasting exactly what I said would happen with the banks raising interest rates, albeit you say to stave inflation and I said to makeup their lost profits, so have you seen the Light?

Am I missing something?

You are quite correct on the comparison between U.S. and Canadian mortgages (my experience has been with U.S. mortgages until last year), and in the U.S. the mortgages included principle, interest, taxes and insurance, with annual adjustments made to taxes and insurance amounts, but the P&I remain fixed for the entire term. Also, as a Veteran, I have the option of have the VA guarantee my mortgage 100% in the U.S..

Personally, I find Canadian mortgages to be written very much in favour of the lenders and portray a real lack of confidence by them in long term loans. I attribute this to our insane political election policies.

It is great to have the ‘government’ (hardly a majority anymore) be on the potential Hot Seat of No Confidence (all goverments should be subject to RECALL and being thrown out, but not for whimsical or power grabbing games like Harper has been doing…and certainly not at $300 Million per election), but I think it reflects back into our mortgage structure?

We are not as stable as Canadians like to think. Our Government can promise to spend money, but never be obligated to write the cheque. When will Canadians catch on to this SCAM of politicing? They seem quite slow on the uptake of reality to moi!

The world has CHNAGED, and like it or not everyone of us will need to re-evaluate our beliefs and get connected to hard reality. Then again, they can live in Fantasy Land and wait for the Sky to FALL! Cluck! Cluck!

Fixed-term mortgages benefit banks by milking consumers for a huge premium. You should go VRM at this time, without a doubt. When rates start to rise in a couple of years, you can make a better decision then. More on this soon. — Garth

#74 Bill-Muskoka (NAM) on 03.21.09 at 12:58 pm

#69 American Expat & Future Canuck on 03.21.09 at 12:29 pm

Yes, the 1980-82 fiasco was the Modern Great Depression lesson for millions alive today. Lest we forget we will be receiving a government ordained UP YOUR’S! again.

Forget? HELL NO!

This time it will not be over obscene and unsecured foreign loans to ‘buy friends in foreign countries, but the complete collapse of the assinine Globalization scheme fostered to benefit a few at the expense of the rest. Like the saying goes ‘Globalism makes rich people in poor countries richer and poor people on rich countries poorer!’ That is why we have so few meaningful manufacturing jobs left in North America, they have been shipped off to Asia, China,and as usual, Mexico (still a part of NA just so no one comes back with that point) to increase corporate profits of the few.

While all this has been happening, together with untaxed offshore accounts, the average person has been put into an untenable and insecure position.

Time to Stand Up and Say NO! Bring our jobs BACK here. Time for rolling out the Good Old Efficiency plans and making costs and wages equitable for all people.

That is going to require wage adjustments and loan obligation adjustments by EVERYONE! Time to get back to REAL WORK, not merely shuffling paper for a living like too many do nowadays. In other words, for God’s and our country’s sake, PRODUCE something tangible!

#75 Senior on 03.21.09 at 12:59 pm

If what you say is true, why do you continually suggest to keep your mortgage variable?

Go ahead and lock in, if you like bank profits. — Garth

#76 dekethegeek on 03.21.09 at 1:12 pm

#70 dgb
Now Now. You cant throw the baby out with the bath water. How else can you feel good about yourself unless you know there is someone truly less intelligent than you out there ?
THATS why Garth allows North Van Jr’s self absorbed rant( besides it is amusing to watch the Blog Board light up with annoyed fellow bloggers).
Feel sorry for North vancouver Citizen Jr. for he knows not what he regurgitates

#77 Jonathan on 03.21.09 at 1:14 pm

Anon regarding comment #13,

I would like to add that month over month average real estate figures are absoutely useless to use. You will always see a rise in MOM from January to July and a fall in MOM prices from August – January. Even in a bad downturn, this is still the case.

Larger home purchases are seasonal and grow in frequency in the first half of the year, and then die down in the latter half of the year.

If you compared an apple with apple, or compared two identical homes in identical neighbourhoods, you would still see price declines.

