Wasting away

buffett1

Not a day goes by here without new arguments why interest rates won’t rise.

They go like this: The weather’s been good since last winter ended. People are enjoying it. They play and prosper in the sun. If the snows come it will be bad. We are not ready. We will suffer. Therefore the government will not allow it to be so.

Other variations, too. Like pointing to Japan where rates have stayed low for two decades. Or claiming central banks will print money, buy all the bonds, and keep rates low. Or the simple argument (above) that because Canadians have pigged out on cheap mortgages, saved nothing, bought McMansions on credit and would be completely screwed if mortgage rates went up, that the feds wouldn’t possible do such an evil thing.

Of course they will. And if they don’t, the bond market will. And I’m tired of telling you why.

Suffice to say this: Anyone not preparing now, is a fool. The kids camped out in front of Mattamy Homes in Milton, as the guys inside typed up new price lists (they added $10,000 on the weekend), are greater fools. Those who think the Bank of Canada can stem what the Government of Canada is doing  ($55,900,000,000 in new debt this year) are the greatest fools.

Like I said, this topic is boring me. Look outside. Damn, today the rain was almost sleet.

Hi Mr. Turner.  I read your blog daily, read your books etc.  Here’s my story, we decided about 1.5 years ago not to be “Fools” and stayed in our current home.  (We reside in a small rural town Northwest of Kitchener-Waterloo)  In the meantime our mortgage expired and we elected to take out a HELOC (TD Canada Trust).  We owe about $65000 on a home that is valued at $200K, this has worked well for the past 1.5 years however my concern is that TD has annouced a rate increase (As per your blog and I confimed this with TD) for the HELOC effective later this year, how many more rate increases are coming?  This is now, what’s next etc?

Any suggestions on how to insulate ourselves from future rate increases?  Lock it into a mortgage again for the 5 year term etc? Appreciate any advice! – Dave

This is a small taste of what’s to come, Davo. That 1% hike in the bank’s LOC arrives because it;s now originating that money in the bond market. So, despite the fact the Bank of Canada rate did not move, your loan rate increased by 44%. Coming will be similar increases in fixed and variable mortgage costs.

Hardest hit will be new buyers with 35-year amortizations and VRMs, since each hike in overall mortgage costs will end up adding to the principle amounts (virtually no equity is paid monthly on long amortizations and the existing monthly will not cover added interest charges). This will have the effect of dampening the real estate market, which around K-W is already kinda soggy.

As for your loan, remember it is purely a demand borrowing. You have zero protection against further increases. So, why not lock in now to a fixed mortgage rate? But do it right.

Here’s a radical suggestion: Get a conventional five-year closed rate home loan at the current rate of 5.5% (relax – that will look cheap within three years). Then ask for a five-year amortization. The monthly will be $1,200, and you will have you mortgage totally and completely paid off in just 60 months. The total amount of interest (included in the monthly payout) will be just over $9,000. There are other ways of doing this, but with a mortgage obligation the bank supplies the will power.

Compare that with your HELOC at the new rate of 3.25%, where five years of interest-only payments would be $10,562, and then you’d still owe $65,000 – and  be looking for a new mortgage at 8%.

Suck it up, Dave. Gird those loins. Head into the storm like a man.

We’re right behind you. Soon as we finish the drinks.

Deflation1
Related: Deflation threatens to eat Japan

104 comments ↓

#1 blobby on 09.28.09 at 10:02 pm

Okay.. Not sure i want to invoke the wrath of garth.. But surely .. If the dollar remains high then increasing rates will make that worse, which in turn causes more deflation which in turn means lower rates?

My understanding (and yes I understand what you’re saying with bond market) – higher rates increase the dollars value, low rates are needed when inflaiton is low (or deflation), high rates are needed when we have high inflation?

Surely the bond market and inflation side of things cancel each other out? And if not, what’s to stop the dollar shooting up to never before seen highs?

#2 Onemorething on 09.28.09 at 10:09 pm

Garth, I would say that advise is the only one worth taking or sell the house but really, even in good ole Kitchener Waterloo your going to have to pay $1200 for something half decent to rent.

Writer, follow the 5 year fixed if you can afford too (I would argue you cant not afford too)! Be the last man standing, it will open all kinds of doors!

Just think, by the time 5 years is up, the market will have potentially bottomed, you may wish to trade up and rent your current home to Baby Boomer or Brat but you better check their credit rating first as its likely they have been foreclosed.

Tough Love from Onemorthing!

#3 Jim on 09.28.09 at 10:10 pm

Everybody thinks that interest rates are going higher and the consensus is almost always wrong.

http://finance.yahoo.com/tech-ticker/article/345240/Everyone-Thinks-Interest-Rates-Are-Going-Higher

Booms can go on for a long, long (did I mention long?) time. People can go bust shorting a boom.

If a person strongly believes in hyper-inflation, then they should take on more debt! After all, the payments on the debt will be denominated in todays dollars and before you know it, after some time with (hyper)inflation you’ll be paying off your $1M loan with fistfuls of $100K bills!

Whether we like it or not, we are currently in a deflationary environment.

Mark Carney is too scared to raise rates and further destroy our economy (via the Canadian super dollar) so all he can do is “warn” people that rates are “unsustainable”.

Canadians are also holding on to their money and not letting go – a trillion dollars to be exact:

http://www.financialpost.com/news-sectors/story.html?id=2044036

And anybody in Japan can tell us how long a deflationary enviornment can last.

Think interest rates will rise? Well, so does everybody else and when everybody thinks that they’ll rise, the market usually proves them wrong.

#4 Cash is King on 09.28.09 at 10:17 pm

Repetition can be boring…Repetition can be boring…

Here’s something to create a little excitement

http://ca.news.yahoo.com/s/reuters/090928/business/cbusiness_us_economy_carney

Mr. Carney is worried about currecny rates. Quantitative easing? Not yet but not ruled out either.

Interesting last two paragraphs.

“At home, he said that when the government’s two-year fiscal stimulus package runs out, the onus would be on consumers and businesses to step up spending to keep the economic recovery alive.”

He said the recovery now is largely due to massive spending by governments around the world and rock-bottom interest rates as well as extraordinary lending by central banks.

In two years the consumers are supposed to increase their spending habits to keep the economic recovery alive. Is this not how we got into this economic free fall to begin with?

.

#5 Cabin_Boy on 09.28.09 at 10:31 pm

I am renting now.

-Got a tentative job offer quite far away. If I like it, I will take it…give notice and move. I can guarantee you the exact date I will move. Don’t have to wait around to sell a house….and then wait around to buy one at my new location.

-My gas oven broke. I get a new one because my generous landlord is ponying up for a new one. Can’t wait to sear some tenderloin on the new gas range :)

-I have electric, water, gas …bundled with my rent. Never liked those ups and downs on the monthly bills anyways.

-I get to live on 80 acres of pristine land bordering on Kaninaskis (ie. The Rocky Mountains). I would never, ever get to live like this if I was forced to buy it all. Just getting an access road to where I live would cost me over 50K. …then there is the phone line, gas lines, power lines etc. …and the home itself.

Am I a freeloader? Not at all. I pay my rent, and thus help the landowner spruce up the place. I think that the sheeple have one-track minds about living arrangements. Living arrangements are:
1. single…detached (of course)
2. mortgaged.
3. filled with crap furniture (with our without plastic on it).
4. manicured lawns (devoid of diversity and life).
5. Neighborhoods with stupid names. ‘cougar ridge’…only cougars here are over 50. ‘sundance’…the sun dances? …and only in here in this neighborhood? And any rubbish name that ends in ‘estates’. You do NOT have an estate.
6. A phobia of your neighbors. It would be very easy to start a neighborhood co-op where everyone pitches in and gets all the yard maintenance equipment, tools for plumbing work, mechanical tools etc. and sign them out as needed. But people in the ‘burbs are too damn paranoid to talk to one another (other than the basic superficial stuff) and so everyone has a lawnmower, weedeater, leaf blower etc.

There is very little diversity in thought when it comes to our living arrangements. Think outside the box…you may just raise your standard of happiness.

#6 Keith in Calgary on 09.28.09 at 10:38 pm

Garth…..

Not directly on the subject of rates, but pertaining to risk and our perception thereof, in today’s Globe and Mail there is an article based on a report from Scotia Capital that says Canadian families have $1 TRILLION of cash, T-bills and bonds on deposit in chequing and money market accounts. That is $28K per family unit…….

http://www.theglobeandmail.com/globe-investor/personal-finance/families-sitting-on-up-to-1-trillion/article1303648/

It is the second or third article this week in the G+M about how “we” have too much cash tucked away that is not “helping” the economy, or our “own” rates of return. GAWD I just love Bay Street’s heartfelt concern for our own well being as being reported by the G+M (heh)……those greedy pigs are salivating at getting their hands on that money and the subsequent commissons, if only they could convince us to give it to them.

