“Thought you might get a chuckle out of this,” says Ian. He’s busy packing this week because he and Marilyn sold their Toronto house and are running away with the money. Suddenly retirement looks one hell of a lot better.
“Yesterday in my night table she found our trusty CIBC Mortgage Payment Guide from the years before home computers, the internet etc. I expect that the youngsters jumping into the deep end of the GTA real estate pool today would choke on those numbers. As you keep saying, the rates today will not last forever.”
The booklet is from 1987. I used to carry one around, too, when I gave real estate investment lectures to horny young people (now your parents). Back then I had one message: sell, because this market is cooked. Four years later prices were down 28%.
Of course you’ll notice the lowest rate the bank (or anyone) could imagine for a mortgage was 6%. The top was just under 18%. This is why houses were cheap then, and why they inevitably got a lot cheaper. Despite money costing so much, people were convinced houses would rise forever. They camped out overnight in front of sales trailers in Mississauga. They flipped and speculated. Some homes closed a dozen times in a single day, each time at a higher value. Then, a crash.
Today rates are absurdly low, houses have never cost more, and real estate’s once again a mania. Like then, most of your friends, co-workers and embarrassing relatives believe prices will rise without end. Nobody thinks rates will creep up or mortgage rules change much. The longer we have 3% home loans the more everyone’s convinced we will always have 3% loans. Obviously this is not the case.
And if real estate can lose a third of its value when mortgage rates go down (as they did in the early 1990s) just imagine what might happen when monthly payments swell (as they will over the next five years). No, 17% loans are not on the agenda. But you sure certainly count on 6%.
Now this brings us to the Idiot Segment of today’s blog, proudly presented by Re/Max.
Did you notice a spate of MSM stories this week about how cottage sales have rebounded from the Winter from Hell, with romping prices and rollicking demand? That’s because Re/Max diddled the media with another of its trumped-up ‘reports’, 34 glossy pages without a single third-party statistical source. No survey. No data. No methodology. No creds. But the reporters ate it up.
Said the Globe:
A cottage that sold for $7.4 million in Ontario’s Muskoka region highlights the increasing trend of younger, wealthier buyers investing in vacation spots as they profit from housing booms in major cities. “Families and investors have more cash to buy a second home as a booming real estate market increases the value of their residences, according Re/Max. “The equity gains in urban center homes have led to increased demand in recreational properties,” Gurinder Sandhu, executive vice president of Ontario and Atlantic Canada for the firm, said by phone from Toronto Tuesday. “They’re leveraging that to purchase cottages. As a result, you’re seeing an increase in the number of cottages changing hands and a steady price increase.”
Well there ya go. Re/Max fabricates it. The Globe repeats it. Must be true. And if it is, Allah help us. We’re screwed.
The last thing city people, who have seen their houses appreciate, should do is borrow against that equity increase to buy more real estate. Especially a cottage. As generations before discovered, that pop in the value of your home can be wiped away by a mortgage hike, because you’re a CBC or Sobey’s or Sears Canada employee, or when the market inevitably topples under its own weight.
But if you’ve borrowed against that increased value, you could end up with more debt than your urban house is worth, plus a cottage which will never sell for what you paid. In any real estate correction it’s a well-established fact that recreational properties – chalets, hobby farms, cottages, cabins and all-nude beaches – take it in the rear. The universe of buyers is actually miniscule, and shrinking.
Time will tell how many folks believe what they read or hear. How many are turning their houses into ATMs. Or who’s using their illusory equity gains to feed more consumption, believing bad stuff happens only to other people.
A new web survey this week found 51% of Canadians expect houses will keep rising in price – 8% a year. In Alberta, 73% think that way.
Meanwhile Ian and Marilyn keep packing. Sharing a little chuckle.
127 comments ↓
Garth what do u think about borowing against your home
to invest in dividend paying stocks like banks and reits.
I believe this is also called the smith manoeuver?
Leverage carries considerable risk. Get solid help. — Garth
Gotta try it…first?!?
” No, 17% loans are not on the agenda. But you sure certainly count on 6%”
I was but a mere follicle in the late 1980’s.
I really want to see 17% mortgage rates again.
Garth, any stats on HELOC use? It appears every new home sports two new cars and cardboard skeletons of excessive purchases ( new tv’s , stainless..etc).
So what happens if interest rates stay low for 15-20 years? And credit becomes even easier to get? Gas goes to $2.00 and Ontario is awash in Alberta oil? Predicting the future or betting on any market is gambling. Risk aside, who wants to be forced to pay attention to a portfolio or hire an idiot who takes half the gains and takes no risk?