#78 Roial1 (Al) on 03.21.09 at 1:14 pm

#35 polecat on 03.21.09 at 5:49 am

Garth,can you or someone here explain this.My credit card was maxed,I’ve been paying it off like a fiend and put just over 10 000 in the bank.Turn around and they upped my limit from 9000 to 14000.Are they just trying to get me to spend more?

Yes!
BUT, You can phone therm and demand that they lower the limit to any amount you choose. (I recommend that it be as low as you can see as being the least that you may need in an emergency)
Also, if your card is paid off or has a low balance you can negotiate a lower interest rate.
If they do not give it to you, shop around for a better card and rate.
I did this and now have a no fee, 11% card.
I always pay my monthly total but keep the card for emergencies or travel.
To keep it current I buy my gas with it.

#79 jwkimb on 03.21.09 at 1:24 pm

#69, I think I see their problem : “Elizabeth and James Pham put all their savings into the deposit they made on a $956,990 two-bedroom apartment at Maxwell Place, a new development in Hoboken, N.J.”

There is no two bedroom dwelling anywhere in NJ worth a million dollars. That is just insane. Their mortgage payment would be ~ 4500, plus taxes, plus huge condo fees…I am guessing a total of somewhere in the 6k range. For two bedrooms. You can easily rent for that in Manhattan. price vs rent is so far out of whack – and for a real estate agent to fall for it? No sympathy here…

#80 Bottoms_Up on 03.21.09 at 1:25 pm

This is what Garth posted:
“The normal fixed-rate mortgage term here is five years, and increasingly borrowers have opted for shorter periods of time..”

HE SAID ‘normal’ people, not ‘maximum’. Idiots should be weeded out from this site, I vote for censorship!

To be accurate, I modified the post slightly after some visitors correctly noted the 10-year term. Originally I did not take that as a serious consideration because a decade-long term, at a big rate premium, is such a ghastly choice, and selected by very few people. — Garth

#81 Bill-Muskoka (NAM) on 03.21.09 at 1:25 pm

Garth,

Fixed-term mortgages benefit banks by milking consumers for a huge premium. You should go VRM at this time, without a doubt. When rates start to rise in a couple of years, you can make a better decision then. More on this soon. — Garth

Oh, they always benefit the banks the people’s expense. The restrictions in paying off the mortgages are even worse. I am not sure what is current in the U.S. but you used to be able to pay off the mortgage with only minor, if any, penalties. The banks were more interested in keeping the principle in circulation because there was always demand for Black Ink instead of red back then. It was called Regulation, which the Reagan/Bush Conswervatives threw out.

As to the rates taking a couple of years to rise…Don;t count on it. They are fishing right now desperate to save their own asses and will do anything to protect themselves an that surely includes hgiher interest rates. The banks are not even really passing on the extremely low Prime to their customers. Where is the reduction in credit card interest rates, eh? Non-existent as usual. meanwhile Harper meets with lobbyists to make sure of pleasing them. A horrid week for Harper

Canada has worse unemployment than the U.S. Our stock markets are in worse shape. Commodity sales are down. Only our banks are better. It’ll be at least four years of straight deficits.

It took the former governor of the Bank of Canada to break a year’s self-imposed silence and set Harper straight. “Unrealistic,” said Dodge. Somebody had to step in before Harper ruined our credibility.

TD Bank economist Don Drummond added his two cents – it’ll be a long, slow grind back for several years.

Harper spent the rest of the week trying to explain what he really meant to say. Not inspiring.

The news came out that Harper is thinking about handing out billions to media giant CanWest which is in deep money trouble, and maybe some millions as well to Québecor.

The lobbyist registry shows that David Asper of CanWest and Pierre Karl Péladeau of Québecor twice met Harper for talks in Ottawa. Not the sort of news Harper wanted to see come out right now.

Especially since CanWest has hired Harper’s old friend, lobbyist Ken Boessenkool, his old campaign organizer, the guy who spent election night on a sofa next to Harper.

You would be right for many except for one key point. We Boomers are now looking at stabilized cash flow. VRM’s throw in a variable that can wreak havoc on us. I still remember 1980-82 and what interest rates did!