Spend 15-20 minutes and read the 200+ comments on the article……195+ are viciously and outright negative towards the media, Bay Street, bankers in general, politicians and Mark Carney…….seems no one trusts them anymore and everyone thinks we are headed for the shitter. If we had a 50/50 or even a 60/40 split in sentiments of the comment section, I wouldn’t mention it, but WOW !!…….it is so overwhelmingly negative towards those clowns it merits your attention. As it should be IMHO.

Public confidence and trust is gone. Wasn’t it a party. Who’s keeping the zombie financial markets afloat ?

#7 Bulls eye on 09.28.09 at 10:46 pm

WARNING to all co-signers. * What a nightmare this is going to be.

#8 Bogdan on 09.28.09 at 11:09 pm

Dave: we decided about 1.5 years ago not to be “Fools” and stayed in our current home.

If you intend to upgrade, you should know it’s not as risky/costly to do it when home prices decline (would they ever do so? :-))… it’s called: “buy in contrary trend”. Selling and renting for a year at the right time would be a great opportunity. When the housing trend is going to change, you should know that you have an advantage of a two-three months window period over the medium priced houses (~$400K). If you watch the market (or this blog) and understand when the trend changes, you can upgrade for the price of two relocations.

Check this out, it may help you: http://mattbg.blogspot.com/2009/09/moving-during-crazy-housing-market-not.html

#9 HouseBuster on 09.28.09 at 11:20 pm

Garth, I checked in on a builder in Oakville on the weekend and I was told that they are getting ready to release a new phase sometime in October. I was told that there would probably be a lineup the day of the release. I asked “Why would anyone do that?” Well, I got a look like I was visiting from another planet and then an explanation about how good the new lots were. It reminded me of a scene from Glengarry GlenRoss and I was expecting Alec Baldwin to come out of one of the offices.

I’m telling you that the attitude there and the way they were speaking with customers tells me that we are close to a blowoff top in the RE market.

It’s a far cry from December when everything was dead and they were desperate for deals. Now they are cocky and think the market is invincible.

#10 Enuff on 09.28.09 at 11:31 pm

Hard to dispute that in the coming days cash will be king, but what happens in the event that the government grants itself the power to seize cash, securities, gold, etc.

Wish I’d kept the link, but several weeks ago I was sent an article “documenting” a bill (C-?) about to be passed by parliament which would give the Canadian Government the above powers.

Would Garth or anyone else in the know care to comment on this?

#11 double mike on 09.28.09 at 11:32 pm

Oh, well. In a rational universe Garth would be right. Interest rates would have no way to go but up. But in a rational universe government wouldn’t spend as a drunk sailor for no reason whatsoever, neither would people buy 100 yo doghouses for above 1 mil. We’re not in a rational universe and rational economical laws don’t apply here. I don’t know how, but our bright government and BOC will manage to sustain the show for much longer. Most likely by just printing out of debt, both institutional and consumer kinds of it. They can’t afford to do otherwise or else electorate will crucify the glorious leader and his old boys on both sides of nonexistent political divide. The party will go on and our children will pay the tab.

#12 PenGun on 09.28.09 at 11:38 pm

Boy you have stamina. Thanks for yelling your lungs out and doing your best to point out the cliff/wolf/whatever.

There is a large proportion of humans that just will not listen to reason. My theory is that having evolved to dominance we can afford to sacrifice fools for amusement/example/space.

#13 This guy is smart on 09.29.09 at 12:07 am

Dave

Change banks…. Others are more reasonable and easier to deal with. Like BMO.

#14 Patsan on 09.29.09 at 1:10 am

Dave,
It looks like you can walk away with no penalties from TD if your debt is HELOC only. Shop around. ING gives 5 year closed at 3.99% today. Lock it with 5 year amortization as Garth suggests – $1196 per month. 5 year at 5.5% – $1240.
And I am sure that TD would be willing to offer you a better rate once you tell them you are moving to another lender.

#15 West Coast on 09.29.09 at 1:12 am

I’ve just begun reading your blog this year and I am very grateful for the forthright reporting. It is getting very difficult to find. About me: I have no property and no mortgage but I have a reasonable amount of savings (more than enough to mortgage the rest of my life if I were so foolish). I have bought a small amount of palladium, taken a few thousand out of the bank in cash just in case (and yes they made an issue out of it) and I have paid off all my remaining loans.

My plan now is do as little spending for the next five years save as much as I can and when I do make purchases – pay cash.

But my concern is, and I think many in my generation are in the same boat, is that if we begin to see hyperinflation are people like me (without property) basically screwed?

– because if suddenly our dollar is useless… that’s all I have.

Should we be looking at property outside of Canada to invest in, conservative investments or maybe something else that is tangible?

I guess the first question should be: If things go really sideways will it be deflation or hyperinflation?

#16 Skye on 09.29.09 at 2:49 am

When interest rates can’t be kept low any longer, when no foreign govts want our bonds anymore, when we’re in a deflationary spiral and unemployment hits 15%… I wonder… will Protectionism start rearing it’s head?

#17 Mike (Authentic) on 09.29.09 at 2:54 am

“(Rates will go up) Of course they will. And if they don’t, the bond market will (force them up)” – Garth

I’m guilty as charged then in making rates go up (among millions of others). I’m currently looking at buying bonds, but I want more than 1.x% on a AAA even on a BBBm. But I’m not alone, other investors are pushing up the prices of bonds as cash becomes harder to raise for many companies. I heard (here?) that there is more debt than money printed to go around. Banks are not lending like they used to, companies need to raise capital via bonds.

All bonds compete with the remaining cash out there (Corporate, Gov’t, Prov) and thus rates are influenced higher.

That’s my take on it.

#18 frank pasquale on 09.29.09 at 6:37 am

Canadian Grasshoppers

http://ca.finance.yahoo.com/retirement/article/canadianbusiness/36/inside-the-looming-retirement-crisis

#19 Halifaxfamily on 09.29.09 at 7:00 am

I wouldn’t go for a 5 year amortization. If you lose your job within the 5 years, you are screwed because you can’t lengthen it… or so I’m told. I would go for a 5 year term with a 20-25 year amortization but pay the mortgage off as if it was a 5 year amortization. We have a 25 year amortization, but we’re gunning it down at the rate of 10 years.

Japan’s deflation was also made worse by the yen carry trade. They tried to flood their own country with cheap yen, but instead it went to other high yielding currencies, commodities, and equities. Japan’s situation was different – the Japanese had savings and were also exporting that to invest abroad. Hence, the low rates didn’t do anything to help the deflation.

This time, it’s different.

#20 Jonathan on 09.29.09 at 7:24 am

Oh poor guy,

65,000 @ 8%, cry me a river.

What about the kids buying 450K starter homes. They’ll have 410K still left on their 35 year am in five years.. 8% means that mortgage will cost them $32,800 in interest per year.

#21 Gord In Vancouver on 09.29.09 at 7:53 am

Blog posters here aren’t the only people who insist that interest rates won’t rise. On BNN yesterday, this financial industry veteran claims that rates won’t rise because the consensus says they will:

http://watch.bnn.ca/monday/#clip218239

This guy will be more popular than Alexander Ovechkin when he visits Toronto and Vancouver.

#22 Gord In Vancouver on 09.29.09 at 8:04 am

Trouble In Paradise

Employment Insurance claims up in Vancouver
http://www.news1130.com/news/local/more.jsp?content=20090928_170302_7168

City of Vancouver must cut tens of millions from budget
http://www.theprovince.com/City+Vancouver+must+tens+millions+from+budget/2044481/story.html

#23 Bill-Muskoka (NAM) on 09.29.09 at 8:09 am

Like I said, this topic is boring me. Look outside. Damn, today the rain was almost sleet.

It started boring me long ago Garth. It is like arguing if the glass is half full or half empty. Bottom line is the economic theory (Note the word THEORY) has been proven invalid, yet people are clinging to it like it is their last best hope. Fact is, it is the cause of the all problems and change is the only inevitable thing coming.

The Bubble is like a boil…it must be punctured lest it kill the host by massive infection. Talk about wasting away!

#24 Mikey on 09.29.09 at 8:18 am

I heard on the Fan 590 this morning that mark Carney might be increasing interest Rates before June 2010

Mikey

#25 Civil Disobedience on 09.29.09 at 8:40 am

I am in the exact same position with my HELOC but with a larger balance. I’m paying off as much as I can on the open loan instead of locking in and doing so on a less than 5 year benchmark. I figure that VR will be lower than similar fixed rates and the flexibility of pouring money onto the debt as it comes in is better for me. If you figure you’ve hit 3.25% guess at how long it might remain lower than what you can lock in for. A good rule is 5% and I don’t think VR will be at 5% within 5 years even at foreseeable rate increases. I could be wrong, but the difference I make in payments will make me right because my debt and the interest I pay will be progressively lower. No reason you can’t chew that debt off 100% in less than 5 if you are very diligent and cut discretionary spending. That means you’re better of VR so long as it’s a priority. If not, then go fixed like Garth suggested and just let the bank be diligent for you.