I have decided to live with less, understand I will not get rich and save my money with no growth. I have looked for a financial advisor but they only sell bonds, MF, and risky crap. It may be better then what I am doing but if any number of things happen in the world over the next 18 months, you could be on the street.
RE is doomed only because it would be a great way for rich people to get richer. I will go back up just like the TSX. Keep your job and don’t sell. Live and let live.
“They are leveraging to purchase cottages” and “Profiting from the housing boom”. I still can’t understand how anybody with the smarts to accumulate wealth can be so stupid and short sighted to actually believe this hype. We sold our Okanagan home 3 years ago and our Victoria condo last month, we will buy another home as we like owning but are glad to be leasing for now and staying out of this market for the time being…
History Schmystery…
Young people tend to think that anything that happened before they were born is ancient history.
People who did not live through high interest rates tend to think that the possibility of say 8% interest rates (let alone, say 14%) is approximately the same as the possibility of them getting thrown to the lions in a colisium. Yeah it happened back in the dark ages but that has nothing to do with today, they figure.
Many people figure the gioverment will keep interest rates low because the government can’t afford high rates. Well they could not afford them in 1980 either, yet there they were.
Was it not Bill Clinton who wanted to come back in his next life as the bond market because then he could intimidate anyone?
Does anyone think Reagan enjoyed rates around 18% in the U.S. on his watch?
And yes, mthe FED partly engineered those high rates at least the high short term rates, but it was basically forced to do it to control inflation.
Basically, some things in life can only be taught by personal experience.
Of course, then again those of us who came of age with 18% rates find it hard to imagine that 4% could be the new norm. In reality over the broad span of history in times of low inflation a 4% long-term interest rate has certainly happened in the past.
We are all colored by our own life experiences.
Making confident bets on which way interest rates will go is always dangerous. Over the past 20 years or more, millions of people have bet that interest rates would rise soon. So far they have been dead (broke?) wrong. Logic suggests rates will rise and surely they can’t fall? And yet the same was said each year for maybe the last 20 years. Oops.
Why buy an ad when you can have a “reporter” do the job for you. Going to run to bank to use my house as an ATM so I can sit in traffic on the weekends and watch small children being carried off by misquitos….not
Six percent floating mortgage rates for prime borrowers may never come back in our lifetimes. Anybody hoping otherwise may need to be bloody patient. The world has changed in significant ways since the inflationary postwar decades. Go read your Piketty please. Class dismissed.
LH
I had a new car loan in 1980 at 16.5%. Crazy times back then. It will happen again.
#9 LH on 06.26.14 at 6:59 pmSix percent floating mortgage rates for prime borrowers may never come back in our lifetimes. Anybody hoping otherwise may need to be bloody patient. The world has changed in significant ways since the inflationary postwar decades. Go read your Piketty please. Class dismissed.
LH
…….
Agreed, the cadaver has no more blood left to be sucked.
First, they took a man’s wage, cut it in half, and made his
wife slave to get the other half.
Then they pushed the wages down, eating there savings.
Then they offered up cheep money, they got that too.
Zero rates till the machines head is on a stick.
………
Pa the dude that’s chirping garth on my blog, I deleted your posts, first time I ever deleted anything.
Felt good, almost like a god…
I will only tolerate chirps against the Smoking Man on my blog.
Chirp any one, it’s going to get deleted. My blog is a dictatorship.
You want Democracy, to it here.
It’s not a matter of what might happen re cottages. If you used a loan against your h ome to buy a cottage on the Gulf Islands, BC, and needed to sell, you’d be in serious trouble. Many places are down thirty percent, sales, when they happen, often take a year or more.
#3 JSS on 06.26.14 at 6:31 pm
” No, 17% loans are not on the agenda. But you sure certainly count on 6%”
I was but a mere follicle in the late 1980′s.
I really want to see 17% mortgage rates again.”
That rate of interest could never happen today without destroying the entire economy. Back in the late 70’s when normal interest rates were around 10% an increase to 17% then would be like going from 3% to 5% today. This would cause real estate to decline by around 38%. That 900,000 teardown in Vancr would go back to around 550,000 which in my opinion is still too high.
At current interest rates and house price levels where they now stand in places like To and Vancr, all you need is an increase in interest rates to around 5.5% to cause a 38% drop in prices.
Garth, I normally find your humour mildly amusing, but “… all nude beaches, take it in the rear” made me LOL. Brilliant, man!
“In any real estate correction it’s a well-established fact that recreational properties – chalets, hobby farms, cottages, cabins and all-nude beaches – take it in the rear. The universe of buyers is actually miniscule, and shrinking.”
So true blows me away, look around, how many “new canadians” are going to buy this stuff? NIL? Where’s the market?