I would extimate that about 50% of we Boomers have been subjects of divorce, financial UP YOURS, etc., so we are still in the market and actively employed. The only people I know who are happily retired are government workers, and those who had the fortune to achieve retirement from a major corporation before the bastards stripped the pension funds nowadays. Even they are sitting on a bubble that will most likely BURST thanks to pissant politicians who allow Bonuses for Failure when pension plans are in need of the cash input. AIG still stands for ‘Arrogance, Incompetence, and GREED’ as the PRIME EXAMPLE, which includes NorTel now and GM (Greedy Mother….)

Thanks for commenting regardless. I agree with your topic comments that interest rates will go up, and probably WAY UP! Maybe I should wait for the new movie ‘UP’ to see what reality will be? LOL

Somehow I suspect it will have to do with housing and mortgages because the preview in the Dreamworks opening of ‘Wall E’ had the Old Man sitting on his front porch as his house rose towards heaven on thousands of Balloons? There be a message there I think?

I suspect Dreamworks will use the flic to present the moral debate and illustration of the current housing crisis just as they used ‘Wall E’ to illustrate the insanity of unlimited consumerism and waste.

We know the MSM sure as Hell will never really deal WITH it because they have those sacred Advertising Accounts to protect at all costs, even our future! It takes cartoonists to tell the Truth in this day and age it seems!

#82 Jonathan on 03.21.09 at 1:34 pm

Got a Watch:

“Thus we will have the setup for the repeat of 1937. The Depression was easing at that point, but the Government raised taxes and removed stimulation, and the economy crashed, again. The second Depression of GD1, so to speak, caused by Government incompetence.”

I don’t think comparing 2010 to 1937 makes any sense at all. In the early 30’s most of the world was on the gold standard – and thus, deflation did not relax until the major economies abandoned the standard. It is quite the opposite today. Our central banks are acting like cheap whores with our money – oh wait I mean my money in my savings account. As a result, you are going to see a very different outcome.

#57 by RationalNational

Japan experienced bubbles in the 80s that were far beyond what was experienced in North America. The stock market quadrupled and home prices were doubling every two years. It was often said that the land under one building in prime downtown Tokyo was worth more than all real estate in California. I think it was $1 million per square foot.

Japan never had the de facto reserve currency. They also delayed assisting their banks, and allowed them to hide their problems for many years.

Furthermore Japanese companies are poorly run and have always lacked strategic direction. People often cite Honda, Toyota or some of the electronics manufacturers as evidence of Japan’s success. But the fact is most electronic manufacturers lose money as they are far too diversified. Furthermore Japan’s closed economy meant that medium and small sized businesses completely lack any competitive advantage and are poorly run.

Japan didn’t start to leave the recession until the early 2000’s when China’s growth and demand for Japanese products surged. China should be recognized for bringing Japan out of that mess – albeit for only a few years.

#83 TheComingDepression on 03.21.09 at 1:36 pm

No. Low rates for a year, then higher after that. Once the Great Recession starts to end, all the dynamics change. — Garth

Yes its called a DEPRESSION then HYPERINFLATION. The US government needs another 750 billion to support the banks. 6 more banks and a credit union were taken over by the US Government yesterday. How much money can the US print before they default on their debt? Rates go up to support the collapsing dollar thus creating HYPERINFLATION. GET IT?

The only ‘hyper’ on this blog is your hyperventilating. — Garth

#84 TheComingDepression on 03.21.09 at 1:46 pm

Sounds like the beginning of the end..
http://www.ft.com/cms/s/d4af1902-14ee-11de-8cd1-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fd4af1902-14ee-11de-8cd1-0000779fd2ac.html%3Fnclick_check%3D1&_i_referer=http%3A%2F%2Fwww.godlikeproductions.com%2Fforum1%2Fmessage754064%2Fpg1&nclick_check=1
Weavering Calls in Administrators Over $637m Derivatives Position

By James Mackintosh, Hedge Funds Correspondent

Published: March 20 2009 02:00

A $639m (£440m) London hedge fund collapsed last night after the discovery that the main asset of Weavering Capital’s flagship fund was a $637m derivatives trade with an offshore company controlled by the fund’s founder and chief executive.

Weavering Capital called in administrators yesterday and its Weavering Macro Fixed Income fund was put into liquidation in the Cayman Islands, after claims the trade could not be paid. Weavering froze the fund a week ago after discovering the position and calling in PwC to investigate.