If you don’t think 3.25% today won’t become 5% within five years, you are not paying attention. — Garth

#26 Devil's Advocate on 09.29.09 at 8:45 am

#1 blobby: As Garth said “we’re tired of explaining this to you”

#3 Jim “Everybody thinks that interest rates are going higher and the consensus is almost always wrong.” Again… we’re tired of explaining this to you… Nothing to read here move along…

#4 Cash is King “At home, he (Mark Carney) said that when the government’s two-year fiscal stimulus package runs out, the onus would be on consumers and businesses to step up spending to keep the economic recovery alive.”

Hopeful, assumptive, bureaucrat imp ain’t he. And what if it don’t work? Sorta like goin’ to the casino tables in hopes of finding your next mortgage payment.

#6 Keith in Calgary; That $1 TRILLION of cash, T-bills and bonds on deposit in chequing and money market accounts is in the hands of a few not averaged over the population and those few ain’t gonna let it go to benefit us anytime soon.

#11 double mike: Hate to admit it but there might be great truth in what you say.

#16 Skye: Protectionism has already reared it’s ugly head. What do you think the bailout of G.M. and Chrysler is?!?

#27 Other Ben (not #2) on 09.29.09 at 8:53 am

Agree with #19 Halifaxfamily that a 25year amort, paid at 5-year amort rate, is the way to go.

And don’t take 5.5% on the mortgage – use a mortgage broker or your own negotiation skills to do better (somewhere around 4%), as #14 Patsan suggests.

#28 Devil's Advocate on 09.29.09 at 8:54 am

“A depression ends when it has done its work. It must correct mistakes. It must punish errors. It must destroy the bubble economy…and the mindset of the Bubble Era. Only then can new real, sustainable growth begin again.” Bill Bonner

I don’t think we have yet learned our lessons.

#29 cashman on 09.29.09 at 9:11 am

DO NOT LOCK IN FOR 5 YEARS!! Go 1 year and put down that 10% or so downpayment your allowed every year at the time of renewal. That’s 1 less year of amortization, 1 year less of being a slave to your bank and the Rothschilds! Yes your rate will go up but, like I said, it is 1 less year you owe on your mortgage. The shorter the amortization period the better. It may be higher payments, but less interest payments your making.

#30 Bogdan on 09.29.09 at 9:11 am

#28 Devil’s Advocate – Bill Bonner is right… when the government doesn’t interfere. In this depression somebody has to gain from all this debt, and the governments are the first to act.

I find this article very interesting: Ten Reasons for an Imminent Stock Market Crashhttp://seekingalpha.com/article/163213-ten-reasons-for-an-imminent-stock-market-crash

#31 PeckedToDeathByDucks on 09.29.09 at 9:25 am

The Internet info that Fed IS the housing market , that it has bought more than 100% of mortgages to support prices and keep interest rates low strains credibility. It can’t be true.

Why, why…it assumes the whole thing is a Ponzi confidence game. It can’t be true, because BNN is certainly not reporting it as they are rejoice in the latest Shiller reports of prices rising in July. Fed supporting the entire mortgage market, giving out $8k to first time buyers. It’s like they are running a Paperprestidigitizer of perpetual wealth….tell me it ain’t so Garth.

#32 Ben on 09.29.09 at 9:41 am

As a <30 young'un myself, words for the happy campers outside Mattamy…
Put down 20%, assume a mortgage 2.7x household income, lock in at a low interest rate, and pay down 40% in 4 years. Today our mortgage is 1.1x income.
Then again, we didn't buy a 400k "starter" house.
Did we insulate ourselves a bit from sticker shock from having bought 4 years ago? Yes, by 15%.
Would I buy an entry-level town today at current prices? I'd like to think I wouldn't, but wisdom is gained over time, and 25-year olds aren't as smart as they think they are.

#33 Dunand on 09.29.09 at 9:43 am

#15 West Coast: if we begin to see hyperinflation are people like me (without property) basically screwed?

I think that you will not be screwed if you invest your money to hedge the inflation. Basically invest in commodities (energy, metals, farmland, …). I’m sure commodities will rise a lot faster than mcmansions if we see faster inflation.

#34 Jim on 09.29.09 at 9:49 am

The chartered banks set their mortgage rates based on yields in the bond market. A Government of Canada bond represents a risk free investment to the banks. If the banks choose to invest in a mortgage, they are taking on added risk and incurring costs to set up and service it. The banks will set their mortgage rates high enough above the equivalent bond yield to cover their costs and provide some sort of profit margin for the added risk they are taking on.

Bond yields are determined by investors’ expectations for interest rates in the future. These expectations are arrived at by assessing the state of the Canadian economy and predicting where it is headed relative to other world economies. There is no science to such predictions (although some economists spend a lot of time trying to make it into a science). At best the markets make their best guess and keep updating their guess every day.

Pro tip: A prediction that rates will go up has the same validity as that rates will go down. Sorry to break it to you.

#35 JFoo on 09.29.09 at 10:02 am

Garth, I’ve been trying on different web browsers to open your link to register for your speech in Winnipeg with no luck. Is this a common occurrence?

Canad Inns, 7 pm. Be there. — Garth

#36 rory on 09.29.09 at 10:10 am

#1 blobby, hi…

Read this: The Politics of Inflation: Theft by Other Means at http://www.oftwominds.com/blog.html

I have not read any other posts as of yet so duplication unknown …

#37 charles on 09.29.09 at 10:25 am

The aging rusted out 91 Toyota pulled up to the tower on King street idling loudly as it has since leaving most of its muffler on the 401 somewhere between Ottawa and Montreal late in 2007. The inside of the windows were completely covered with an odorous moisture except for a hand wiped circle filled with the rounded face of Harpoo’s most loyal admirer VanLoon staring at the tower entrance actually panting. A dark skinned couple walked by, the woman’s head covered, as VanLoon growled at them.
Finally Harpoo emerged from the edifice brandishing a crumpled box of doughnuts under his arm and hurriedly got in the back next to his favourite maul who seemed to constantly be adjusting her leather skirt stretched beyond all the laws of physics and constantly muttering “I so hope, I so hope” over and over again.
Flipping open the cardboard lid he looked at her with his dead empty eyes and offered up“day olds?” VanLoon had both hands in the crusty remnants of the bankers meeting before anyone could react. Beard with one hand on the wheel slapped him on the side of the head and bellowed “ladies first”. Harpoo again offered up the spoils of the meeting towards the buck store lipstick redhead as she sorted through the bottom of the box as though looking for a fresher item.
“Lets go see Carney” Harpoo ordered as the Toyota immediately rumbled in the direction of the Exhibition Grounds.
Long before the crew could see him Carney could be heard “step right up and win a prize”, his voice echoing through the deserted darkened fairground.
Harpoo steeped up to the glittering array of tantalizing prizes hung before him. Decimal percentiles scribbled on paper hung above the fixed dart game Harpoo had mastered so well. With the first dart Carney shouted “and we have a winner” giving Harpoo a wink and a smile.
They head back to the Toyota, the redhead staying back, only to discover the doughnuts have been stolen.

#38 Albertagirl on 09.29.09 at 10:30 am

Hi Garth, I’m not sure why you have to repeat yourself either. People can check this out for themselves. I was on the RBC websit last Monday (Sept 21) and noticed a 7 year mortgage with them was 5.1%. Yesterday I looked again just for sh*t’s & giggles, well a 7 year motgage as on Monday the 28th of Sept is now 6.51%…. Thats quite the jump for one weeks time. The people that argue with you can just watch the interest rates rise all by themselves instead of wasting their time telling you you are wrong, when clearly, that is not the case. Keep up the good fight Garth!!

#39 rory on 09.29.09 at 10:32 am

#18 frank pasquale

Frank, good link …long timers on this blog know I have said this is going to be an issue …MSM and the politicians are starting to wake up …it will not be fun as it ranks up their with abortion issues and the like because their will be no middle ground …if you have a DB pension you will have an opinion based on what is good for you …those without (the majority) will not want the status quo (and pay for those DB plans) …problem is the unions and gov’t control the DB plans …you know those groups that have the collective power and all the guns…not good.

“Politicians are also starting to take the issue more seriously, and some believe it will become the dominant issue of the next federal election.”

http://ca.finance.yahoo.com/retirement/article/canadianbusiness/36/inside-the-looming-retirement-crisis

#40 Robert1 on 09.29.09 at 10:34 am

Harper, Flaherty and Carney, what a trio of smug s.o.b.’s. These 3 are to economics as much as the 3 stooges were……….. dammit ! We in Canada deserve so much more !! Time for these 2009 versions of Larry, Moe and Curly Joe to exit …. STAGE RIGHT !!!

