Rate roulette


Long ago, far away, a crisis was born.

After Nine Eleven the wisest man in America (so everyone said) dropped interest rates hard and fast. If the system is flooded with cash, he mused, the people will buy stuff and capitalism will defeat terrorism. No recession on my watch.

So the Fed kept rates at an all-time low, even though some people warned cheap money encouraged reckless behaviour. The housing market was alight, prices raged and buyers bid them even higher with low-cost mortgages. Eventually the Fed began to raise rates, but in increments so small the binge did not slow.

More people warned it would end badly since house prices were supported by a sea of debt, not income gains, but the Fed went slowly, cautiously, lest a recession start. Not on my watch, said the wisest man, and then he retired.

You know the rest. The American housing market today is in the 40th month of its collapse. It destroyed a good deal of the country’s middle class wealth. It brought down virtually all of the major investment banks. It ushered in a recession which is seen to be the worst economic event since the 1930s. It has indebted America, Canada, Britain and ensured an entire generation of tax increases.

And, again, it’s spawned cheap money.

Those who influence rates, fearful of a depression, said not on my watch. As a result, there is more reckless behaviour among us. Despite fewer jobs and greater uncertainty, low-cost mortgages have encouraged a wave of borrowing and buying, forcing prices higher while igniting bidding wars. Once again, higher asset values float on debt, not a rise in family earnings.

Will the American experience inevitably be visited upon us?  Will the Bank of Canada make the same mistakes the Fed did, keeping rates low so long irreversible damage is done, sucking middle class wealth into overpriced assets destined to pop?

The answer is simple. Clear, too. It’s no.

Mark Carney is a lot of things, but stupid’s not among them. The central bank boss knows he’s playing a high-stakes game of rate roulette, aware ultra-low rates can do as much damage as good. While he was desperate to prevent a deflationary spiral, he’s now adamant to deflate an uncontrollable bubble with but one outcome.

At least one economist has found the courage to state that clearly. Carlos Leitao, of Laurentian Bank, is warning Canadians to prepare for “aggressive” interest rate increases once Carney pulls the trigger. That will likely happen in about nine months, after unemployment peaks in early 2010.

“An aggressive tightening – rather than a gradual one – will be necessary because rates are extremely low,” he says. “A measured pace would not be appropriate to ‘normalize’ rates when the starting point is virtually zero.”

Exactly. In fact Leitao says each time the Bank of Canada raises rates, it will be by as much as a full 1%.

So imagine what that would do to a 3% VRM, raising the effective rate by 33% in a single move. In fact, it would only take a couple of years of aggressive bank moves to put five-year mortgage money back into the 8% range – the average of the last twenty years.

As I mentioned here two days ago, a cheapo Van house worth $600,000 bought with 10% down can be financed now with a VRM at 3% for $2,560 a month, requiring an income $92,000. But if it renews in, say, 2014 at 8%, payments jump to $4,200, needing an income of $151,200. Consequences – obvious.

Anyone who believes this isn’t just possible, but certain, seems destined to relive history.


#1 PVC on 09.09.09 at 11:16 pm

Does Garth knows more than Greenspan about what is money.

According to Greenspan GOLD IS MONEY! Read the ultimate source of payment comment.

Yes payment=money. End of debate.

Sept. 9 (Bloomberg) — Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.

The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said.

The price of gold has jumped 13 percent this year as rising government debt coupled with declines in the dollar spurred demand for the metal as a haven. Silver, platinum and palladium also gained.

“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.


#2 dd on 09.09.09 at 11:36 pm

Great write up.

An interesting read is “Your World is About to Get a Whole Lot Smaller” by Jeff Rubin. He basically says that cheap oil is responsible for low inflation and therefore cheap money. But that is about to change.

#3 George on 09.09.09 at 11:38 pm

I’m about to purchase a “split it all down the middle right now please” divorce sale – house. The deal is good the need for shelter sincere and any thoughts of moving ever again non existent. It is not in any metropolitan bubble town . For how long would you lock into a fixed? The banks appear to already be on greafool mailing list as 18 years costs 8.75% on average. Can the crystal ball focus that far out?

#4 Bilbo Bloggins on 09.09.09 at 11:52 pm

Sadly, there are still many who believe low rates are the norm and that they will stay low for years to come.

These are typically your late 20s to early 30s yuppies who have been coddled from since childhood.
Never faced adversity in their lives. Have decent incomes, but no propensity to save.
Living in a world of Starbucks machiatos, Bikram yoga, and Facebook/Twitter.
Downpayment has been handed over by well-to-do boomer parents.
Armed with low low teaser rate mortgages, they are now out there gorging themselves on every POS character home and shitbox in the sky they get their grubby little hands on.

You’re right Garth, this can’t end well.
But it’s going to be one hell of a show to watch from the sidelines!

#5 nonplused on 09.09.09 at 11:53 pm

I’d have thought the rate raising would have started already but at this point I think we have to wait for a bond auction that doesn’t clear. When house prices were rising at 20% per year it was a calamity for consumers, both first time house buyers, people who needed to trade up, and for those who got suckered into a “home equity line of credit”. If they didn’t act then, I’m inclined to think they won’t voluntarily.

#6 Tom Araxias on 09.09.09 at 11:53 pm

And for every one economist who forecasts that interest rates will rise (BTW unemployment will not peek in early 2010 but that’s another story), there’s another economist who forecasts that interest rates will remain at their all time lows for some time. Show some perspective if you want to sound credible.

Interest rates will EVENTUALLY rise but we are a long ways off of that point in time. Start reading the FOMC’s meeting minutes and things will become abundantly clear to you.

#7 Doug from Calgary on 09.09.09 at 11:55 pm

Or… in keeping with “how much can I afford per month” which seems to be the logic these days, the same payment of $2560 with 10% down will drop the price of the house to approx. $375,000. Roughly a 10% drop in house price for every 1% increase in interest rates.

#8 Gord In Vancouver on 09.09.09 at 11:59 pm

As I mentioned here two days ago, a cheapo Van house worth $600,000 bought with 10% down can be financed now with a VRM at 3% for $2,560 a month, requiring an income $92,000. But if it renews in, say, 2014 at 8%, payments jump to $4,200, needing an income of $151,200. Consequences – obvious.

Thanks, Garth. Now watch bulls say this:

“What’s the big deal? 2014 is a LONG way away – new buyers are locked in at obscenely low rates for 5 years – no worries.”

#9 Nostradamus jr. on 09.10.09 at 12:00 am

Carney will do no such thing Garth.

…Because Canada’s new Prime Minister Igantieff…your boss…will spend McBillions of $$$ on National Mega Projects…so Carney current interest rates will remain where they are for a lot longer than you suggest.

Nostradamus jr.

#10 Iguana on 09.10.09 at 12:10 am

What you say seems credible but when you say this about Marc Carney:

he’s now adamant to deflate an uncontrollable bubble with but one outcome.

That may be a wish of his and I hope you know it as a fact rather than a supposition, but when I can see The British banks suddenly lending, to who knows where, along with their real estate market taking a bit of a turn for the better, that, along with the US market becoming less dyspeptic, I can only visualize an agenda in the ‘West’ that has not much to do, particularly, with worries about deflation or inflation in Canada (or in that other partner in the crime Australia). More likely it is a case of ‘We’ll hang separately if we don’t hang together’.

#11 Gigglefinder on 09.10.09 at 12:11 am

Requiring an income of $92K? Are you serious? That’s a tight budget, indeed. You’d have to be hard core on the cost control to hit that target.

#12 WillsDad on 09.10.09 at 12:20 am

so deep throat, er, the Laurentien bank dude, has let the cat out’ the bank eh?


#13 Nostradamus Le Mad Vlad on 09.10.09 at 12:37 am

“. . . a crisis was born.” — Whether the crisis was born deliberately doesn’t matter, as there is a far larger picture to look at.

Cycles are a part of our lives, whether we know it or not. The average lifecycle of nations for eons past and to come has been about 200-300 years, and during that time usually run through the following sequence:

From bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance; from abundance to complacency; from complacency to apathy; from apathy to dependence; from dependence back into bondage.

The US is over 225 years of age now, and I figure sheeple of the world are so desperate for help from govts. that they are now in the last cycle.

Very smart people can say, predict and forecast whatever they like about anything they want, but what is said and what actually happens are two entirely different things.

My guess is about as good as anyone’s, other than I’m retired and thoroughly enjoying it!
#119 45north on 09.09.09 at 8:53 pm — Thx. for the link.
Alternative, renewable energy being built by a company from Arizona in China. A further link to the company at the end of this one. —
Japan’s Warren Buffet says it’s winter time. Second link also concerns winter, but from a different perspective. —
See title of link. —
A good comparison! —
Most of you already know this, but . . .
Assuming that Kraft buys out Cadbury, this from The Daily Mash . . .
“Consumers looking forward to Kraft Chocolate Singles
“I hope they’re all rubbery and taste like vomit,” says woman.

#14 Chincy on 09.10.09 at 1:16 am

“The answer is simple. Clear, too. It’s no.”

Disagree Garth, the mess is already built in on the West Coast…25% haircut on houses and I figure it will be alot uglier in the condo market.