The failure brings down one of London’s older, if relatively small, hedge fund managers, set up in 1998. Weavering, which runs small funds including one in Sweden, was set up in 1998 by Magnus Peterson, former head of trading at Swedish bank SEB. It had solid returns of 10-12 per cent a year for the past five years.

Also on the board of the UK company were his wife, Amanda, James Stewart, head of research and a frequent TV commentator on economic issues, and Chas Dabhia, chief operating officer, who called in PwC.

The two directors of the Cayman fund were Mr Peterson’s brother and stepfather.

PwC, liquidators of the fund, said there was “considerable uncertainty” over the $637m value listed for the fund’s main asset not pledged to lenders, a derivative transaction with Weavering Capital Fund Ltd in the British Virgin Islands.

PwC said it had been told the BVI company’s assets were $10m of cash and $40m of private equity positions, although these have not been substantiated. It is unclear who the directors of the BVI company are, but PwC said last night that Mr Peterson had told them he controlled it.

Matthew Wilde, partner and head of the hedge fund restructuring team at PwC, said he could not comment on who at Weavering put the trade in place, or what it was for.

“Core to the role of the liquidator is to undertake the investigation of who knew what,” he said. He said he had had a “fruitful dialogue” with Mr Peterson, who had been in the office yesterday.

The problem was discovered after investors tried to withdraw $223m, of which only $90m has been paid so far. In addition to the outstanding $133m payments, the fund reported assets of $506m at the end of February, down from $535m in January.

#85 bobs your uncle on 03.21.09 at 1:52 pm

North Van Citizen,

Is it the 31 murderous shootouts you have had in Van since Christmas that makes it the NA leisure center or the government funded drug injection sites?

#86 Jonathan on 03.21.09 at 1:53 pm

Got a Watch:

“Thus we will have the setup for the repeat of 1937. The Depression was easing at that point, but the Government raised taxes and removed stimulation, and the economy crashed, again. The second Depression of GD1, so to speak, caused by Government incompetence.”

Ok ignore my comments above about your post – I think we are saying the same thing. Cheers.

#87 EcoInsurgent on 03.21.09 at 1:55 pm

More than one person I know in Calgary have mortgages up for renewal, have never missed a payment, and look like the banks will NOT renew. Their houses will go up for a forced sale.

#88 Taxpayer like you on 03.21.09 at 1:58 pm

68 dbg said:

“Why higher rates?
Inflation doesn’t dictate that we have higher rates does it?
The BOC has been cutting rates to keep inflation in check for the last decade.”

Inflation (or the thought of it) would dictate higher rates.
Lenders (and depositers) want to get a “real” return on their money. These rates have to be higher than inflation rate for this to happen. The problem is trying to predict the inflation rate a few years out.

Cutting rates does not keep inflation in check hence the fears of it coming back.

The BoC rate can either be the cause or effect of
economic turmoil. Over the least few years it is
more “cause” as it was historically low creating credit bubble. Right now it is more “effect” of trying to inject liquidity into system. It wasnt working for a while as banks did not lower their rates.

51 -dd. Lets hope we get back to old style banking. Unfortuneately, even though I know my banker, he still takes orders from Toronto…..

#89 Bill-Muskoka (NAM) on 03.21.09 at 2:03 pm

#78 jwkimb on 03.21.09 at 1:24 pm

Is there ANYTHING worth that much in New Jersey? I bet Jon Stewart is about the only ‘thing’ worth that amount FROM NJ? LMAO!

#90 EcoInsurgent on 03.21.09 at 2:05 pm

Canadians USED TO GET 25 and 30 year fixed mortgages. They were taken away. The people were duped into supporting the banks and their blackjack table approach to finance. This didn`t just happen in Canada. The way to fix this is for the government to now provide 30 year fixed interest rate mortgages and become the major competitor to the banks.

#91 CalgaryRocks on 03.21.09 at 2:08 pm

59 Herb on 03.21.09 at 11:04 am #40 Calgary Rocks,

“Nothing to do with capitalism.” Au contraire, mon ami, it is capitalism pure, laissez-faire, untrammeled by law, regulation, ethics or morality. Marx’s “wet dream” indeed!