#41 Chaostrology on 09.29.09 at 10:39 am

It’s official!

Mark Carney is interviewed yesterday and said,

The govt has done all it can to maintain an airway and heartbeat to the Canadian economy, now it is up to business to carry the ball. (paraphrasing)

There is no more taxpayer money to spend.

Let’s see what happens now.

#42 Makeorbreak on 09.29.09 at 10:39 am

Why live in a McMansion, buy Vera Bladley bags and a Toyota Sequoia if you end up having to use a food bank?

http://www.washingtonpost.com/wp-dyn/content/article/2009/09/28/AR2009092803937_2.html?sid=ST2009092804194

#43 Inside a deluded city on 09.29.09 at 10:41 am

Hi Garth.

Enjoying your posts. Very real instead of the syrupy stuff from the Calgary Herald.

So you say interest rates are gonna skyrocket? You should be posting this as really good news. What person wouldnt want a 12% interest rate on a home that costs dramatically less? Only an idiot? Its interesting that in Calgary it is seen as advantageous to buy a $500K house for 2% interest(the house is only worth probably $200K).

Here is a good link of King Diamond singing about the uninvited guest: http://www.youtube.com/watch?v=u6R0qQLSkkw

The King is singing about the housing bubble that started in 2005 in Calgary. It was uninvited and unneeded. Now time to execute it with high interest rates.

#44 X on 09.29.09 at 10:42 am

Carney: No guarantee of low rates.

http://www.financialpost.com/news-sectors/story.html?id=2043394

Leitao: steep rate hikes in 2011

http://www.financialpost.com/news-sectors/story.html?id=1976736

#45 Nathan in Edmonton on 09.29.09 at 10:47 am

Dave in an enviable position — mortgage free in 5-years and Garth advice is spot on. Most people buying today with 35-year amortizations won’t be in Dave’s position until their 60s. One has to have a lot of faith in a bright future if they think they can make mortgage payments for 30+ years.

#46 PeckedToDeathByDucks on 09.29.09 at 10:50 am

Paying it forward

As was shown by the Cash for Clunkers program, there is a way to bring tomorrow’s sales into today’s economy. The same method is being used in the 8k rebate for new home buyers to encourage them to buy today when they really should be waiting for affordability in income. Cash for Appliances will use the same technique.

Concurrent with this strategy, is the idea of not realizing debts until tomorrow. Buy now, no payments for 2 years. Foreclosures halted in favour of reduced payments as renters or even no payment. Bank debt accounted to “model” instead of market prices. Quantitative easing now to multiply paper into the liquidity funnel thus decreasing the purchasing power of currencies in circulation in the future.

A third scam is now surfacing. It is now proposed that healthy banks support their failing institutions by paying their fees three years in advance. This strategy has tremendous potential. Consider if it is applied to income taxes. The deficit would disappear in no time. It is imperative that is applied quickly, before the super rich leave. Get those trillions of cash on the sidelines before it wastes away.

All these strategies share the dubious quality of not recognizing the dire reality of the current situation and delaying the eventual resolution.

:-) going foward :-)
we are paying forward
assuring chaos
– a dangerous strategy

#47 pjwlk on 09.29.09 at 10:52 am

#5 Cabin_Boy: Amen brother! You are just one step ahead of me. I’ve been renting for the last two years and I am now looking for a place with some acreage to rent in the countryside.

I can’t tell you how much my life has changed since I stepped off the home ownership merry-go-around. I’ve got 5 nights a week now to do the things I want to do instead of yard work and maintenance. (Weekends I’m usually away up north.)

You’re right though, there’s a number of things you have to get over first before you can really start enjoying yourself. In the end, I think the trade-off is well worth it.

#48 Artisuseless on 09.29.09 at 10:53 am

@Onemorething: I thought “brat” made it clear he’d sooner live with mummy and daddy than rent. I don’t know which is lamer – that or parents who can’t cut the umbilical cord.

As for interest rates, the best way to see it is this: there’s nothing you personally can do to control them but they are at an all time low and cannot go lower. This leaves only one direction for them to go and it is extremely foolhardy to predicate one’s entire financial future on something where only a handful of specialists actually understand the variables well enough to predict with any level of confidence when and by how much the increase could be.

@ West Coast: Hyperinflation/dollar devaluation is largely a fear tactic being used by ‘Austrian school’ ideologues to scare people into buying gold or gold funds. They’re rarely clear on what the dollar will devalue against (except gold, which is according to any real economist).

They’ve received more media attention lately since they promote themselves as having ‘called the crash’ but the reality is that they’ve been calling it since the 90s. They’re also wrongly bullish on Europe and Asia, which are far from immune from the same crisis – the ‘decoupling theory’ they promote (where the dollar falls against Euro, Yen and Yuan) is just as dubious as their goldbug claims.

See http://econospeak.blogspot.com/2009/09/washington-post-puffs-gold-buggery.html and

As for the G&M ‘cash on the sidelines’ theory – it’s being used in an attempt to pump the stock market higher. It looks like by including unincorporated business money Scotiabank has cast the net as wide as possible, even without going into the obvious – how widely that cash is actually distributed. The super-rich are notorious cash hoarders. Mish Shedlock has debunked this whole concept repeatedly.

#49 BDG YYC - Weeee ... What a ride !!! on 09.29.09 at 11:07 am

Not much left to be said at this point Garth. The system is desperately looking to get the last of the tickets sold to the last of the willing … as our fearful leaders fight over who gets to sit at the controls of this lumbering pig. Geezez.

Hurry up folks … now or never … you’ll never get another chance to ride if you don’t act now …

http://www.youtube.com/watch?v=YDU2MWJwJDc

#50 Soper Eats Babies on 09.29.09 at 11:12 am

From today’s G&M:

Mr. Carney said the bank’s commitment to keep rates at record-low levels until next June is not guaranteed.

“This conditional commitment does not indicate what will happen following the end of the second quarter of 2010. Nor is it a guarantee that rates will absolutely remain at the current level. In short, it is an expectation, not a promise.”

____

Sounds like we need to be getting ready for the Canadian version of the Adjustable Rate Mortgage.

#51 PeckedToDeathByDucks on 09.29.09 at 11:13 am

Reuters
Fed will gladly “borrow” your money market funds today, for an Exit Strategy tomorrow.

Incredible…the paperprestidigitizer turns into the world’s most efficient vacuum cleaner. Bernanke is a clear believer in Star Trek easy solutions. “Just reverse the process Scotty!”

#52 David Bakody on 09.29.09 at 11:16 am

#14 Patsan on 09.29.09 at 1:10 am

Good plan I used it more than once saying please provide me rate in fair and honest competition with ____ who are offering this lower rate. It worked for me.

#19 Halifaxfamily on 09.29.09 at 7:00 am

Not a good plan as Murphy’s Law, there is something that always sneaks in to justify not making that payment. WRT to one loosing a job/sickness or whatever …. the banks would rather negotiate for a good customer than loose one, just consider the added costs as a type of insurance policy that you only have to pay should you need it. This also happened to me, I went to bank with my tale of whoa and the mgr said if it happens come see and we will work it out. I left the bank feeling better and as luck would have it never looked back. Oh Dave I have stayed in my smaller home and now that the kids are long gone this home appears too big at times and it allowed me to max my RRSP’s some years without giving up on other projects.

Keep it Simple Dave and enjoy life. I lived in K-W at one point and the area is full of good areas with fine food and a beautiful country side.

#53 Justin on 09.29.09 at 11:30 am

#24 Mikey on 09.29.09 at 8:18 am

It appears that the BoC and Federal Government are expecting a massive shortfall in revenues (taxes).

This is why Governments FEAR deflation. It destroys their power base (i.e. they are forced to downsize etc.)

Long Live Deflation!

#54 Maurice on 09.29.09 at 11:30 am

AMigos: So the Town of Milton put development levie charges up $18,000 and Mattamy only put the price of house up $10,000. Get a look at what the Region of Halton is proposing. The local and municipal governments keep driving up the Development Fees. This keeps assessment going up and tax revenues coming in. As far as interest rates check the US 30 year bond rates. Now below 4% and dropping day after day. Now tell me that increasing interest rates or inflation are a problem. Never mind the 5 year and 10 year rates, look at the long term 20 and 30 year bond rates.

Homeowners are also being sent bills for $7,888. — Garth

#55 Partisan Spectator on 09.29.09 at 11:32 am

Bill-Muskoka #23:
The glass is twice bigger than needed.

#56 jess on 09.29.09 at 11:40 am

so the banksters have to chip in 45b.to shore up the FDIC insurance funds..is this another reason to raise rates?