#15 confused and a little crazed on 09.10.09 at 1:31 am


but is anybody going to wait until 2014 to buy a home probably not. Will the econ improve by then probably yes but a lot of the jobs in the past will never return. Logging in BC will just be whole logs not processing . Just ship the whole thing over to China/ India…whereever but not here. We still don’t have any major manufacturers here…some small clothing lines…tea/ coffees but no boeing or merck . None of the big boys. Oh well BC doesn’t need it. We haave tourism even if the US dollar is par.

what’s going to happen…i don’t know but thru my business contacts sales are bad. They are offering extra discounts for me to buy their services and goods. They want to lock me in for 9 month or 1 year….longer terms than normal as well. Some people who have lost jobss in May and March have found some in august . still they are very cautious .. optimistic but cautious 2 out of the 6 are still looking

maybe they should go into real estate :)

#16 daystar on 09.10.09 at 2:01 am

This so reminds me of an old post of mine not so long ago.

#14 Daystar on 09.02.09 at 1:27 am


The link above gives us a good timeline from 1996 to 2006 of what happened with U.S. interest rates. Note that as soon as the Republicans were turned to power, interest rates began to plummet and remained in at or below 2% from 2001 to 2004, creating a real estate bubble, construction boom, commodity boom, financials boom and ultimately a wealth effect that was fully dependent on, you guessed it if you’ve read this far, near 0 interest rates.

And things did get wreckless in the U.S. . If you fogged a mirror and had ID, you were paid cash to walk into a home with no money down. Real estate became the new casino, folks. Same thing happening now here?

And the bond markets… we have not seen a credit expansion like it in modern history. The majority of this credit expansion in the bonds markets was led by “mortage backed securities”. This was done through deregulation on wall street that enabled them to do so. (In Canada, Harper did it through deregulation of the banking industry in 2006, we’re so asleep.)

As the boom turned bust (where is that chart, ah yes, here it is, 05′ to 08′, and we know whats happened since, its flatlined at or near zero) from higher interest rates forced on the Republican government as their currency came under fire from war bills and ballooning trade deficits and federal deficits (Bush loved to spend money):


Interest rates went up! And here is the key question, readers… Pay attention. “How much control over interest rates does a federal government have over key lending rates?”

I say Plenty!

If Canada’s federal government runs federal taxation/spending surplus’s, instills successful trade policies that run trade surplus’s and are percieved by the world economy as top notch, the Bank of Canada’s worry isn’t “geez, how am I going to buy bonds in the world market, what should I set my rates at”, its worry becomes… “where is our currency the most competitive considering Canada’s overall economy and how are the feds regulating mortgages?”
And is there a one of you who believes that federal governments don’t have a say in where currencies are established through interest rates with the bank of Canada under such a scenario? (like what we enjoyed actually for a decade until Harper) Or what our federal government can do to mortgage lending regs? (again, Harpers policies stand out big with 40 year nothing downs, interest mortgages only (yeah, they actually briefly tried it, the same as U.S. ARM’s) and whatever else they could deregulate to create a real estate bubble?)

And if governments run wreckless trade policies and run trade deficits, their corporations/governments need to borrow more to make up for the red ink, mainly through bond markets. If governments run wreckless spending/taxation policies and run major deficits, they have to go to the world with their hat in hand to borrow from the world markets. If governments through stupid, wreckless (and sometimes even traitorous) policies go to the bond markets for huge sums of money (like say the Harper government following through with plans to borrow through the bond markets a full 200 billion year over year with national debt at a mere 465 billion to start with and a small 1.3 trillion dollar GDP to adjust to such wreckless borrowing… this puts the Bank of Canada in a bad position because it has to consider bond sales in world markets in a big way besides currency, knowing full well what large sums of debt will do to currency later on.

When Mark Carney mentions words like “Quantative Easing”…. readers… get worried.

And why does Harper need so much money from world bond markets?

– Harper needs 50 billion just to handle his wreckless tax/spend policies that have led us into an estimated 50 billion dollar federal deficit this year.

Harper needs 18 Billion for crown corporations, but mainly and especially so for CMHC credit purposes and more to run the highly successful programs like “first time home owner grants”!

– Harper needs a further 125 Billion dollars to shore up potential CMHC losses as an anticipated Canadian real estate bubble bursts up here:


Check out the charts provided by CMHC:

Canadian mortgage debt:


Equity as share of home value:


Is this evidence of a bubble spawned by 40 year nothing down loans and cheap rates below?


And this… and its ugly.


Its ugly because just as the U.S. expanded their credit through “mortage backed securities” or “derivatives” which defaulted world wide even though they were triple AAA rated bonds due to a sub prime led real estate bubble that blew up in everyones faces, our Canadian government is doing it here. Only… Harper is doing it on a larger scale than Bush did in relation to the size of our economies. Look at that link above one more time. Mortage backed securites are Canada’s biggest bond market seller in the financials.

And what did Harper need 125 billion of the approximate $200 billion he had planned to borrow through the bond markets by our federal government… planned as early as Febuary of 2009?

To “invest” this 125 billion in CMHC so that CMHC could buy a full 125 billion worth of the same “mortgage backed securites” it already insures under CMHC guidlines. This link below explains the seriousness of it to the taxpayer.


CMHC’s 2009 plan is to cover 440 Billion worth of insured Canadian mortages and a further whopping $ 372 billion dollars worth of “mortage backed securities”. Please note that these numbers are on the low side. Federal interest rates have been near zero for 10 months and VMR’s are at unheard of lows inflating our Canadian bubble even larger in comparison than the U.S. real estate bubble at its zenith by a whopping plus 20%.

So… ask yourself one more time if you want a federal government to borrow $200 billion dollars to shore up bad policies that have led to a real estate bubble that is sure to burst with higher interest rates, “investing” 125 billion in “mortage backed securities” with rising rates that the feds can’t control… and most certainly can’t control when they have to go to bond markets for $200 billion every year with a GDP that is ball park a mere 1.3 Trillion.


Read the link above one more time, its that good (except for AIG lobbying the Cons in 2007, it was in 2006… I know, I’m knit picking and in reality, it was likely AIG’s lobbying even before 2006 and/or it was Republicans before that but thats another can of worms except to say that the creation of real estate bubbles and “mortage backed securities” is nothing new, Republicans “perfected” the sales of these types of bonds world wide as soon as they got into power and are Canadians are now doing it here through Harper)

And if there is a reader who doesn’t believe me, that Harper planned to sell this kind of truckload of bonds to create roughly 200 Billion in debt over the last 12 months, look at the Conservative 2009 Budget and see for yourselves. Its there in different language, but its there:


#17 Mike (Authentic) on 09.10.09 at 3:08 am

Garth, your wisdom is priceless.

“Each time the Bank of Canada raises rates, it will be by as much as a full 1%.” -Leitao

Makes perfect sense and I hope Mark Carney is smart enough to raise rates by that amount (or more). Not that I want to see individuals hurt, I don’t want to see the Canadian economy go down the US road. Even if individuals want to make poor debt choices it doesn’t mean the country has to as well.

Yes, +1% prime is harsh, but when you are starting from 0.25…

What happens to value of the CDN dollar though if rates go up? How does Mark Carney walk this thin line? We could have a CDN dollar worth $1.25 to the USD.


#18 Joe on 09.10.09 at 7:23 am

Where does giving Carney credit come from. He didn’t see the recession coming and I don’t thing he knows when it will be over.

#19 dontcallmeshirley on 09.10.09 at 7:27 am

Huh? Didn’t you say central banks are powerless to influence rates which are really controlled by the global bond market? Me confuse…

You need to pay more attention. Central banks respond, they do not create. — Garth

#20 double mike on 09.10.09 at 7:27 am

“each time the Bank of Canada raises rates, it will be by as much as a full 1%”

Won’t happen. To politically charged in many respects to be possible.

#21 NOBODY on 09.10.09 at 7:30 am

Another post once again about interest rates hike.
That storys getting old by now.
We all know that rates have ONE way to go: up!
I want to know WHEN.
Spring 2010…Fall 2010…

Can ya read, dude? Answer is above. — Garth

#22 David Bakody on 09.10.09 at 7:54 am

Come Spring when interest rates rinse so will GIC’s …. a couple or so years ago growth GIC’s were paying good rates up to approx 10% so it would seem to me the banks knew then what Garth is saying now. Then again I could be wrong if banks pay more out in interest than they collect< !

#23 frank pasquale on 09.10.09 at 7:59 am

Carlos Leitao ranked #2 world economist by bloomberg news


#16 Great charts. How come these arnt on the news

91% of mortgages issued in last 2 years cmhc insured? geexz!

#24 Devil's Advocate on 09.10.09 at 8:00 am

Smoking was once a very socially accepted thing. Board rooms to bedrooms were once filled with second hand smoke as people puffed away the soothing fumes of burning tobacco. Today we know better, we know smoking is bad for us and for those around us. Consequently smoking is little tolerated in public today.

Greenhouse gasses aren’t bad for the environment so much as they are bad for our environment.

Keynesian economics, that model by which we have largely managed our western economies since the Great Depression while beneficial in fighting that Depression, is now proving to be bad for us. Keynesian economics has culminated in the biggest debt/credit crisis of all time enslaving all but few with a loss of liberty through the shackles of debt.

We evolve, we learn. That which once was thought acceptable becomes unacceptable as we experience the consequences. Unfortunately it seems we must learn a harsh lesson before we begin to negate our reckless acts. Yes there are early warnings, such as those of Garth Turner, Ron Paul, Peter Schiff and others today, but they go largely unacknowledged as our addictions to self gratification lead us astray.