There’s nothing capitalistic about a bunch of inbred executives voting themselves bonuses after they bankrupted their company. These people are the scum of the earth but free market people they are not.

#92 K on 03.21.09 at 2:21 pm

Only an absolute goof would believe that interest rates will stay as low as they are. This is so typical of people living in the moment and never thinking about tomorrow. This is what got us into this mess in the first place. Until people change their thinking there will be no end to this crisis. It will only get worse.

#93 Jay Currie on 03.21.09 at 2:25 pm

Garth, I think you have it about right as to direction – rates going up – but I am wondering about duration.

Wild optimists see a turn around in Q4 09, I think a more realistic view would be Q2 10; but that is with no “big surprises”. A big surprise in Canada being the end of GM/Chrysler or a drop in the oil price to $20.

Our economy is in relatively decent shape but unemployment is likely to rise. That will not do much to interest rates but it will put many more houses on the market with a strong local downward pressure on price.

By all means go variable rate if you are buying; but you might want to insulate yourself from an unpleasant renewal by paying the difference between the variable rate and, say, the current 10 year rate against principal. Yes, it is extra money every month but it will mean a much smoother renewal regardless of what the rate is.

#94 Shawn on 03.21.09 at 2:41 pm

A $69,000 income can possibly qualify for a $400,000 mortgage with a 3% rate. Ha, hilarious a bankruptcy waiting to happen.

A $140,000 income is also far too low for a $400,000 mortgage.

With a family gross income of $150,000 a mortage of no more than $200,000 is really comfortable. $300, 000 or twice the income should be an absolute limit.

If a 6 figure per year job is lost you may find you simpoly an’t get another job like that.

Do not take on obligations that you can not meet in the event of higher interest rates or a 30% drop in income.

#95 dbg on 03.21.09 at 3:20 pm

Tax payer like you and Garth.

I have no answers but I think that ECON101 is not going to give us the answers to when and if rates go up.

We are starting to see inflation creap back into food and fuel(basic consumables). Why? People need to eat. There are a lot of people on the planet and soon to be more. By 2050 they estimate 9billion. So, inflation is inevitable in these consumables. Competition for resources will be fierce only driving prices higher.

I just don’t see the connection for higher rates. Yes, at this moment companies are demanding higher returns on their cash when lending it to certain companies that are tied into toxic asset markets. For example GE will have difficulty getting cheap money and operating their Capital Solutions division as they have in the past. But if there are buckets of cash out there sitting on the sidelines just waiting for some kind of safe marginal return how does this end in higher rates???

#96 Dark Wettler on 03.21.09 at 3:22 pm

I would not rule out any eventuality yet… hyperinflation could happen. U.S. dollar collapse could well happen, and would have already if it were not the world’s reserve currency. The current rate of money creation is without precedent in history, except in a Weimar experience.

I have been enjoying Garth’s blog for some time, but do note recent inconsistencies with previous postings. Everybody can and should change their point of view as new information becomes available. The problem is that Garth is voicing his predictions as though they are fact, indisputable and inevitable – and ridiculing those who might offer a contrary opinion.

The truth is we don’t know what is going to happen, we really are in uncharted territory and unable to use economic history as a guide.

I do believe that it is wildly optimistic to predict that housing prices will stop declining next year and that economic activity will begin to increase at the same time. The fact that the Fed blind sided the markets with the announcement that they are essentially going to monetize debt tells me that this situation is far more serious than we could have imagined. The Fed has shown it’s hand and is desperately throwing anything at the derivatives wall to see what might stick.

The total amount of outstanding derivatives without mark to market value is now roughly 100 times world GDP. This is a problem with no practical solution. Money supply is being increased exponentially to offset existing losses in a futile attempt to fill the black hole. Inflationary? You bet.