Below is an example of personal frustration over a 12% credit rate that zoomed up to 30 . The bank lowered her rate after it went viral.
http://www.youtube.com/watch?v=jGC1mCS4OVo

#57 kitchener1 on 09.29.09 at 12:04 pm

2 Onemorething on 09.28.09 at 10:09 pm
Garth, I would say that advise is the only one worth taking or sell the house but really, even in good ole Kitchener Waterloo your going to have to pay $1200 for something half decent to rent.

The rental market is getting very weak out here in Kitchener/Waterloo. For $1200 you are either getting a detached 3 bedroom home with a garage and basement or are living in a very nice 2 bedroom apartment with ensuite laundry/gym/swimming pool etc..

A lot more vacany signs all over the place, Most of the signs are becoming permanent in nature. Potential tenants have a lot of negoitating power in this market.
There is downward pressure on rents in the region, only excpetion being Waterloo area by the university. That is going to change in 2 years max as there has been a flurry student housing development.

I predict that the region is going to have a net loss of population come 3-6 months as peoples UI run out and there are no jobs here for a lot of people.

Biggest diff between this rescession and the 90’s one is that in the 90’s you knew you were going to be called back to your job, only issue was when, 3-6-9 months depending on seniority.

Today, those factories are closed down, those jobs are never coming back.

#58 kc on 09.29.09 at 12:04 pm

here is a very interesting graph that places at the heart of (its not a bubble) in vancouver…..

http://vancouvercondo.info/2009/09/gvrd-house-prices-and-local-incomes.html

2 other reads of interest…..

Connecting the Dots to the U.S. Housing Market Recovery

http://www.marketoracle.co.uk/Article13821.html

Debt, the Rogue Elephant In Our Living Room

http://www.marketoracle.co.uk/Article13806.html

It is impossible to think that interest rates won’t rise, the forces of returns for the (investment banks around the world) and bond markets are making it harder to lure in new capital. Lets buy tulips and trade them for houses.

cheers

#59 Bill-Muskoka (NAM) on 09.29.09 at 12:18 pm

#54 Partisan Spectator

Darn your hide. There you go applying sentient thinking and logic. Excellent point! Notice how restaurants use that trick to make you think you got a deal? But then the Sheeple have been carefully indoctrinated to accept such illusions, like huge homes with granite counter tops way beyond their means.

#60 kitchener1 on 09.29.09 at 12:19 pm

The other issue in hard hit manufacturing regions like KW is the new EI bill that has been passed.

It was tailor made for the boomers and will put more pressure on the weak job market, espcially for those who are under 35.

Long time workers that were laid off are now going to qualify for UI sooner and their severance will not matter. They will have their wages topped up (to whatever their salary was when getting laid off) for 2 years should they decide to take a lower paying posistion.

This will hurt those people who are under35 as the boomers will now be competing for jobs in the same salary range as 35 under crowd. Since their salary will be topped up anyway they will be willing to work for less. Great for companies, get someone with 20 years experience for the same pay as someone just starting out. Bad for the younger crowd. Even the 20 year olds as now their will be more competition for service sector jobs. In the past, the boomers might have held out and waited for a better posistion, now they will just take whats out there, cause for 2 years there getting toped up anyway.

Its a joke, because, what the Conservatives are hoping for is that the economy will be improve by then and the boomers jobs will return. In the meantime, they took jobs away from the younger crowd thanks to a govt subsidy. Insulate the largest voting block from the rescession at the behast of the younger generation.

Without work opportunites the younger generation will move to where there are jobs and cities like kitchener will no longer grow in population.

Thats the one thing that boomers fail to understand. Without good jobs for the younger generation, they won;t be able to buy the boomers houses or their stocks in 5-7 years when they want to downsize.

Every single boomer that does not retire at 65 (working into your 70”s is going to be the new trend in a few years) is taking away that job for the younger generation, thats one less teaching, gov’t job, engineering job etc… in the marketplace.

#61 jess on 09.29.09 at 12:51 pm

Ethical attorneys http://calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395

now that is what is called consumer protection publishing a list of the bad guys!

San Francisco, September 18, 2009 — The State Bar of California, alarmed by the number of lawyers preying on vulnerable homeowners, today identified 16 attorneys who are under investigation for misconduct related to loan modification.

“In my 21 years in attorney discipline, I have not seen a crisis of this magnitude. It is truly unprecedented,” said Interim Chief Trial Counsel Russell Weiner, who is waiving investigation confidentiality in favor of public protection. The waiver, allowed by law, is used only occasionally, but Weiner said the seriousness of the problem demanded a strong reaction by the bar in order to protect consumers. This is the first time the names of more than a few lawyers being investigated have been made public.

The number of attorneys using their law licenses to essentially take money from unwary but trusting consumers is astounding,” Weiner added. “There are literally thousands of victims who have lost money they could not afford to lose. Under the circumstances, the need for public information and protection is paramount.”

#62 Daystar on 09.29.09 at 1:05 pm

#26 Devil’s Advocate on 09.29.09 at 8:45 am

I was going to waste 15 boring minutes addressing them but you did it for me. Thanks, pal :-)

Blobby:

“Okay.. Not sure i want to invoke the wrath of garth.. But surely .. If the dollar remains high then increasing rates will make that worse, which in turn causes more deflation which in turn means lower rates?

My understanding (and yes I understand what you’re saying with bond market) – higher rates increase the dollars value, low rates are needed when inflaiton is low (or deflation), high rates are needed when we have high inflation?

Surely the bond market and inflation side of things cancel each other out? And if not, what’s to stop the dollar shooting up to never before seen highs?” – Blobby

Ok, interest rate causal effects, 101:

rates rise:
– currency rises (as long as its foreign investors that are buying bonds and believe the nation will be a going concern in the intermediate-long term)
– inflation falls (as long as currency rises)

rates fall:
– currency falls (but only if bond buyers use foreign currency and there is a national need to borrow, i.e. trade/government deficits and lets not forget about which dollar we compare ours with! If the U.S. dollar plunges, our currency will still rise)
– inflation rises (again, only if there is an expansion of currency, read my first point first)

You’ve got that much right in terms of the general impacts of rising and falling interest rates, except for how the impacts of federal governments running massive deficits and trade deficits or in short, the need to borrow, effect interest rates, as well as the Greenback impact on our currency.

If governments run massive debt (like Canada is now), interest rates must generally rise to attract foreign investment (unless bond holders believe nations who run massive governmental debt and trade imbalances consider such nations to be stable nations to invest and hold their currency in the form of bonds and they don’t!) to attract investors into buying bonds in that form of currency. As a rule, at first there is pent up demand to buy into a nation that issues the sale of bonds. (which is what has happened recently. Flarehty is in the process of finishing the sales of a full 200 billion worth of bonds in the bond markets, 60 billion to service this years federal deficit, 125 billion to hedge against a RE bubble with CMHC. It was estimated that there was between 150 to 175 billion worth of pent up demand to buy into Canadian bonds at the beginning of the year. That pent up demand is pretty much now met)

Readers who have this bogus belief that interest rates can’t rise or the government won’t let this happen, try to understand what the majority of us consider as boring information to process. Governments that run massive debt have a major need to borrow. If there are trade imbalances, corporations overall will also have the need to borrow and both entities turn to bond markets to do this. There are two influences from there that will determine where interest rates go from there if a nation experiences massive trade and or governmental debt and hence, has a major need to go to the markets with hat in hand.

1) international banking policy. the G-20 has a low interest rate policy in place and is prepared to keep it that way until world bond markets stablize or the U.S. economy stablizes or the world can move on without them. Either way, low interest rate policy can’t last because sooner or later, nations will experience positive GDP growth and will end up needing to raise rates for obvious reasons.

Now the big question from here is…. for how long can they keep rates low? How long can the G-20 remain tight with a low interest rate policy? And most of you should see what the obvious answer is already. For as long as nations continue to run shrinking GDP quarterlies.

If there is a one of you who believes that the majority of nations can run positive consecutive GDP growth quarterlies (meaning corps will raise rates higher to expand growth) in the face of governmental need to borrow due to run amuck government spending without wanting to increase rates to either service debt or keep inflation/currencies in check, you are wrong. Its called competition (with corps and other nations for that borrowed dollar).

2) International bond market competition. Bond buyers will simply shop around for the best deal they can get and they will, if they are smart, use certain criteria to establish risk before they buy and its all about future projections. They will ask themselves what kind of governmental system and government policy will come from the nation (s) in question to establish risk. They will look at the historical/present trends of the economic performance to establish the risks and weigh them against the interest rates being offered, as well as the risk of the nation(s) currency going up or down depending again, more than anything, on government policy and record to establish the best values before buying.