#25 BD on 09.10.09 at 8:11 am

That was an easy one to predict Garth. With massive amounts of money sitting in cash, the New York stock exchange being gamed, most companies reporting declining sales and the worlds banks making the mafia envious at their audacity and viciousness, the status quo must end sooner than later. Most importantly is that the world has pretty much run out of money to borrow.

At the same time the worlds economy is grinding to a halt from a shortage of medium and long term capital which can only be supplied when the interest on things like 5 year gic’s rises closer to 5% and attracts lots of the pension fund, municipal and retirement money sitting in cash now. How many people on this blog alone have asked where is a safe place to put their money? Like myself millions know just enough about investments including real estate to be dangerous to ourselves!

I think you may be a bit long in your prediction if the stock markets correct in the next couple of months as they should. The demand from business for stable medium term financing as well as the cry for a safer haven for investers money might see the first increase before christmas. This could be accelerated even more if the states continues to find few buyers for their debt in the coming weeks and are forced to raise interest rates to get some demand.

#26 Tom Araxias on 09.10.09 at 8:19 am

Goldman Says Deleveraging May Keep Fed Rate Low for ‘Years’

By Simon Kennedy

Sept. 10 (Bloomberg) — The Federal Reserve may keep interest rates low for “many years” to help U.S. consumers and companies as they pare back debt, according to economists at Goldman Sachs Group Inc.

Sluggish spending as households reduce debt could lop as much as 2 percentage points from U.S. economic growth over the next three years, New York-based economists Peter Berezin and Alex Kelston wrote in a report released late yesterday. While not enough to threaten a long-term recovery, it may require the Fed to offset the weakness by keeping its benchmark rate unchanged through 2010, they said.

“It is hard to escape the conclusion that the Fed may need to maintain fairly low interest rates over a period of many years,” wrote Berezin and Kelston. “If you want to bring down leverage, you should keep monetary policy sufficiently accommodative to forestall a collapse in spending and a deflationary spiral.”

The entire article:

They learned a lesson. Will we? — Garth

#27 dd on 09.10.09 at 8:20 am

.#18 Joe

“Where does giving Carney credit come from. He didn’t see the recession coming and I don’t thing he knows when it will be over.”

He stated last month that the recession was over.

#28 Gord In Vancouver on 09.10.09 at 8:31 am

#17 Mike (Authentic)

We could have a CDN dollar worth $1.25 to the USD.

Most of today’s featured BNN analysts agree that the CDN dollar should hit par by the end of this year. If you have a job, love it.

As I forecast a couple of months ago. — Garth

#29 kitkat on 09.10.09 at 8:45 am

yada,yada…a lot of scary interest hike talk but look at the action…no change today, no change tomorrow. You know the drill – it’s the same as their schedule for controlling the debt. “Now is not the time”.

If this is “rate roulette”, then somebody better check the big wheel…..the ball keeps dropping on zero.

Garth, that last paragraph in your blog is confusing. Anyone that believes interest rates will go up is destined to relive history? And those that don’t believe will live in the future?

#30 My_View on 09.10.09 at 8:52 am


Your equation does not factor in principle being paid during those 5 years or less. Since Greater Fool came out almost 2 yrs ago, your prediction was wrong. In fact a whole 5 year mortgage term will pass while people wait for the correction or at least a bottom. And besides what were the 5 year rates a couple of years ago? VRM-discount? I’m sorry but I don’t see carnage.

Only carnage to those who have no equity. Smart guys like you are immune, right? — Garth

#31 Rai on 09.10.09 at 9:01 am

The Bank of Canada has left its key overnight interest unchanged at 0.25%, and it intends to keep it same till the next summer.
Consequently the mortgage rates will remain the same.
So Garth where does this all lead to.
I always thought that the coming Fall/Winter of 2009 will predict which way the market will go.
But it seems it will remain status quo for quite a long time.
Overpriced houses/Multiple offers !!!

#32 Jim on 09.10.09 at 9:06 am

I have to wait another 9 months for Carney to act because he wants to see how the unemployment numbers pan out? That sucks! I want “aggressive” rate increases now!

#33 Justin on 09.10.09 at 9:25 am

It may also be noted that Lenders (Banks etc.) may be forced to adjust their rates an additional
.5 – 1.5% for added risk if houses prices begin to fall.

Also…The UK is to award Alan Greenspan, chairman of the US Federal Reserve, an honorary knighthood. The honor, which was approved by the Queen, is to recognize Mr. Greenspan’s “contribution to global economic stability”, the UK Treasury said……….


#34 pezzazz on 09.10.09 at 9:33 am

#21 Nobody, I can’t believe that you could get bored of talking about interest rates and their effect on the country. For me, surfing the internet for the bearish arguments on real estate has (nearly) replaced pornography.

#35 Soylent Green is People on 09.10.09 at 9:38 am

#24 Devil’s Advocate on 09.10.09 at 8:00 am Smoking was once a very socially accepted thing.

Agreed. As an aside, drinking cow’s milk today is where smoking used to be in the 1950’s. I was upset when my kid came home today from school with a dairy brochure telling us how all the kids are getting free milk on the last Wed. in September.

Excuse me? As far as I’m concernced, that’s like handing out free cigarettes to them. I know most people don’t view milk as a poison like I do, we were all raised on this crap, myself included, but I have never given cow’s milk to my child and he’s one of the tallest in his class… at the moment, and in the so-called ‘gifted program’ which believe me, I can’t take any credit for his brains as far as DNA goes.


This link states 95% of African Americans are lactose intolerant which means they should not drink milk. I wonder if the rates are the same in Canada. Any bloated black people on this board?


#36 Sphinx on 09.10.09 at 9:52 am

“…In fact Leitao says each time the Bank of Canada raises rates, it will be by as much as a full 1%.”

not sure what Leitao is smoking!!, 1% hikes??? not gonna happen. Unfortunately, interest rates will stay low for loooong time, BOC can’t let the economy die, we rely on exports to US where their dollar is tanking making CDN$ move higher, hiking rates will push CDN$ to the roof specially canada is a resource economy more than anything else.

“Central banks respond, they do not create. — Garth”. Well, BOC can use the Quantitative Easing tool, and this how they ‘create’ artificially low rates, right?

IMO, unemployment will take care of the housing bubble. If gov seriously wants to take away the punch bowl, it MUST freeze or reduce the CMHC mortgage portfolio, and that will take increase mortgage rates without affecting other sectors in the economy.

#37 Mikaroo on 09.10.09 at 9:59 am

The plan will all come together when the BoC interest rate hike above the FED rate causes the loonie to fly above 1.20 USD. Quantative easing will crash the value of the currency back to .65 This will allow Canada to monetize a large portion of this new CMHC debt onto the backs of the speculators in the currency markets. Also, our devalued dollar will re-instate us as the preferred foreign manufacturing base of American industry. Life goes on for the guy in the street… with sky-high mortgage rates and *really* expensive foreign travel/goods. Hey, it worked for Argentina, right?

#38 Dean on 09.10.09 at 10:10 am

Garth you’d have to be on drugs to try to actually live off 92K with a $2,560 mortgage payment. No wait, forget I said that, you wouldn’t be able to afford any drugs.

#39 robert on 09.10.09 at 10:20 am

I would assume the higher interest rates everyone is expecting will also include an unborrowed downpayment of more than 5%? If we need the disciplinary medicine of “normalized” interest rates then expect similar downpayment/savings medicine (if I recall, 20% was the “norm” not too long ago). With employment and income both in global free-fall only those who do not have to borrow would be laughing under this fantasy higher interest rate scenario.

Demand in everything has been falsely stimulated by low rates and has been pulled forward for years. Hell, the low rates themselves were artificially pulled forward! Who wants to borrow to buy houses that some see falling in price by 25%? Who wants to pay 8.25% for this “privilege?” More importantly who will be able to borrow in a tighter credit regime? Those that do not need to for sure but the remaining 99% of us?

Continue whistling past the graveyard all you want but the real demand for the next few years will be for cash and income to service and pay down debt (not for more credit). With employment, hours worked and wages continuing to fall this cash can only come from asset liquidation and hence asset price deflation.

A massive deleveraging process is underway. No government on earth can stop it but they can and will make it much worse.

#40 Joe on 09.10.09 at 10:35 am

I see in the news today that the Bank of Canada sees faster growth in the economy, but will leave interest rates low until June 2010 or later.

Dude, I think your faith in Carney is misplaced.

Did you read the post above? This is exactly what I said. — Garth

#41 Brian on 09.10.09 at 10:46 am

Garth you forgot to mention that you the V in VRM is for Variable which means your mortage goes up the month after the BOC changes rates. No need to wait till 2014 for those with VRM’s to go bust.

Quite true, to a point. Payments usually remain fixed for a set term, but the interest-o-meter races ahead. — Garth

#42 Investor on 09.10.09 at 10:50 am

I am shocked at the title of this article. Recovery. Since when imports are good in this type of environment.


That said, the data also showed the damage done to the Canadian economy by the economic turmoil that has ravaged its neighbor. Exports to the United States in July were down by 35.2 percent from July 2008.

#43 dotava on 09.10.09 at 11:07 am

Just don’t forget that they make it space to play with interest rate – so far BoC was the one who lover the rates but lately they stop it – what happened – banks that didn’t follow with interest rate drop (in about a year) – they are “asked” to do that now when they find themselves in not really pleasant situation as BOM lately. Usually there were 1-1.5% on top of BoC on lending but right now there is a bigger gap that can be used to distort our not pleasant economical situation.