I did not predict housing prices would stop declining next year, but rather have said we’ll have a multi-year housing recession. However the economic contraction will stop next year. Employment will take at least seven years to regain 2007 levels. No depression. No hyper-inflation. But lots of misery. Are you prepared? — Garth

#97 Dark Wettler on 03.21.09 at 3:30 pm

The economy sucks. Markets are uneven. There will be no depression. But neither will we return to 2007, and there are many opportunities now to make money. What’s hard to understand? — Garth

As above – Dark

#98 Barb the proofreader on 03.21.09 at 3:31 pm

What a mess. Banking & Insurance were poorly supervised by Government Regulators.

Banking & Insurance, with a little Lobbyist spin, take money to COVER UP Government Regulator BUNGLING of the past several years.

The Government cons “failed” in their jobs of coherently overseeing criminal elite gamblers. AIG did their corrupt deeds in full view, at the behest and bungling of officials:
http://online.wsj.com/article/SB123725551430050865.html

***

So now, in Canada, who will stop what is starting here? We are witnessing the willful lack of protection for the public. It’s about banks (new low rates) and this government’s ideology, arrogantly & criminally seducing naive citizens to commence the cycle of devastation in Canada.
Trust our Con “government”? I think not. Keep up the good work Garth.

#99 Happy Renter in North Van on 03.21.09 at 3:32 pm

Republic_of_Western_Canada… You could buy the ETF Horizon Beta Pro US 30 Year Bond Bear… It is traded on the TSX… It’s not a perfect hedge if you have a 5 or 10 year mortgage, but if the yield curve steepens at the long end in the US… then this strategy should work beautifully… Garth, any comments?

This is a joke, right? — Garth

#100 john m on 03.21.09 at 3:35 pm

We live in a society unable to face reality.As i talk to people daily i am more and more convinced there is no conception of what is really happening around us until it hits ones own dinner table. Jobs are disappearing,the oil companies are trying everything in their power to raise prices,the banks will be next they will squeeze until they can’t squeeze anymore. The same people that got us in this mess will keep us here. Its a long road out if this mess and becoming less promising daily as our incompetent government drags us deeper in the toilet.

#101 jess on 03.21.09 at 3:38 pm

joseph cassano -they never seem to deny or admit

http://oversight.house.gov/documents/20081007102250.pdf
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/1

#102 Dark Wettler on 03.21.09 at 3:40 pm

Sorry Garth, just rattling your cage.

This is your statement regarding housing prices from your recent blog:

‘Real estate prices will be lower at Christmas than they are now, will stabilize in 2010, and then flatline for years after that.’

– Dark

Still an incredibly insightful sentence. — Garth

#103 Barb the proofreader on 03.21.09 at 3:42 pm

#15 Da HK Kid: — “But wait, it gets better”

HK,
Great post, enjoyed it.

#104 dbg on 03.21.09 at 4:17 pm

#15 Da HK Kid
“My two cents but why take the risk when you dont even have too!”

No risk no reward ……that’s why.

#105 Bill-Muskoka (NAM) on 03.21.09 at 4:34 pm

Garth,

Have Jon Stewart’s people called you yet to book your appearance? Let us know when you get scheduled, eh?

#106 Bill-Muskoka (NAM) on 03.21.09 at 4:38 pm

#84 bobs your uncle on 03.21.09 at 1:52 pm

I heard it was now 40 last night on Global National! Welcome to Gaza on the Pacific!

#107 Chincy on 03.21.09 at 4:47 pm

#82 The Coming Depression

1)Explain to me how you can have hyperinflation when no one is borrowing, everyone (except the bloggers here ;)) is in debt up to their eyeballs, and unemployment is on the rise.
2)Help us understnad the here and now, not 4 years from now.
3)Stop sleeping with your Peter Schiff doll

Thanks.

#108 JoeCalgary on 03.21.09 at 4:55 pm

EcoInsurgent, #86, can you give some numbers? Are the foreclosures happening to high-end SFH’s purchased in the past couple of years? Yesterday someone mentioned a one in ten foreclosure rate for homes presently listed in Calgary, and layoffs are huge, yet stores, malls, streets and thoroughfares are still as crowded as ever. What’s going on?

North Van Citizen, please keep on keepin’ on; tongue-in-cheek humour touches my funny bone. :)

Contrarians to NVC: this blog format kindly places posters’ names above the post. Recognize the names of posters you value and skip the rest.