To summarize, while people think Canada is a great place to invest because its nation is considered stable and has a good governmental system, its policy makers are currently running record deficits and have for the first time in over 32 years, begun to run trade deficits through governmental policies (which are quite bad, I’ll be frank). This should concern those who believe interest rates can’t go up in this nation for the most obvious of reasons. While the system of government is a good one, its policy makers are leaving bond investors room to worry and the reason should be clear as crystal. We have a major need to borrow money! And once that pent up demand to invest in Canada is met, Canada will likely have no other choice but to raise interest rates to attract investors because in case readers haven’t understood this yet, Canada is now a debtor nation.

And one final thought. The U.S. dollar has taken a large slide this decade compared to other international currencies including our own. They are an empire in serious decline and while many think this decline will take mere months or years, think!!!! It will take decades and its already well on its way, but will take decades more. And as the U.S. does decline (more gradually than the majority of us are initially seeing right now), Canada has to make a big choice. Try to keep our currency cheaper than theirs and face the consequences on the international markets, or try a higher dollar than theirs and we should all know the pains that would occur in manufacturing and later the sale of commodities with a dollar above par, especially with trade to the U.S. .

And keep this heavily in mind when you think of this. Does the U.S. want Canada’s dollar to be at or above par? (yes, there will be a short quiz and multiple choice’s at the end of this lesson)

The present government is forcing this nation into a weaker dollar through a credit expansion created from a real estate bubble and record governmental deficit spending. It will weaken this nations currency internationally, and over the long term weaken this nations ability to invest abroad quite substantially if this current minority government is allowed to continue on the path they are on. And while that credit expansion goes bust (i.e. Real estate bubble goes bust), will Canadians be better or worse off? More indebted? Or less…

Do readers still think we don’t need an election?

#63 Civil Disobedience on 09.29.09 at 1:09 pm

Yes it is true that prime + will hit over 5% inside 5 years. This is a given. The issue is that if you amortize over 5 years, in a bit over 2.5 years you’ll have paid half back at a lower rate then locking in, thus have paid less interest and more principle than over a higher rate for 5 years guaranteed. I’m not smart enough to run the numbers, but would guess that if you start at 3.25% and get 1/4 point for each raise starting next June, you’ll be ahead paying the same amortized over 5 years on fixed. My hedge is that rates being low, but payoff in short sight, it’s better to keep it open with flexible payment terms so you can chuck a chunk down when/if you can. I was paying attention Garth…debt is not a forever thing, debt is to be repaid ASAP. For someone who is hedging on slower rate increases…or even moderate ones and those that have debt payoff within a 5 year window, I think staying in a HELOC is the way to go especially with just 60k owing. I could be wrong…you never know, but I like control so I’m keeping things open and my money at prime.

As a side note. I had a back-up HELOC with Scotia and I just called them, they have no plans to move to prime + on loans issued before a certain date. Thus from TD to Scotia goes my debt since I was lucky enough to have made back-up plans before the shtf. Of course, I will see what concessions TD will make first. Not holding my breath…

#64 dd on 09.29.09 at 1:21 pm

#52 Justin

“Long Live Deflation!” and smaller pay cheques.

#65 Keith in Calgary on 09.29.09 at 1:24 pm

LOL !!!! It sure didn’t take the G+M editor long to move their “$1 TRILLION in savings” story OFF the website.

It can still be accessed if you click on my previously posted link, but otherwise, it is gone. Seems like the truthful sentiments of 95% of the 210 Canadians who posted comments there in the last 24 hours was too much for them to handle, as it hurt the feelings of their Bay Street masters.

#66 Live Within Your Means on 09.29.09 at 1:30 pm

#51 David Bakody on 09.29.09 at 11:16 am

When we bought our current home, our lawyer asked our bank (now TD) for a 3 mo. confirmed % rate. They would only give us 2 mo. So we went to the Royal and got it. I had been a good customer of TD & all its previous names for at least 15 yrs. They lost our mtg. business. Plus, we could double up each mo. and pay down annually 10% of the original mtg. principal, which we did. Several years ago we rec’d a notice from TD that they were going to start charging us on fees based on an estimated # of mo. transactions. I did a year’s research of our transactions. They had underestimated those transactions by at least half. My hubby spoke to the Bank Manager and said we, and others, would pull out our money. He handed my hubby many of his cards to give to his friends. We’ve never paid a fee with them. They’re making enough $$$ off of our money sitting in their bank. Stupid us. Which will lead me to a question in my next post.

#67 shifty on 09.29.09 at 1:35 pm

Total CPI
August 2009 114.7 114.3 113.8 -0.8
July 2009 114.7 114.0 113.7 -0.9

Recent consumer price index indicates Canada is in a deflationary trend similar to Japan.

#68 taylor192 on 09.29.09 at 1:38 pm

#3 Jim

Lets hope you’re wrong and rates do rise. Look at how deflation has affected housing prices in Japan: Japan has posted YoY price drops since 1991! That’s 18 years of deflation with no sign of recovery.

Most Canadians hold their wealth in their homes and expect to use it as their retirement fund. Imagine if this happened here – retirees think they have been hit hard now, the worst is yet to come.

#69 Evangeline on 09.29.09 at 1:40 pm

#4 Cash is King

((“At home, he said that when the government’s two-year fiscal stimulus package runs out, the onus would be on consumers and businesses to step up spending to keep the economic recovery alive.” ))

What a moronic statement eh? All that stimulus money wasn’t produced by government, it was taken from consumers in the form of taxes. Patting themselvs on the back for what? for acting as proxy spender for consumers?

Does he actually think that with more tax burden on consumers, like the HST, we are going to spend more? Dream on. What’s next, a law saying we have to spend our money? Nothing would surprise me now.

It really burns me that we are picking up the tab for the banksters’ lousy decisions. They get cheap money, they rent it out high, and when they still can’t keep their financial house in order, we the taxpayers have to pick up the tab.

Do they really think we’re that stupid? What they better learn and that right quick is that if they step it up much more, we will all be investing in pitchforks.

#70 taylor192 on 09.29.09 at 1:43 pm

Garth,

Bond prices are dropping after having risen earlier this year. Can you post some info on this, since it seems counter-intuitive?

AFAIK bond prices should be increasing with the economic recovery, since investors can make better gains elsewhere. So I’d expect bond prices to continue increasing as there’s less demand for safe investment, yet the opposite is happening. Why?

Is this the first sign the rally is over and investors are cashing out?

Bond prices fall as interest rates rise. As rates rise, so so bond yields. As yields rise, existing bonds become worth less, so investors insist they sell at a discount to face value. In an economic recovery, inflation and credit demand generally swell, which puts upward pressure on rates and downward pressure on bond prices. This means bond holders see a capital loss. — Garth

#71 Jim on 09.29.09 at 2:18 pm

Although the Bank of Canada does not have an impact on mortgage rates per se, there is one exception to this rule. Most variable rate mortgages are affected by changes to the prime rate as set by each of the chartered banks.

The prime rate will change, in the same direction and by the same amount, as any change to the overnight rate. So if the BoC announces a decrease in the overnight rate by 25 basis points, then you can expect most variable rate mortgages to also drop by the same amount.

So do more (or less) homeowners have VRMs? And how does Carney feel about the overnight rate? Hrm?

#72 pjwlk on 09.29.09 at 2:25 pm

#9 HouseBuster said: – “I’m telling you that the attitude there and the way they were speaking with customers tells me that we are close to a blowoff top in the RE market.”

That exact thing happened to my boss in 89/90. He balked at the rediculous price for a condo in Thornhill and they told him to step aside and let the person behind him in. My boss told them to get stuffed. It wasn’t even a year later when everything started to go for a crap that they called him back to beg him to come in for a second look and to consider buying again. Hey just laughed and hung up the phone… Ya gotta love it!

#73 MikeB on 09.29.09 at 2:41 pm

Agreed interest rates should bloody well rise indeed. however… will that translate into tangible price reductions. It will only if rates go up by a significant enough factor… We can all hope but with high int rates the debt level also goes up as we pay higher rates to our lenders. The other insanity is that real estate in Toronto for example is so highly manipulated by the system that it would be very difficult to crush the prices to anything worthwhile.
As mentioned in the previous blog, affordability is out of control here but there are also 30k or more realtors who live and die by the prices. Even during the previous winter I saw few bargains IMO… most were sitting there because they had one or more fatal flaw.

#74 PeckedToDeathByDucks on 09.29.09 at 2:52 pm

@charles #36
:D

#75 Fred Barker on 09.29.09 at 3:01 pm

Misinformation by #53 maurice. I really hate that.

http://miltonsearch.com/blog/2009/09/10/uproar-in-milton-over-increased-development-charges-passed-on-by-mattamy/

#76 Ryan on 09.29.09 at 3:04 pm

Garth,

I was wondering if there is any chance that you might be able to record your presentation in Winnipeg, and post it on this site?
I’m cycling around South America at the moment, so i won’t be able to make it back to Winnipeg to see you in person.
Thanks for maintaining the site and the conversation that evolves around it.