#44 Men With Hats on 09.10.09 at 11:15 am

Sorry Garth but Carney is a card carrying member of the triumvirate of stupidity .
Harpo and Flaherty are also members in good standing .
This guys predictions are all over the map .

#45 Mel Eager on 09.10.09 at 11:25 am

For 3.05% VRM people (like me) with this new knowledge, looks like our options are:

A.) Lock in now
B.) Ride the 3.05 rate for the next 9 months and Lock in in then
C.) Ride out the VRM for the next 5 years and pay whatever the rate changes to
D.) Keep the VRM but make mortgage payments today based on a 8% rate
E.) Sell and get out of Dodge……

What to do, what to do………..?


#46 Artisuseless on 09.10.09 at 11:41 am

@#16 daystar – thanks for those links – they’re fantastic!

Though really, really scary. That CMHC post makes me long on torches and pitchforks. Meanwhile the media covers nothing but car crashes and fake celebrities.

You’d think a million-strong mob of angry taxpayers storming Parliament Hill would be great for ratings though…

#47 newcomer21 on 09.10.09 at 11:48 am

With the BOC rate set at .25% the only direction it can go is up and the question is when not if. You don’t know any better than I do but, in the mean time, my plan is to make a 10 percent payment against my VRM this month and continue with the double payment plan to pay this sucker off in 5 years or less.

Real estate consumers are not impacted by the high cost of the purchase as much as they are impacted by the high cost of extended periods of amortization. While interest rates are low and while there is widespread uncertainty, paying off debt as quickly as possible is the best investment you can make. The returns are enormous relative to other forms of investment and it provides “peace of mind”.

I find your approach to be condescending to the average person who understands these very simple rules. That so many are seeking the security of a real estate investment confirms that this asset is highly desireable. People are not planning to buy this asset with someone else’s money, as in the USA, because here in Canada interest expenses are not tax deductible. It makes perfect sense to retire debt on your principle residence as quickly as possible.

Do you ever tire of this “old saw”? Can you play any other tunes? Canadian real estate markets are seeing a rise in prices. The “market” suggests this is where the smart money is going (despite your predictions!).

Perhaps you will need to redefine “greater fool” to include all those who do not accept the validity of market economics. What do you propose? State controlled real estate?

#48 rory on 09.10.09 at 12:02 pm

Looking for other ways to spend your leftover cash …

“The public sector in Canada employees almost 3.4 million or 24% of all employees in Canada. Statscan points out there are 4.5 million unions members in Canada.” (http://fairpensionsforall.blogspot.com/)

So just about all union people are gov’t employees and their is a lot of them …3 of us and 1 of them …that is a yikes – can’t wait to pay for all those pensions that will be due especially after the stock market crashes & interest rates go up.

And, Unions usually do what is best for their memberships so what is best for Canada may not be in the Unions best interest yet Unions are basically running the gov’t (hence the country)…not good any which way you look at it …IMO.

#49 daystar on 09.10.09 at 12:05 pm

#3 George on 09.09.09 at 11:38 pm

Sounds like you didn’t buy a half a million dollar home. Lock your mortgage in for 5 years. Even if when it comes time to renew God forbid, rates are at 10%, the spread over ten years is a less than 7% average and chances are the 10 year average will be lower so… lock it in for 5 and start paying down the principle.

#20 double mike on 09.10.09 at 7:27 am
#21 NOBODY on 09.10.09 at 7:30 am
#29 kitkat on 09.10.09 at 8:45 am
#30 My_View on 09.10.09 at 8:52 am
#36 Sphinx on 09.10.09 at 9:52 am

None of you are getting it. Firstly, Mark Carney is on record saying that he won’t raise rates until June of 2010. After that, its easy to assume that all bets are off.

Secondly, the G20 is keeping bond rates artificially low as a group due to the sheer reality that U.S. and Japanese bond values are whales that have to be dealt with and U.S.’s only course right now in particular is to bring value back to an oversold real estate market to recover from their recession to have a hope of turning it around and that takes cheap interest rates to do so. Its still too soon to say this with certainty, but there are indications that the U.S. housing market has bottomed. Cheap rates should bring values back on the rise, even in the middle of an ugly recession. If cheap rates don’t do it, nothing will. This is, the big tell, readers and especially to those that aren’t getting it. Once RE valations begin to rise from their bottoms, all bets are off on low rates. Think about the negotiations that had to take place to get the G20 and Asia and middle east to play ball with keeping world bond markets flooded with low rates and mostly nothing but. Cheap rates end when the housing bottom ends in the U.S. or very shortly thereafter.

There will be an end to low rates and it will come with a world recovery and its kickstart will either be a pop in U.S. housing valuations, or it’ll be far worse… imagine for a moment what would happen if RE valuations don’t pop in the U.S. and the recession continues on and on.

A U.S. housing recovery that is modest is something the world can hope for in the near term and has its least pains which is why the world is supporting cheap rates, not to mention that most of the western world faced a RE bubble themselves without U.S. mortgage backed securities and derivities and municiple bonds blowing up in world market faces. Alot of nations need cheap rates right now as well, (including us) but the U.S. needs cheap rates the most.

And just imagine if you will, what will happen if the U.S. can’t kickstart their economy because that leaves us with scenario number 2.

The rest of the worlds economies will be sluggish but eventually they will pick up driven more than anything by commodities as resource extraction falls behind from continuing human population growth as well as developing nation growth, Asia and Germany will become the dominant nations, and currencies will simply leave the Greenback behind in a big way over time. But ask yourselves…. seriously now… do you or the world truly want this to happen? Maybe over 20 to 30 years, but not now. (and its likely to happen over 20 to 30 years, but not 2 or 5)

Thirdly… think for a more rational moment what will occur once that bottom in U.S. housing has passed and a 1% raise hike hits the markets and not just the U.S., but world wide. The U.S. greenback gets support but more importantly, its a signal to investors, real estate buyers on the sidelines, everyone that the economy is recovering and one can’t wait any longer to get back into the market. Even if its a head fake folks, this will likely cause another pop in RE valuations and kickstart the actual need for rates to rise as… mission (a pop in real estate valuations in the U.S. creating a wealth effect and leading them out of the recession and inflation and growth and all that comes with this wealth effect) is accomplished.

And lets say I’m wrong about all this. Lets say that the U.S. can somehow keep a low rate policy for years on end, waiting for a Real estate recovery in the U.S. to come but never does. To accomplish this, the entire WORLD will have to do the same as this is what the U.S. competes with when it comes to the sale of their own bonds to support their need to borrow. Do any of you actually expect say… a nation like Germany to keep rates low for 5 years in the face of positive GDP growth and inflation over 4 years? Do you all believe that the U.S. has the power to dictate interest rates indefinitely? You think the Bank of Canada still does? GWB sure didn’t. The U.S. has world support to keep rates low now, but their support as time rolls on will become fragile… so think!!

We’ve got until June of next year according to a promise Mark Carney made early this summer, to keep rates low. This is in itself a signal of what the G20 plans to do with rates or when they expect changes but mark my words. Even this isn’t a lock. Unexpected things can still happen. A nation could turn rogue and raise their rates to prop up currency or hedge against inflation (meaning they’ve got a big pop in GDP) and they all begin to fall like dominoes before next June. China, the empirates, Japan (but I doubt Japan) could start (and China and the empirates have already started to some degree which explains why gold is picking up steam) moving away from the Greenback and get rid of some of what they do have in the money markets. If the U.S. greenback comes under serious pressure, the U.S. feds might have to raise their own rates and that will surely mean a rise throughout the rest of the G20 and beyond and do I have to mention what that might do to a housing market that might not officially have bottomed? That in itself is a bad scenario if it occurs.

These are nervous times… but my bet is that rates will go up… in June of next year as Mark Carney has indicated. Too soon, and a U.S. recovery led by real estate recoveries is in jeapordy. Past June… and it means the world is in deeper doo doo than most of us can now fathom or comprehend. If it takes longer than June for rates to rise, the world economy is in more serious trouble than people realize, and the U.S. has one hell of a good negotiator in Barrack Obama (but they’ve got one excellent president there anyways, I truly impressed with him) and or both, but… expect nations to report positive GDP growth between now and June and should it be 2 or 3 quarters in a row, what does that mean? It means rates are going to rise.

So… scrap the notion that interest rates will be at or near zero for 5 years or more. We will be lucky to see interest rates below 1% federally a year from now. Very lucky… and as Garth accurately predicts, it will rise dramatically. I’m thinking its next to impossible in fact for rates not to rise year over year and rate hikes could come by early next spring.

And consider the consequences as this RE bubble in Canada continues to inflate in the face of the inevidable… rate hikes. This will end badly for Canada. Its so predictable… a vaste majority of Canadians will be very angry with this current government in the years to come with the policies they have put in place.

#36 Sphinx on 09.10.09 at 9:52 am

All over about 5 years is my guess. And yeah, it worked for Argentina real well, lol.

#50 Onemorething on 09.10.09 at 12:05 pm

Do you know what is left? Maybe some protectionism and the slow breakdown of globalization! This is what happens when the G countries dont want to play together anymore!

The USD is not going anywhere as the US consumer has gone on too big of a holiday already.

Dont worry all, the further 25% down to go in the US RE market wont happen to Canada, especially VAN!

You bunch of misguided dreamers!