In 1996 I got a 25-year locked-in mortgage at 5%. I was offered no other term, nor was VMR mentioned. So I assume it was the Liberals who changed the regulations for the banks. When did they do it, and why? BTW, when I became aware of the availability of VMR I moved to it. Rates immediately went up, and so did my payments. But I’m smiling now.

JoeCalgary

#109 dbg on 03.21.09 at 5:00 pm

I am not a fan of Peter Schiff but here is a bit on inflation and interest rates.

“Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt then it expects as it becomes the only buyer in a seller’s market.

Just last week, Chinese premier Wen Jiabao voiced concern about his country’s massive investments in U.S. government debt. In the most unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with depreciation, not default. With his fears now officially confirmed by the Fed statement, we must wonder when the Chinese will finally change course.

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan which it then uses to buy treasurers. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.

With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status.”

Here is the link:http://seekingalpha.com/article/127120-don-t-ignore-bernanke-s-bell?source=feed

I ask again after reading this article why higher rates?

Garth do you have more logic than what goes down must go up?

Would really like to know why you believe this.
An answer would be much appreciated.

Schiff’s comments support higher interest rates going forward, since the US eocnomy will face inflationary pressure the Fed will seek to temper. Not this year, and not next. But within five years, a certainty. — Garth

#110 David Bakody on 03.21.09 at 5:10 pm

Hey Garth & Friends, a very recent news poll suggest that 60% will not resume their old spending habits when the economy recovers. It took a long time for spending to take off after WW II …. so I hope these people stick to it. Time of course will tell, this we know: all those “Senior Boomers” are going to put one hell of a strain on government resources. who will be almost broke fixing this crisis. In any rate it will all be interesting and the summers will be hotter, the winters be longer (messy) and the food scarce/expensive.

Stop! Do y’all know that less than 3% of world’s population can actually put their hand into their pocket and pull out some change to buy a cup of coffee! and we here are talking daily about loosing 10’s of thousands of dollars in stock markets and housing! just a thought.

#111 Got A Watch on 03.21.09 at 5:12 pm

What I was trying to say in that previous comment is that I think interest rates will be sticky on the way up, as in slow to rise.

The politicians and public will protest loudly if interest rates move up quickly, and people will “blame the BoC for crashing the economy”.

Any rise in interest rates tends to slow economic activity. The “recovery” will be fragile, unless jobs make a big comeback. Rising rates will also be very bad for real estate, as Garth points out. The public won’t like that either, they are hoping for house prices to come back.

The BoC prefers inflation to deflation, so I think they will be tolerant at first, until they see the economy actually picking up and inflation becoming a real problem. At that point they will want to raise rates, the standard anti-inflation play.

But if they do, they risk hurting the “recovery” they worked so hard to get. Rock, meet hard place. A conundrum for Government and BoC. So I would expect they will do little to raise interest rates at first. Then panic when inflation seems to be getting out of hand.

That’s why I brought up the 1937 experience, a “recovery” can be smashed early if they do the wrong thing. And the ability to do the wrong thing is almost limitless at all levels of Government.

I would not want to be a Central banker, almost anything they do will be seen as the wrong thing at the wrong time.

#112 Wininig Pigger on 03.21.09 at 5:24 pm

Although I RATIONALLY agree with the forecasting properties prices SHOULD go down, but market in Winnipeg is blindly defiant!
It’s more than that, properties values in Winnipeg is going up!
I was monitoring a property since last DEC, they were asking for 398k and I think this was overpriced values; the property should be priced at more than 350k
But this month, instead of lowering the price, they increased it to 412k
Worse, my rent value will be increased by 8% next month

Holy cow, Is that really a recession?
Every price is going up, except salaries

#113 go green on 03.21.09 at 6:27 pm

I forget which posters talked about 5/10 year mtgs here in Canada. During the 80’s when my sis and I got hit with a 19% rate for 6 months, one of our directors had a 25 or 30 yr. mtg. at 3% rate. He was laughing. So yes 25 or 30 year mortgages existed here in Canada but I don’t know when they stopped.

Thankfully, we’ve no mtg and no debt. I learned a long time age, if you can’t pay of a debt at the end of the month, don’t charge it.