Pedal faster. — Garth

#77 Downsized and Delighted on 09.29.09 at 3:53 pm

#15 Westcoast – I’m intrigued that you are pondering purchasing something “outside” of Canada because you are worried about our currency deflating. I, on the other hand am fearful of buying outside of Canada (specifically the U.S.) because their currency (read deficit) scares the bejeebies out of me. And this is a large part of why I can’t see interest rates rising in Canada. Our dollar would soar. And to those who enjoy lecturing on the bond market supply and demand
– do you have any concept of how much capital is available in this country?

#78 Live Within Your Means on 09.29.09 at 4:20 pm

Folks – I’m looking for some input. I’m a naive investor. We stopped investing about 4 years ago as we kept seeing our investments going down. We didn’t cash in, however. I’d say we lost about 40%, but, after changing our portfolio last year, we’ve recouped anywhere from 17-19% of our investments. Our portfolio is only worth about $160K now.

Our Fin guy called the other week suggesting that we might want to ‘again’ look into Manulife Income Plus. I’ll be 62 next mo. and have an indexed pension plan and am also collecting CPP – about $2,500 net/mo. Its a bridged plan. My hubby will get 2/3rd of my pension when I die. Hubby will be 53 in Feb and will work till at least 60+ & likely do part time consulting. He earns $55K+. His pension plan is not worth much as he’s only worked with his present employers about 11 yrs and he got shafted when an emalgamation plan was implemented. Plus, if he dies before 5 yrs of retirement, I’ll only get what he’s put in ASFAIK). But, I’m living on borrowed time and will be lucky to be alive before he retires. I know, be optimistic. But, I’m also a realist. We spend about 1/3 our mo. income. He’ll inherit at least $100K+EU from his parents.

I guess my question is: We’ve got about $100K+ sitting around and earning zilch. I’m thinking about maybe putting in $30+k into Manulife Plus though I realize MER’s are high and there could be other fees. But I’m looking to be able to sleep at night and not worrying about our investments. BTW, we are DINKS, mortgage paid off (because we were frugal) We’d like to leave some money to our nieces & nephews.

Please don’t get down on we boomers. We’re also trying to leave as much as we can to our younger generation who’ll surely need it. I & my husband were not born with a silver spoon in our mouths. We also experienced hard times, worked our butts off, were frugal, and want to help those less fortunate than we.

BTW, have apprehensions about even posting this message.

#79 Jan Etter on 09.29.09 at 4:45 pm

#53 Maurice – not sure how it works in other provinces but in Ontario keep in mind that by legislation DCs can only be imposed based on historical costs over a 5-year time period and, as much as Hazel likes to say “Development should pay for itself” the limitations in the DC Act mean that the existing property tax base inevitably ends up paying for a portion of the costs of new development. It’s true DCs are a revenue source but it’s to pay for development-related costs such as community centres, road widenings, etc. that are necessitated by new development so the existing tax base doesn’t bear the burden. Also note that the development community almost always appeal the DC bylaws passed by municipalities to the OMB to lower DCs (as it’s in their self-interest) so there are mechanisms in place that in practice put greater burdens on existing property owners than the people buying new homes.

#80 PKS on 09.29.09 at 5:11 pm

Garth, I don’t often disagree with you, in fact, my sister and I just inherited a house in Halifax, and we basically took your advice on a VTB mortgage.

But what do you think of the argument that people like Paul Krugman make that the future tax consequences of fiscal stimulus in the short term aren’t nearly as bad as people are making them out to be?

The argument Krugman makes is that governments don’t get out of debt by cutting spending, you get out of debt by growing your economy.

So yes, it adds to the debt/deficit to do stimulus spending now, but that translates into increasing GDP growth, so the consequences aren’t as bad as some are claiming.

What’s wrong with that argument?

Also, what do you think of the argument that, really, if they had their preference, central bankers would have interest rates a few percentage points lower. They can’t, because they’re coming up against the “zero-interest rate bound”.

I think most of the arguments you make around government debt and interest rates are solid, in normal times.

But we’re not in normal times, we’re in a liquidity trap with a risk of deflation.

That’s something that we haven’t really seen since WWII.

The current crisis had its genesis in excessive debt. We cannot get out by creating more debt. Canada’s $55.9 billion deficit and $600 billion national debt (within 2 years) would require GDP increases of 5% annually for a decade just to finance. That is about twice normal growth. How will that occur with families tapped-out, and 1.5 million unemployed? No country ever borrowed its way to prosperity. Praise be Klugman is not in charge of anything. — Garth

#81 dd on 09.29.09 at 5:39 pm

#79 PKS

…But what do you think of the argument that people like Paul Krugman make that the future tax consequences of fiscal stimulus in the short term aren’t nearly as bad as people are making them out to be…

You live through the 90s? The extra taxes pounded growth to nothing. We are borrowing future GDP point / growth and using it today.

#82 Canned Goods and Buckshot on 09.29.09 at 5:45 pm

Sung to the tune of “Why don’t we get drunk” with apologies to Jimmy Buffett

I really do appreciate the fact you’re sittin’ here
Your grantite countertops so wonderful
But yer real price ain’t too clear
So bar maid bring a pitcher, another round o’ brew
Honey, let’s buy it then kneel at the pew

Chorus:
Why don’t we get drunk and buy
I just bought a water bed, it’s filled up for me and you
They say you are a bubble queen
Honey I don’t think that’s true
So, why don’t we get drunk and buy

#83 Ben on 09.29.09 at 5:57 pm

#77 Live Within Your Means:

Go to Canadian Money Forum, and post your same question under Retirement. Lots of smart helpful people there.

#84 West Coast on 09.29.09 at 6:32 pm

#76 Downsized and Delighted on 09.29.09 at 3:53 pm

I’m in way over my head here.

“do you have any concept of how much capital is available in this country?”

No I do not nor am I clear what the implications might be.

I wish to preserve the money that I have saved in the most conservative way possible. I am not looking for huge profits – just maintenance.

Yes I have been looking at property in the US but I have also been learning about the capital gains they tax on foreigners and other financial penalties they impose…

I am convinced that there are a lot of us in my situation that recognize the housing market in Vancouver as a losing game but we are simultaneously skeptical about simply leaving savings as cash in the bank.

At least piece of land is real or as others have advised investing in other very tangible commodities such as energy, metals, farmland. But it seems like most people figured that one out in 2002 and I would be entering at a peak. And have a look at Rhodium???

So yes, I am searching the globe for land/property that might be stable and is not as overpriced as ours.

#85 Mel Eager on 09.29.09 at 6:48 pm

Howdy Bloghounds,

All this talk of rates had me contact my banker to see what’s available today.

If you recall I asked for advice here earlier about my Prime + 0.80 VRM, and whether to lock in or ride the variable.

Banker Man says:

Bank of Canada has told us they expect rates to stay low into the new year however we do have some great rates that are worth considering locking in for. At the moment the posted closed 5 year fixed rate is 5.49%, the RBC special rate is 4.19% but I can offer you 3.99%.

Who here would pull the trigger at 3.99% ?

Cheers,

Mel.

#86 GoldBugs on 09.29.09 at 7:01 pm

http://www.bnn.ca/news/12575.html

By yer gold online. Better hope you don’t lose your internet connection when you need it most!

#87 Live Within Your Means on 09.29.09 at 7:08 pm

#82 Ben on 09.29.09 at 5:57 pm

#77 Live Within Your Means:

Go to Canadian Money Forum, and post your same question under Retirement. Lots of smart helpful people there.

Thanks Ben – will do.

#88 Mark in Japan on 09.29.09 at 7:43 pm

Hi Garth,

We (wife and kids) are presently living/renting a home in Japan for a year. We sold our 4000 sq ft 1993 McMansion in Victoria this spring (thank you Garth) and went on a one year sabbatical from work. We plan to rent when we come back to Canada and see where it goes from there.