#51 Seilfworcehtsa on 09.10.09 at 12:16 pm

Abandon ye all hope who enter here. If the interest rate bears don’t maul you the interest rate bulls will trample you. Add too that the infestation of gold bugs and one is left pulling wads of hair out of a perfectly good scalp. Houses are no longer homes but an investment in the future. The economy is sick but massive govt. bailouts have masked the symptoms and the MSM are all reading from the same book;”The Power of Positive Thinking.” And what does a good Newfie do? He goes fishing. Caught any fish Jarge? Naa but I’se got me EI check and that oughta do’er for a wile.

#52 rory on 09.10.09 at 12:33 pm

No recovery …all just a big cover-up ….Gerald Celente audio at http://economicedge.blogspot.com

#53 Barb the reader, Calgary on 09.10.09 at 12:38 pm

#16 daystar, I meant to say thx for the post the other day, and today, lotsa work.. reminds me of this time last year.. ‘connecting the dots’.

#54 DaBull on 09.10.09 at 12:38 pm

#32 Jim

I have to wait another 9 months for Carney to act because he wants to see how the unemployment numbers pan out? That sucks! I want “aggressive” rate increases now!

I can give you a mortgage at 25% today, if that will make you feel better.

#55 Paul on 09.10.09 at 12:38 pm

I want prices to dip badly in Vancouver, but why in such a big bubble as california san francisco prices have hardly changed? Many people say it is very simlar to Vancouver in landscape and and high immigration of rich Asians?

#56 Genghis on 09.10.09 at 12:49 pm

There is no doubt in my mind that houses are overpriced in the major cities and many other areas of Canada. The market in these areas heavily unbalanced towards the seller, however this is presented by the mainstream press as a positive thing. I read about triple digit increases in prices in many areas in between 2002-2009, and yet this is presented as normal, nothing out of the ordinary, to be expected.

Garth, I completely agree that the root of this bubble goes back to decisions made at the US Federal Reserve, back in 2001. Most house buyers don’t care what the house costs, they just care about what the monthly payments are. The result of dramatically low rates on house prices is now completely predictable, however strangely enough virtually nobody (including Greenspan himself) anticipated this major side-effect back in Nov 2001.

Do we need to wait for interest rates to go up in order to see the current situation to unwind? As demonstrated in the US and much of the rest of the OECD a couple of years ago the answers appears to be no. Interest rates are a major factor, however not the only one. There are so many other factors that could cause this to blow-up, either on their own or in combination. This can change on a dime, without warning. No need to wait until June 2010.

#57 Vancouver Old-timer on 09.10.09 at 12:51 pm

I’ve had evidence in the last week that the banks must be anticipating rate hikes in the near future. I have accounts at three financial institutions, each account $100,000+, and in the past week each bank has called me to try to convince me that a five-year fixed term is the best option for my money. Not one of the banks has called in the past to offer any suggestions as to what I should do with these accounts so I’m thinking that they’re looking to lock up some money at low rates. By the way, the three to five year fixed rates they’re offering are only about 3/4% more than what I’m getting in a one-year cashable.

#58 smw on 09.10.09 at 12:52 pm

#8 Gord In Vancouver

What isn’t far away is 2011 and 2012 which are 5 years after the initial intro of the 40 year mortgage(2006) and the highest number of resales(and price increase) in Canadian real estate history(2007).

We know our love for ARMs here in Canada, looks to be in and about the same time of the second wave of ARMs in the USA.

People will be very dissapointed when the BEST case scenario is that their RE purchase stayed flat(and only lost their down payment) from 2006/2007 to 2011/2012.

#59 T.O. Guy on 09.10.09 at 12:58 pm

Hi Garth
A fews months ago I said I would pull the trigger to buy my first house but I couldn’t do it. Now prices have gone up a bit more while mortgages rates have come down a little and housing inventory supply is down almost 40% from this time last year.
So two things I have to ask you, first why the drop in supply if this is a great sellers market and secondly would you say that 30% down is a good start?
T.O. Guy

#60 Chris L. on 09.10.09 at 1:01 pm


“Affordability rates remain worse than average in Toronto, where a two-storey home declined 0.7 percentage points to 55.7 per cent of income. That means it takes more than half of pre-tax household income to carry a mortgage, property taxes and utilities.”

Wow, only 55.7% of income to support your T.O. property! Sounds like a good deal. I’ll take two…one for me and my family and one as a rental.

#61 JeffinPickering on 09.10.09 at 1:07 pm

#44 – We’re a prime less a half point VRM household – term is to Dec 2013.

We bought a house well within our means and purchasing power (i.e. less than 30% of our income services the mortgage, and we’re ok even if one of us lost our job). Our strategy right now is accelerated payments and making extra lump sum payments. In other words, paying down debt and building equity while cash is king.

Pulling the trigger just yet on a lock-in with higher rate and penalty would be a bonehead waste.

If you are disciplined, and can really load up on accelerated and extra payments now, you might find it’s best to ride it out variable all the way.
Best thing to do is sit down and spend a few hours with a quality mortgage calculator, and figure out all the different scenarios.
e.g. is it better to beat down the principle and take a higher rate on a lower balance in 5 years? does it make sense to pull the trigger at a particular rate depending on your balance at the time, etc.?

#62 smw on 09.10.09 at 1:11 pm


Listen to this chap David Laidler, he figures Carney will keep his promise of low rates until June 2010, but after that, he’ll have pressure to jack rates as you stated above Garth at a fair clip, no .25 and .5 point moves, FULL POINTS a crack.

#63 JeffinPickering on 09.10.09 at 1:14 pm


You’ve hit the nail on the head in terms of strategy, but there’s one major, major problem.

The average person does NOT understand this. Their actions speak volumes to it. Houses are bought with no down payments, well beyond income means, at maximum amortization periods, and the VAST, VAST majority are NOT paid off/retired early (no accelerated payments, no extra payments, etc.).

#64 jess on 09.10.09 at 1:16 pm

The Talking Down and the Dumbing Down

the word “free” placed before the word market will never again occur in that order

FRAUD market is more apt. the secrecy that the banksters have engaged in – in US Treasury markets, the gold markets, the US dollar markets, agriculture commodities, stock markets, and financial markets –

Sept. 10 (Bloomberg) — Bank of China Ltd., which led the nation’s $1.1 trillion lending spree in the first half, said ample liquidity has caused “bubbles” in stocks, commodities and real estate.

“The potential risk is that a lot of liquidity goes to the asset market,” Vice President Zhu Min said in an interview in Dalian today. “So you see asset bubbles in commodities, stocks and real estate, not only in China, but everywhere.”

China’s record credit expansion, which helped the country’s economy expand 7.9 percent in the second quarter, has raised concerns that bank loans have been diverted and used to buy stocks and real estate, fueling unsustainable gains in equity and property markets.

#65 Sphinx on 09.10.09 at 1:16 pm

#48 daystar
I’m a bubble sitter, but not a wishful thinker. Not Argentina, but check the Japanese experiment of the last 20 years, where’s their interest rate at now, and how did they manage their RE bubble and banking crisis. We’re on a worse path, and the BOC & canadian gov will do whatever it takes to save the economy by the devaluation of the CDN$ vs. US$, they have no choice, repeat, no choice. Raising rates will kill both exports, jobs, and housing… they’ve got to figure how to burst the housing (credit) bubble while preserving the rest. CMHC is a good place to start at.

#66 debtfree on 09.10.09 at 1:48 pm

Think the re market is in recovery ? Just check out ozzie jurok . The deals are starting to look desperate . Selling shares in development that may or may not be built.. if not built ….to be payed back through sale of the entire 120 acres … sold to whom and when . What a laugh . 40 % of building lots . Just made a bundle in the lithium plays and my vulture senses are tingling . Must control myself .

#67 Nostradamus jr. on 09.10.09 at 1:51 pm

# 32 Jim

“”I have to wait another 9 months for Carney to act because he wants to see how the unemployment numbers pan out? That sucks! I want “aggressive” rate increases now!””

…Perhaps you and four of your renter friends might consider splitting a downpayment…say five ways…then you can own part of the Canadian Dream…owning a home.

You are too dumb to realize 99% of the rest of the world would love to be in your Current Canadian Renter Shoes versus their own below poverty lifestyle.

Nostradamus jr.

#68 debtfree on 09.10.09 at 2:00 pm

$from asia $ wrote the other day that china is in the same boat as us of a and ca . This is not true and leads me to think that he/she is not from asia . The lowest down payment required is 25% down but few chinese put that little down . The savings rate there is the highest in the world .

#69 jwk (nee jwkimba) on 09.10.09 at 2:04 pm

#6 Missing the point. FOMC has kept rates so low the damage is done. Garth hopes Canada will not do the same.

# guy whining about math. Ok, real income needed for example in 2014 is 130,000. Up from 92,500. Hope everyone has a fantastic 5 years!

#44 D (Get used to it now)

#70 jwk (nee jwkimba) on 09.10.09 at 2:05 pm

Sold our downtown TO condo last night. On market 3 days, 24 viewers, 8 offers including 4 in person at our brokers office last night. Nuts.

#71 X on 09.10.09 at 2:09 pm

re#51 – I am a little surprised myself that the biggest recession since the Great Depression has (thus far) resulted in a V shaped recovery. Although gov’t has reacted differently than in the GD.

#72 George on 09.10.09 at 2:10 pm

Garth Bro make a call here! How long to lock in. some say we will never see a recovery. Throw your cast iron size cajones out on the blog and make that call. 5 year lock down? 10 year lock down? Plea bargain? Witness Protection Program. How long would you estimate lock down in Fixed Prison.