#114 North Vancouver Citizen Jr. on 03.21.09 at 7:13 pm

#70 dbg

“”My Self Promotion?””

…I’ve been promoting Vancouver to my ex-Toronto friends and peers for nearly 20 years.

Unfortuately, “Centre of the Earth” mentality still swells their heads, except for a couple of’em.

…Stop calling me names and just think for a moment or two first…..China is the future power, followed by Asia, followed by Arab Oil…that leaves the Pacific Northwest and Vancouver/Hongcouver as the canadian gateway,perhaps even North America
s, in and out.

I don’t ask Garth to remove your Oshawa/Ajax postings…do I.

#115 Taxpayer like you on 03.21.09 at 9:12 pm

dbg 94 – Dont confuse inflation with high prices which
may be due to other factors than an increased money
supply.

Schiff is always worth a read. But he was talking Chimerica, and the Chinese do admit a concern with devaluation. Logical response is for US to raise interest
rates.

But heres a direct question for you: if inflation hits
10%, will you lend me money at 5%?

#116 vantown on 03.22.09 at 3:29 am

This blog has become kind of funny and depressing at the same time: it is essentially advising that there just never is a good time to buy a home.

Since 2007, Garth (and earlier, many others) have been warning us about the impending collapse in values. Now that it’s happening, and some of us are looking forward to being able to actually buy, we are told that buying is going to be a disastrous decision: now, because rates will go up and we won’t be able to afford the increase in monthly payments; and later, when rates go up so much it will of course be too expensive to buy!

I mean, seriously, where does this end? It seems like it’s going to end with a bunch of 65-year-old renters who were “right” about everything but frittered away their lives waiting for perfect conditions in the real estate market that will obviously never arrive: $100 a square foot at 2% interest locked in for 25 years. Meanwhile, their friends will be looking at them like they are some kind of dopes. Which, of course, they will have become.

Listen, there are always risks with a major real estate purchase. I think at a certain point, the risk of NOT buying eclipses them. What do you have to lose, versus renting?

I’m going to wait until prices go down another 20% or so (I hope), and then buy. I’ll try to get a good rate, locked in for as long as possible. Then I’ll use the time I spend reading these damned real estate blogs for something more worthwhile.

#117 dbg on 03.22.09 at 12:13 pm

Taxpayer like you
“if inflation hits 10%, will you lend me money at 5%?”

Thanks, I like that it’s a good way of looking at inflation.

#118 Dithers on 03.22.09 at 1:54 pm

Depressing and more depressing.

This blog has become redundant.
Homes are places people live in, they are not financial instruments.
Try to remember that.

Its good to have a place to live, rented or purchased.

If you rent; you will never own, but you can still be happy.

If you own; one day, if you work hard, you will own the place, but that isnt a guarantee of happiness, but its a good thing.

This blog can continue to say the same things over and over again, but they aren’t necessarily true.
Its a place to crow for those who already have homes paid for, I suspect.

Canada is what Canadians have made it: a place where a dangerous lunatic like Harper gets votes and a place where most people are lazy and spiteful.

Hard work, homes, good books, an older car, walking, real food, 8 hours sleep, helping others.
These still exist – forget this silly overblown egotistical spiteful depressing blog and live.

It will be less depressing if you leave. — Garth

#119 dd on 03.22.09 at 5:05 pm

North Vancouver Citizen

Calgary is override Vancouver soon enough.

#120 Future Expatriate on 03.23.09 at 9:03 am

#116… when you buy 20% down from here, you will be kicking yourself all the way down as the value of your beautiful brand new home drops at least another 30% with everything else in Van.

These blogs will tell you when the bottom is in, but by then you’ll have lost at least six figures by buying way too early and not paying attention.

#121 checking out the market on 04.05.09 at 9:56 pm

I have been checking into purchasing a home. Speaking with a bank representative I asked the question. A current variable rate is down to 3.3% for a 5 year term. My friend’s variable rate is down to 2%, he bought years ago. The representative mentioned that the current 3.3% rate is the lowest banks will go in light of their costs. Basiclly the banks are close to a point of not profitting off low rate mortgages.

My fear, I can not see banks continuing with these low rates in years to come.