Intererting read from your link to the Globe and Mail about Japan’s fear of prolonged deflation ( http://www.theglobeandmail.com/report-on-business/fears-of-prolonged-deflation-rise-in-japan/article1305114/ ). This might explain why, presently when we shop at the local grocery story (akin to Loblaws) in Yokohama there are 15 yen(roughly 15 cents US) onions, 28 yen green peppers, a litre of fresh orange juice (not concentrated) for 98 yen and the ability to buy a 6 pack of beer for 488 yen. What also is amazing is the cost of clothing and household goods. A pair of jeans will set you back about 883 yen, a non-stick fry pan about 383 yen. The same Nike running shoes that I paid $160 (plus tax) in Canada for are 7900 yen here. Men’s dress shirts will run about 1400 yen each. A litre of milk is still pricy in my opinion- around 158 yen- yet 10 large eggs can be bought for 88 yen. Also notable is the amount of recycling stores that offer used appliances, electronics and furniture. Once a week I hear a truck with a loud speaker driving around the neighbourhood announcing they will take your used goods. And these stores are busy with people and the product is constantly turned over! Gas is running at 124 yen per litre (full service of course). A pack of cigarettes is 300 yen (I don’t smoke but for those that do). A 100 gram chocolate bar 88 yen. Half a loaf of bread is 88 yen. A bottle of Japanese white or red wine will set you back about 328 yen for 750 ml – sometimes on sale for 299 yen (made from imported concentrated grapes I am to understand) and a bottle of decent Aussie wine about 700 yen. And for those whiskey drinkers out there, you can buy a 4 litre bottle for 2600 yen. And let’s not forget that ALL these prices include tax.
The other big business that is booming over here is the Hyaku (100) yen shops or as we call them in Canada, the dollar shop. We practically outfitted our kitchen/home with all the essentials for 100 yen each; wine glasses (made in Turkey per the sticker) were 100 yen, plates, bowls, household cleaners, cutlery etc. Most of these products are made in China (what isn’t these days?) and shipped here cheaply as the container/shipping industry is in a state of crisis and are offering companies cut rate prices.
Previously I had lived here (in Tokyo) in the early 90’s- back in the day of a 700 yen cup of coffee and 950 yen pint of beer – and am now astonished at how low the prices are especially rent more so in the outlying areas of the cities likely due to the family/ancestoral home being empty as Ma and Pa are too old to maintain/live in it and the kids do not want to live there but rather in the city in their condos – this is the situation that got us our 4 bedroom home for 1300 US/month (one thing that has not changed is that they still require 2 months of key (deposit money) one month of which you do not get back but is a gift to the landlord although some rental agencies do advertise that do not require key money anymore).
Don’t get me wrong, there are still pricey areas and high end shopping (Omotesando District) but overall, deflation is definitely evident in my opinion here.

#89 Eduardo on 09.29.09 at 7:53 pm

Re 84: Ask for 3.5%

#90 West Coast on 09.29.09 at 7:53 pm

I just read #6 Keith in Calgary on 09.28.09 at 10:38 pm

http://www.theglobeandmail.com/globe-investor/personal-finance/families-sitting-on-up-to-1-trillion/article1303648/

It seems a lot of people are just leaving their money in savings accounts. And investing VERY conservatively.

#91 Herb on 09.29.09 at 8:30 pm

Jan Etter @ #78,

try to find out from your City Hall how much in real money a dollar in development charges raised actually costs the city. I have asked an Ottawa councillor, and got the reply that it costs $1.40 to provide the services paid for by a dollar of development charges.

The Ontario Development Charges Act is not designed to have have growth pay for itself. It is full of loopholes that developers are happy to exploit, from inefficient capture of historical cost data by city staffs, to cost recovery mandated at less than 100%, to inability to make up shortfalls through higher charges in future, to debate about BTE (“benefit to existing”), to poor wording of the requisite municipal DC bylaw, to appeal to the OMB.

#92 Richard on 09.29.09 at 8:31 pm

Garth regarding the following advice :

Get a conventional five-year closed rate home loan at the current rate of 5.5% (relax – that will look cheap within three years). Then ask for a five-year amortization. The monthly will be $1,200, and you will have you mortgage totally and completely paid off in just 60 months. The total amount of interest (included in the monthly payout) will be just over $9,000.

Compare that with your HELOC at the new rate of 3.25%, where five years of interest-only payments would be $10,562, and then you’d still owe $65,000 – and be looking for a new mortgage at 8%.

Why would you have him pay $1200/ month for the mortgage but only $176 ( 10562/60 ) of interest payments for the HELOC. If he could afford $1200 for the mortgage then he would be able to afford $1200 for the HELOC. Plus he’ll save on the total interest, unless I’m missing something.

Regards,
Richard

I stated the reason in the post: A forced payment plan since the mortgage structure will give him no option but to retire the debt. — Garth

#93 T.O. Bubble Boy on 09.29.09 at 8:33 pm

Apparently the US Fed will also be “aggressively” raising in 2010.

http://finance.yahoo.com/news/Officials-Fed-will-need-to-apf-1511169380.html?x=0

That being said, the herd mentality seems to be shifting towards this interest rate rise, so I’m now waiting to see what changes in early 2010 to make the governments hold off on raising rates for another year or more.

#94 Basil Fawlty on 09.29.09 at 8:38 pm

Eric Sprott on Quantitative Easing, or printing money.
“This month, Cheng Siwei, a Chinese official said, “If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard.”
http://www.Sprott.com/Docs/MarketsataGlance/09-09-MAAG.pdf

#95 Jim on 09.29.09 at 8:39 pm

When everybody thinks that inflation is around the corner, the market screws you:

http://www.theglobeandmail.com/report-on-business/crash-and-recovery/deflation-taking-root-in-global-economies/article1306056/

#96 S. on 09.29.09 at 9:38 pm

# 10 Enuff’
Until recently one could go to any gold dealer (other than the banks) and using cash purchase gold bars or coins quite anonymously. Not anymore. Now the dealers have to keep records of who bought what. So bring your ID and a cashiers cheque. Apparently cash is not welcome, either. I tried…
I am somewhat sceptical of the new TFSA, too. The minuscule potential gains aside (only investment gains are tax free) allowing governments and financial institutions to keep track of your assets has a few downsides…

#97 steven rowlandson on 09.29.09 at 9:59 pm

Well Garth there is no shortage of fools in Canada.
Many of them think that rates can’t rise and there is nothing government can’t do or shouldn’t do and many think house prices only rise and can’t go down because this is Canada. Oh yes they also think deflationary or hyper inflationary depressions can’t and won’t happen either. Also it is widely believed that currency backed by debt expressed in currency is worth something.

No shortage of fools in Canada.
No doubt they will find out the hard way.

Steven

#98 Grantmi on 09.29.09 at 10:17 pm

Yea Think!!!!

Proceed with caution when signing for rock bottom mortgages, advisers suggest

Mon Sep 28, 6:14 PM

David Friend, The Canadian Press

TORONTO – If you’ve been shopping around for a mortgage lately, you might’ve noticed that some offers from the country’s biggest banks are looking especially attractive.

Canadians have been handed a golden opportunity to snag mortgages at rock-bottom rates, but highly competitive lending is pushing overly optimistic opportunities on people who might not understand what they’re getting themselves into, suggest some members of the mortgage industry.

http://tinyurl.com/yl85pzz

#99 Peter Wiener on 09.29.09 at 11:00 pm

Re # 87 Mark in Japan

Not that I doubt you, but………….
How are those prices possible – you said Japan, right?
Like to hear more about how life in Japan differs from your Canadian experiences if you find the time to post.
Thanks for your eye-opening post.

#100 Farnsworth, Hubert J. on 09.29.09 at 11:24 pm

Re # 87 Mark in Japan

Your post is counter-experiential, given what I’ve seen traveling through Japan in the last 6 years or so. Like Peter Wiener, I’d like to know more.

#101 Onemorething on 09.30.09 at 1:09 am

Japan has gone from deflation to worse!

A good friend who just moved there for work says the house he is renting is now 30% cheaper than just last year before the crash.

Schools are still expensive! All else cheap!!!

2 months deposit is normal, usually one month is for agent fees but usually halved between landlord and tenant.

#102 dosouth on 09.30.09 at 1:14 am

As Jimmy says, “Only time will tell if it was time well spent….”

#103 Mark in Japan on 09.30.09 at 2:00 am

Hello posters 98 (Peter) and 99 (Hubert):

I agree the numbers I have provided do not sound possible and are contrary to your experience but they are what they are. That being said, feel free to google and download a large grocery chain’s (called Jusco) latest weekly flyer (called a chirashi) or check out another up and coming company called Nitori (a japan style ikea that is super cheap and popular). As I have pointed out and if you have Japanese friends, feel free to run my numbers/prices by them. I have no hidden agenda here but in the same token I want to stress that this country is not a cheap retirement haven. Just that from my current viewpoint/experience deflation is at work in an economy that once boomed and was reputed for it’s inflationary prices. You’ll note I qualified my post by pointing out that there are still expensive areas to shop. That being said, when we visit friends in Tokyo and shop at a grocery chain (ie Ozeki), the prices are slightly higher (makes sense given Tokyo land prices) but still alot cheaper than what it was back in the early 90’s. Overall electronics I find are about the same and in some instances better deals can be found in Canada granted you won’t have the latest/greatest ie a dell or acer netbook is about $398 USD. Hope that helps.

#104 Peter Wiener on 09.30.09 at 12:17 pm

re # 102 Mark in Japan

Thanks very much for the clarification, I am going to follow up on your suggestions but am still flabbergasted by your revelations. Thanks again for taking the time to post, much appreciated!