#73 John on 09.10.09 at 2:10 pm

We don’t have to wait until 2014 to feel the effects of an interest rate hike in 2010. The prices will drop immediately. The prices are set by the buyer afterall and there will be a rapidly shrinking pool of buyers able to afford current prices when rates do rise. When this occurs prices will tumble. As soon as a crack appears in the insulation around Canada’s housing market pressure will build until it just implodes. I predict the time between crack and implosion will be the smallest of all the bubbles around the world. I’m talking like 6 months 40% drops in shitcouver.

#74 POL-CAN on 09.10.09 at 2:16 pm

#5 nonplused said:

“I’d have thought the rate raising would have started already but at this point I think we have to wait for a bond auction that doesn’t clear.”

Right on time (today) via ZeroHedge:

Failed Polish Bond Auction Raises Serious Questions For Emerging Markets


I think that only one auction has “failed” to date in the USA. When the bid-to-cover ratio is below 2.0 the auction is considered a failure. The USA has that pesky reserve currency thing going for them. They also enjoy that flight to safety bs with their currency/bonds/bills. They are the only country in the world that can in theory do QE on a huge scale. But for how long?

Poland has a population larger then Canada all packed into an area approx the size on Ontario. Poland is considered to have a healthy economy when compared to the rest of the former Eastern block. Their RE bubble poped earlier this year and a lot of people are hurting due to their mortgages being in foreign currency.

I think we will see more of these auctions blow up over the next few weeks/months but I do not think there will be much impact to us until the USA auctions start failing.

In the mean time we should all watch the US $ as it is the only thing propping up the fake stock markets and commodities like gold and oil.

#75 lgre on 09.10.09 at 2:26 pm

“The “market” suggests this is where the smart money is going (despite your predictions!). ”

LOL, that was funny now. You mean taxpayer money. People borrowing 95%+ to buy inflated assets are hardly smart. This market suggests nothing, manipulated low rates are drawing in the idiots, eventually that phenomenon will end just like in the US. Thats when the market suggests, not when its propped up..that is a short term game.

#76 robert on 09.10.09 at 2:29 pm

#48 daystar

Well said.

I like June of next year too. If you examine stock market behaviour in the early 1930’s you will note that the DJIA bottomed in June 1932. The question is, will next year be our 1932? Or will we be stuck in a 1931 version of groundhog day?

If one also considers the correlation between market behaviour and Presidential election cycles there is evidence, at least going back to the Reagan presidency, for a market low (ultimate low?) to possibly occur next year followed by a rise (probably a lot more “measured” than the one we are witnessing) into the 2012 US election. If history has any rhyme to it this would then be followed by another major decline but not to new lows. I would also expect that by this time the US Dollar will no longer be the global whipping boy and could actually rise (and fall) in tandem with US equities. One thing for sure, the Dollar rising with stocks will be a sign of economic health. The money-changers will have finally been driven from the temple.

Caveats. Our problems are so large and intractable and solutions yet so completely absent that this timing tool may be useless. And, of course, correlation does not necessarily imply causation.

#77 nonplused on 09.10.09 at 3:05 pm

Maybe Buffet has the timing of rate rises figured out. From the Daily Reckoning:

Buffett does the math. This year, the US deficit will total $1.8 trillion. That’s 13% of GDP! Since 1920, the largest peacetime deficit was 6% of GDP. The magnitude of it alone should be cause for alarm. But there’s more. Where does this money come from? Even if you could direct 100% of the net US trade deficit (about $400 billion, the money that ends up in foreigners’ hands as a result of American spending) and 100% of American’s savings (estimated to be about $500 billion), you’d still be $900 billion short.

If so, the long term bond starts to head up dramatically in just a few months. The Feds can’t do too much about that without a whole bunch of Quantitative Easing (money printing to buy bonds), but they are at the mercy of the Chinese willingness to still hold dollars if they try that.


You have to draw the trend lines yourself, but from a technical perspective the spring rally failed to regain the trend in every market except maybe Ottawa. This should mean we will be setting new lows through the fall and winter.

#78 Solitario on 09.10.09 at 3:11 pm

we both agreed Harper’s income trust destruction was WRONG. Carney had a strong involvement in the income trust debacle and he’s responsible for tens of billions of dollars in losses.
That makes Carney either stupid or a crook, in my books.
You say “Mark Carney is a lot of things, but stupid’s not among them.”
If stupid is out of question…
Why would you trust a crook to do the right thing for the country and increase the interest rates when needed?
As proven again and again by the so called “conservative” government, crooks do not have ideology nor convictions. Their words and promises are worth nothing. They will only do whatever is needed to stay in power, serve their masters and protect their interest above all.
If Harper doesn’t have anything to gain from floor crossing- he’d condemn it.
If he’ll have a personal gain- he will allow it and encourage it.
If Harper doesn’t have anything to gain from politically appointed senators- he’d fume against it.
If he’ll have a personal gain, he’ll stuff the Senate with his appointees.
If Harper can’t reap any personal benefit from big government- he’d be all against it.
Once in power, he’d put together the biggest government this country had ever seen.
If Harper doesn’t have anything to gain from income trust destruction, he’ll be apoplectic about it: http://www.youtube.com/watch?v=U9mibZYpVPY&mode=related&search
Carney’s interest rate policy will only be determined by Carney & Harper personal gain.

#79 Greg W., Oakville on 09.10.09 at 3:21 pm

Hi Garth, FYI, this sat TV and radio shows.
‘Climate change’, and ‘Oceans of Trouble’.

BIG IDEAS airs on TVOntario every Saturday and Sunday at 4:00 pm.

Thomas Homer-Dixon and Chris Turner on climate change, green energy, and creating the foundations of a sustainable future. Part I of Green Summit

To download our podcast, please go to our website at http://www.tvo.org/bigideas .

Quirks & Quarks is heard on Saturdays on CBC Radio One from 12:06 – 1:00pm in Canada, with a rebroadcast Monday evenings at 11:06pm

Oceans of Trouble. We kick off our 35th season with a full-edition special on the state of the world’s oceans. Our seas are in trouble — serious trouble — and marine scientists have only begun to understand just how imperiled they are. From over-fishing to ocean acidification, there’s a growing threat to the health of our oceans, which could threaten life on land as well. Award-winning environmental journalist, Alanna Mitchell, joins host Bob McDonald for this special look at our planet’s troubled waters.


#80 nonplused on 09.10.09 at 3:22 pm

Trade wars also ramping up, which can’t be good for Canadian jobs and can’t leave the Chinese with more extra dollars to finance the US deficit:


#81 Men With Hats on 09.10.09 at 3:25 pm

So super troll Flaherty thinks we we will have surpluses by 2015 ” When pigs fly ”
This guy is so stupid it is a wonder he remembers,or knows how, to breathe .
How troll ?
All economists say this is impossible . No new taxes ? No programs slashed ?
This guy is pure magic .

#82 kitkat on 09.10.09 at 3:26 pm

“Flaherty plans speech on surplus.”…
“Feds to announce surplus.”…

Yup, that’s what today’s headlines say.
You have to have a certain mental outlook to phrase headlines like that.
You also have to have a certain disrespect of your listening public to subject them to such inane language.

Oh. I see now. They are talking about a surplus in 2015
:-) going forward :-)

Now that’s amazing prognostication from a government that couldn’t see the deficit coming only a few months ahead.

#83 nonplused on 09.10.09 at 3:37 pm

Heard on the radio today Calgary Construction Permits off 30% y/y. Shift is also away from renos towards new homes, which could mean renos make up a large portion of the decline. No more HELOC’s, no more renos.

#84 Calgary Rip off on 09.10.09 at 3:41 pm

Nice post Garth.

Its all speculation. Until 2010 hits, rates could go up, stay, or go negative. No one knows.

What is factual is that if what you are saying happens, mortgage rates of 10%, this will check Calgary into reality. No more delusions.

It will also hammer many people in Calgary. I wont be one of them. I didnt buy into the idea that any house in Calgary is worth double value of its 2004 price. :)

#85 George on 09.10.09 at 3:46 pm

For How Long Garth — forr howww longggg?

#86 Rai on 09.10.09 at 3:50 pm

Garth your examples are always assuming high priced properties half a million plus to calculate.
But look at it from a perspective for somebody buying a 300K house.
He will have paid a substantial portion of his Principal in the next 5 years.
BoC maintaining the same int. rate kind of blows away to what you have been saying.
Now all of a sudden your examples start talking of 2014 for int rate increases.
So all this sounds as long as you buy a house and the monthly instalment is well within the 25-30% of your gross pay, it should be fine.

#87 CM on 09.10.09 at 3:59 pm

Another giant nugget of 24K gold from Murray Dobbin.

Stephen Harper unfit to govern

“Despite all that, we need to take the opportunity…to get rid of the most destructive and mean-spirited prime minister the country has ever had…Quite simply, Stephen Harper is unfit to govern. Surely the only prime minister in Canadian history who has actually expressed contempt for his own country, Harper has demonstrated a disregard for the rule of law that should, in a rational world, disqualify him from leading any government.”

The whole article and the personality traits Dobbin outlines won’t be any surprise to Garth, who has experienced them first hand. That video from northern Ontario on the CBC site was truly scary. I was happy to see that the audience wasn’t exactly enthusiastic about some of the proposals – junking UN standards for instance.

#88 Peter Wiener on 09.10.09 at 4:21 pm

# 49 Onemorething and all other idiots on this blog that believe Vancouver or other bubble real estate markets are immune to any correction, ever.

1. You have no history on your side – therefore you will be wrong as this has happened before in history and everyplace where fundamentals have detached from pricing (price bubble dynamics), a serious correction or collapse in prices has occurred.

2. You had better hope there is a MAJOR correction because the concept that you are cheerleading will assist in the disintegration of the Canadian economy and a more miserable life for you and everybody else.

3. Look at yourself in a mirror and then, in all honesty, ask yourself if your business acumen is such that you have become wealthy by your own investment decisions in the past, rather than luck.

4. Separate what you’d LIKE to happen (your fantasies of wealth without work) from what HISTORICAL FACT dictates what will happen when distortions such as we are witnessing happen in an economy.

I don’t really care one way or the other as I’ve done very well in this ridiculous RE market, but I’d hate to see any (more) neophyte investors make a fatal error here or for a young family get to in over their heads – life is tough enough for most people without debt slavery.

ANYONE buying ANY real estate now cannot know or doesn’t want to recognize the reality of the underlying economics and will live to regret a purchase made now.

So, like go ahead and buy and commit financial suicide dude or dudette. Just don’t ask me for a handout, SUCKER!

#89 Peter Wiener on 09.10.09 at 4:33 pm

#46 newcomer21

Are you daft?

We already have pseudo “state controlled real estate” (via ridiculously and unsustainably low interest rates courtesy of temporary government intervention).

” People seeking security” don’t buy highly leveraged investments at the peak of historical valuations and at record low debt service interest in bidding wars. Morons and speculators do that. Sheesh!

#90 nonplused on 09.10.09 at 4:42 pm

Great article about what is going on in aggregate State side.


I expect nearly every measure there will be repeated (to scale) in Canada on the continuing 18 – 24 month lag we have seen in the housing market.

#91 Ed Tevratis on 09.10.09 at 4:44 pm

Insiders sell like theres no tomorrow.


#92 Dan in Victoria on 09.10.09 at 5:05 pm

Post #46 followed your reasoning until the last two paragraphs,so am I to understand that real estate never goes down and all the people flooding in with nothing down and long amatorizations are smart money?And the “market validity” never corrects?Just wondering thats all.Problem for me is I’ve seen it go down a few times.Hard.There is no mercy for the stupid ones.

#93 G-Money on 09.10.09 at 5:49 pm

Are people so leveraged and so sensitive to interest rate increases, that even the smallest interest rate increase will have the recessionary effect Carney is looking for? Meaning that huge interest rate increases may not be needed to tame inflation.
hmmm hard to say, will just have to wait until it happens to see what happens.

#94 dd on 09.10.09 at 5:55 pm

#66 Nostradamus jr.

…You are too dumb to realize 99% of the rest of the world would love to be in your Current Canadian Renter Shoes versus their own below poverty lifestyle….

Ya what the heck throw money at the top of the market. I guess a loss in Canada is better than a loss in some other country.

#95 TJ on 09.10.09 at 6:15 pm

The rumored “value” of “off book” Derivatives are in the neighborhood of 400 TRILLION Dollars. These “assets’ are so rotten that Banks and Pension Plans are reluctant to mark them to market.
These SIV’s have been scaring the pants off Geithner and his gang of fitzels, and that is why we have seen Banks ‘hoarding’ their cash.
The days of ‘fog a mirror’ – get a loan are long gone.
ANYONE who doesn’t believe in a Market Correction in Vancouver/Toronto Real Estate has NOT been paying attention.

Say it can’t happen?
Vancouver got slaughtered when interest rates peaked out at nearly 20% in the early 80’s.
Drops of 65% were not uncommon.
But wait, there’s more – in the late Seventies and early Eighties, Paul Volcker and the Fed were dealing a major Oil shock, inflation in food and stagnant Industrial Demand. Stagflation.
BUT and big but -there were no pools of worthless Derivatives hovering off books in 1980 and look what happened.


Carney and all Central Banks are praying they can let air out of this balloon slowly and in an ‘orderly’ fashion.
The ‘animal spirits’ and the organic nature of ALL markets eventually force a return to equilibrium, no matter how much Fiat money is printed, or how many ridiculous Bailouts are pumped into the ballast.

In Vancouver that equilibrium number is nowhere near $700 K for a dump on East 33rd.
The crash will be extremely painful and wipe a lot of people out.

As I write = in California, the “Golden State” – 1/114 units is in some form of foreclosure. In Nevada it’s 1/61.

But don’t worry.

It can’t happen in Vancouver – because we have the Olympics.

If you believe that, you probably also believe that the Tooth Fairy is Jim Flaherty.

#96 X on 09.10.09 at 6:23 pm

More US foreclosures?:


#97 jess on 09.10.09 at 6:29 pm

“The savings rate there is the highest in the world”

I have to wonder about that number. Especially when the majority of chinese earn so little. I wonder also if one can trust their bureau. I know the american bureau of statistics and their un/employment model based on birth/death has me confused.

National Bureau of Statistics of China

#98 Nostradamus Le Mad Vlad on 09.10.09 at 6:32 pm

#65 debtfree on 09.10.09 at 1:48 pm — “Must control myself .”

Please don’t! Pray tell: I understand that baskets of commodities (all long-term growth, at least two or more decades) in agriculture, energy (all sources), transportation and Cdn. equities will provide good pensions, working on the assumption that CPP will be here, but OAS and GIS won’t (too expensive for the feds.).

Any other ideas? Technology is changing and improving so quickly, one can get lost in the maize of investments.
#76 Solitario on 09.10.09 at 3:11 pm — “. . . the biggest government this country had ever seen.”

By creating a bloated govt., the politicos (up front) and Carney (out of the limelight) lead Canada down the garden path to total self-destruction, but there have to be reasons for the PMO and FM to take this route.

There is a glimmer of light, ‘tho: A group sued Harper and the CPC for breaking their own “fixed election” date, and calling an illegal and unnecessary election. The judge ruled that that case can go ahead to trial.

If Harper and the CPC are found guilty of breaking that law, the punishment may be to have another election.

This is why Iggy should hold off until all this legalese stuff is sorted out, one way or the other. Harper / Flaherty / Carney etc. may end up with a whole lotta egg on their faces, the public will know full well what the CPC is doing to this country and vote the other way.

#99 Alberta Ed on 09.10.09 at 6:39 pm

I don’t think I’d trust Carney, Flaherty, Harper, Iggy or any of the current crop of pols as far as I can spit (present company excepted). Carney may be ‘smart’ but I don’t know what drummer he’s marching to. But post-election, if it happens this fall, my guess is all bets are off.

#100 Dyugle on 09.10.09 at 6:41 pm

Garth it is possible that rate hikes will not come but that scenario is much darker. The U.S. starts withdrawing the stimulus and the economy falls over again. Right now there is the end of cash for clunkers, unemployment insurance will need to be extended again soon or 1.5 million people will exhaust it by the end of the year, the FTB $8000 grant will expire before the end of the year and the second wave of mortgage resets, 1 trillion worth, is heading ashore and according to the Dr Housing Bubble only 3.5% have been reworked and most of them will fail anyway. Don’t forget there is the protectionist thingy that might whack global trade down for the count. And of course unemployment must stabilize. If all of these are rectified by cheap money then yes interest rates will go up and lets hope they do.

#101 George on 09.10.09 at 7:01 pm

Daystar, thank you for the call on the five year. And to Peter Weiner Von Schlong Hanger, I’m probably one of those idiots you speak of on this blog – Got to start somewhere.

#102 Onemorething on 09.10.09 at 7:06 pm

Mr Wiener, my last line of my post was to be sarcastic! If you have even read my posts for over the last year you will note my bearish attitude on Canadian RE, especially for VAN. Canadians and VAN RE owners are the biggest dreamers in the world. We grew up in a society and culture so sheltered from the truth and global view that at this time we still cant figure it out.

I guess you only post your comments so you can read them later! Shame on you, Mr. Selfish!

#103 Onemorething on 09.10.09 at 7:13 pm

Furthermore Mr. Wiener, you come onto this blog and absolutely blast everyone for everything outside of your viewpoint.

My I submit that you are likely on the same page as the more educated and worldly people on this blog however frustrated that the real economy hasn’t sunk in yet and secondly the disbelief that more people haven’t seen the Global Ponzi scheme being lead by the USA hasn’t folded.

Dont worry, it will, be ready!

Get to know your blogging community, they may be the last friends you have!

#104 Too Old Bob$ on 09.10.09 at 7:18 pm

Just watch when those rates go up. People will complain, try to sell, walk away, whatever, it won’t matter cause the Gov. is there to help them. Just like in the eighties when they introduced ” The Canada Mortgage Renewal Plan (CMRP)”. Almost $50 million paid out and they didn’t even know who it went to or how much income they made. I remember numerous buddies getting it and having a joyful time.
After that they introduced the “Mortgage Rate Protection Program (MRPP)” It didn’t last too long cause rates started dropping fast.
So you see, no matter what, they are here to protect you, so party on.

BTW! I didn’t qualify cause my rate was too low. 11 3/4%, ya ya sour grapes :(

#105 Men With Hats on 09.10.09 at 7:21 pm

U of C economist Frank Atkins, Harper’s master’s thesis supervisor, said this big-spending budget won’t solve the country’s economic woes and could create bigger problems down the road, such as inflation, higher taxes and greater interest rates. “This is not an economic budget in my mind. It’s a political budget, much more so than any other budget has been a political budget,” Atkins said.
Some of the original Reform MPs grumbled in public as well. Art Hanger said the massive deficit made him “uneasy.” Former Wild Rose MP, Myron Thompson, worried that the industry bailout funds won’t work and are simply a waste of taxpayers’ money.
A ringing endorsement .
Not only are they running huge deficits à la Mulroney, they have recognized Quebec as a nation, appointed senators, and scrapped a fixed election date. There’s not much left of the original Reform pillars.

Various sources

#106 Dan in Victoria on 09.10.09 at 7:25 pm

56 billion dollar deficit announced in Victoria by finance minister.How fitting,we’re all in La La land out here.Fits right in doesn’t it.Probably looking to buy a couple of fixer uppers and sell them to pay off the deficit. http://www.timescolonist.com/business/Finance+Minister+reveals+billion+federal+budget+shortfall+Victoria+luncheon/1980476/story.html Somehow I just don’t think their do nothing, and wait plan is going to cut it.

#107 catamaran guy on 09.10.09 at 8:10 pm

I find it completely bizarro that people would sign their lives away presuming they will be earning 2 incomes for the next 30 years without interruption,as well as presuming interest rates will stay the same.or are they thinking flip flip flip?

#108 Alberta Renter on 09.10.09 at 8:20 pm

Just before I got home, I was reviewing Canad’s budget deficit (50B over the next 2 years) as listed on the Canada Government website and I remember saying to myself “yeah right – it’s probably more like double”. Then I came home and read the following headline.

“Two-year $101B deficit ‘worse than expected:’ Flaherty”


Most people on this site have been right all along. In the next years, we’ll add 100 B to the national debt ..almost as much as 25% of the total in just two years.

Based on that information alone, something has to give. There is no way we can continue as a country to provide social programs and service a debt to the tune of 30+ % . At some point, this is all going to come crashing down. The big question is when.

I have a feeling it won’t be until the increasing boomers start to retire in bigger numbers and all try to cash out at the same time. Until then, why would those that make the rules make it hard on themselves?

#109 Nostradamus Le Mad Vlad on 09.10.09 at 8:27 pm

#89 Ed Tevratis at 4:44 pm and #93 TJ at 6:15 pm — If those insiders are dumping their stocks, taking profits and reaping the rewards, then they KNOW something is up and are setting themselves up nicely, to be out of the equation altogether.

See TJ’s post for clarification. Another October / Spring Surprise? The following may have something in common.

“The news developments above are screaming warning sirens telling the world to get out of the dollar before it is too late.” (wrh.com).

Plus — http://eclipptv.com/viewVideo.php?video_id=7223

#110 dd on 09.10.09 at 9:04 pm

What to bet that the Tories don’t raise the GST. I wonder what kind of tax they are going to slip by the taxpayer.

#111 char on 09.10.09 at 10:00 pm

Milk ?

Since #35 Soylent brought up milk, as it were… Garth, were do you and your party stand on the Michael Schmidt raw milk cow share thing ? I notice you sell organic seeds. Must be some farmers left in Caledon…




#112 Peter Wiener on 09.10.09 at 10:17 pm

re #49 and #100

“Don’t worry, all the further 25% down to go in the US RE market wont happen to Canada, especially VAN!

You bunch of misguided dreamers”

umm……, buddy , go back and read EXACTLY what you wrote please and don’t blame me for interpreting your weak attempt at sarcasm and /or poor writing skills.

Actually your post surprised me given your historical bearish stance and seemingly intelligent, but poorly composed posts – perhaps review your posting for intent or coherence before pressing the ‘submit’ button. Ok?

Want to get nasty and personal; – well you know where that can lead and it is not pretty nor productive.

#113 char on 09.10.09 at 10:33 pm

oops…where with an “h”

#114 Peter Wiener on 09.10.09 at 10:34 pm

# 101 Onemorething

“Get to know your blogging community, they may be the last friends you have.”

Get real!

If my life came down to relying on a bunch of strangers on a RE blog to be my “friends”, I guess it’d be time to put that gun in my mouth and pull the trigger. I really don’t think that I have read anything that inane in literally decades!

But thanks for reminding me, yet again, at the futiliy of posting here. Hell man, you blame others for not interpreting your misleading post correctly and then try to give them crap for pointing it out? WTF?

I really don’t want to get personal with you as I said it is not productive and wastes bandwith, so I’m going to leave it that.

Have a nice evening, Onemorething.

#115 Peter Wiener on 09.10.09 at 10:50 pm

# 102 Too Old Bob$

You bring up an excellent point regarding government funded mortgage payment “assistance” and it actually has me concerned as well.

However, the ‘cram-downs’ (lenders reducing the principal amount owing on the mortgage) or ‘rate-reductions’ (lowering the rate of interest, but usually by also extending the amortization period) that are occurring in the US market are still seeing high (almost 48 %) percentages of “walk-aways” and “jingle mail” post these mortgage payment modification programs.

The greatest inducement to “walking away” for the home debtor is when they (the borrower) has seen their equity evaporate and they realize that they are making a payment on an “underwater” asset; – contractual obligations, their credit ratings and morality be damned.

Take a look around you – you think these ‘citizens’ who have nothing anyway give a sh!t about consequences?

I would not bet on it. If they did in the first place, they wouldn’t have bought.

It’s just another day at the casino Canada for them and they don’t believe there will be repercussions anyway.

Just blame CMHC for your additional future tax burden!

#116 jmcanuck on 09.10.09 at 10:53 pm

Highly recommended reading: “Empire of Illusion – The End of Literacy and The Triumph of Spectacle” by Chris Hedges. He makes some very sensible arguments about how our increasingly illiterate culture can no longer tell the difference between reality and illusion.

“Those captivated by the cult of celebrity do not examine voting records or compare verbal claims with written and published facts and reports. The reality of their world is whatever the latest cable news show, political leader, advertiser, or loan officer says is reality. The illiterate, the semiliterate, and those who live as though they are illiterate are effectively cut off from the past. They live in an eternal present. They do not understand the predatory loan deals that drive them into foreclosure and bankruptsy. They cannot decipher the fine print on the credit card agreements that plunge them into unimaginable dept. They repeat thought-terminating cliches and slogans. They are hostage to the jingle and manipulation of a consumer culture…Life is a state of permanent amnesia, a world in search of new forms of escapism and quick, sensual gratification.”

#117 Dan in Victoria on 09.11.09 at 12:40 am

Post#99 George,The econmy has become so complex that the majority of people no longer understand it or can function compentenly in it.Heres a link to a fellow who got frustrated with people not being smart enough to understand what was going on. He shut it down. http://ashizashiz.blogspot.com/2008/12/global-poker-tour-allegory.html

#118 Dan in Victoria on 09.11.09 at 12:41 am

Sorry about the spelling,Really tired,time to hit the rack.

#119 daystar on 09.11.09 at 1:08 am

#64 Sphinx on 09.10.09 at 1:16 pm

I agree fully. Start with CMHC by toughening the regs… but it can go much farther and I’m pretty sure you’ve got some ideas yourself. Harper deregulated the banking industry in late 2006 to pave the way for banks to sell mortgage backed securities world wide as well as increased foreign ownership of our Canadian chartered banks. This will prove to be a colossal mistake in the years to come as our RE bubble unwinds.

And in trade, IT’s are obvious in terms of turning back the clock, as well as toughening the regs in the area of foreign M & A’s and especially the area of foreign ownership percentages of our Canadian chartered banks. In all seriousness, the Cons have governed poorly. I don’t agree with much of anything they have done fiscally to be frank and their record socially is quite poor as well. A great deal of what they have done fiscally needs to be reversed and/or rethought and improved on and it shows the most with where the Cons have led us in the bond markets.

I also believe its time for a new law requiring federal governments who issue the sale of bonds to call it what it is… call it debt. Borrowing to “invest” in a CMHC shell game doesn’t work for me as the Cons have done and plans to go to bond markets within the last year for 200 Billion and having gone there for close to 150 Billion doesn’t sit well with me. These are big numbers that will burden our children for reckless, blinding greed of today.

And your right about Japan. I’ve been wanting to look at their bond/economic history for a couple weeks now but find the time!! Catch you on the flip ;-)

#120 TJ on 09.12.09 at 6:53 pm

Think the Real Estate ship has righted itself?

Mr. Turner has been trying to get our attention about the real numbers. Now, what follows are US stats, but we do 70% of our business with America.
If they are in a world of hurt – Canadians are in deep clam dip.
What follows is infinitely more worrying than the much balleyhooed ‘subprime crisis’.

Read this and tell me you think that we can all go back to the party.

The people that buy now – are going to lose.

This is outright SCARY:

Option ARMs, the dubious name for a mortgage product of financial destruction, are back in the limelight showing that they have not gone away. Everyone by now has heard about option ARMs. These toxic mortgages allowed borrowers a buffet of payment options. However, in recent data released this week we are told that things are much worse than we had initially thought. Option ARMs have now become an oxymoron. In fact, they should be called minimum payment mortgages because 94 percent of those who took on these mortgages elected to go with the minimum payment.

These loans are having default rates comparable to subprime loans. In states like California with a decade long housing bubble, option ARMs were a lucrative and inviting mortgage for quick talking mortgage brokers chasing big yields. But one thing is certain and that is these mortgages are here for the next few years and will cause additional problems.