MSM are schlocks!
#9 LH on 06.26.14 at 6:59 pm
Six percent floating mortgage rates for prime borrowers may never come back in our lifetimes. Anybody hoping otherwise may need to be bloody patient.
=========================
Well, maybe. The price of money depends on demand which is pretty low right now. But the world is not just old, tired G8 countries. It is full of young people with cellphones and ambition. China is opening up Africa with railways. Africans are developing cellphone banking networks. They are learning to manufacture. The world has indeed changed but it is still growing. Meanwhile
Treasury Begins Push to Revive U.S. Mortgage-Bond Market – Bloomberg
The Treasury Department will start an initiative to revive the market for mortgage securities without government backing as part of an effort to aid recovery of the housing market, Treasury Secretary Jacob J. Lew said.
http://www.bloomberg.com/news/2014-06-26/treasury-begins-push-to-revive-u-s-mortgage-bond-market.html
Bullard Predicts Fed Rate Increase in First Quarter of 2015
Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens.
http://www.bloomberg.com/news/2014-06-26/bullard-sees-fed-raising-rates-in-first-quarter-of-2015.html
. . . .Vancouver and Victoria House Prices. . . . . .
. .Percent Increase/Decrease Since June 2010. . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.0%. . . . . . . . . . . . . . . . . . . . . . . .*. . . . .
14.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.0%. . . . . . . . . . . . . .* . . . . . . . . . . . . . . .
9.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 0%. . . *x. . . . . . . . . . . . . . . . . . . . . . . . . .
-1.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-2.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-3.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-4.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-5.0%. . . . . . . . . . . . . . x . . . . . . . . . . . . . . . .
-6.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-7.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-8.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-9.0%. . . . . . . . . . . . . . . . . . . . . . . . . x. . . . .
-10.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . June. . . . . . . .May. . . . . . . . May. . . .
. . . . . . . 2010. . . . . . . 2012. . . . . . . .2014. . . .
(Index data from Teranet)
(*) = Vancouver, (x) = Victoria
Based on this data, house prices in Victoria peaked in June 2010 and have declined 9% since then. House prices have fallen across all areas of Greater Victoria from Sidney to Oak Bay to Sooke.
The story has been different in Vancouver, where house prices have increased by 15% since June 2010, based on this data.
Considering the extreme amount of housing market stimulus that continues to be applied to Canada’s housing market (historically low interest rates, etc.), both Vancouver and Victoria should have experienced strong price gains since 2010, but that has obviously not been the case. Why has Victoria’s housing market been so weak since 2010?
When the average family can no longer afford the average home (even with Canada’s historically low rates and easy access to credit), house prices hit a ceiling and then a price correction takes place. This has happened in many cities/countries throughout the world and now it’s Victoria’s turn.
Victoria’s housing market remains extremely overvalued. House values are far above the level where incomes and rents can provide price support. House values in Victoria will continue to fall until this support level is reached and that will require a major, multi-year price correction (in addition to the 10-15% correction that has already taken place).
Similar incomes in Canada and the US should mean similar house prices (historically this had been the case until 2006), but Canada’s housing bubble was blown bigger after 2006 while the US housing market began its major correction (2006 to 2012).
House values in Nashville, Tennessee are close to being supported by incomes and rents, as is the case in most US markets. Let’s take a look at house prices in Nashville. Note that the estimated values of these houses are listed below and that the asking prices may be higher and unrealistic.
House criteria:
* min. 3 bed, 2 bath
* min. 1800 sq. ft. of above ground primary (main) living space
* 2004 or newer
* attached double garage
In Victoria, a house like this would probably cost $700 K or more.
In Nashville, the combined value of these 5 houses (that fit the above criteria) is about $695 K.
$ 115 K ( 3 beds, 2 baths, 1,895 sq. ft.)
$ 124 K ( 3 beds, 2.5 baths, 2,124 sq. ft.)
$ 147 K ( 4 beds, 3 baths, 2,358 sq. ft.)
$ 154 K ( 3 beds, 3 baths, 1,811 sq. ft.)
$ 155 K ( 3 beds, 3.5 baths, 2,004 sq. ft.)
Girls and guys, buying a house in Victoria at a time when Victoria’s housing market is in a major bubble is a bad idea. Millions of American families bought houses at near-peak prices and millions of these families continue to face severe economic stress as a result. There will be a much better time to buy a house in Victoria. Wait for prices to fall a lot more before you buy. Don’t take the (buy now!) advice of those who earn a living form the sale of houses. It would be a huge mistake and you would regret it later. You will have the opportunity to be an owner before too long. Buying after prices have fallen a lot more will allow you to look forward to the value of your house appreciating, not dropping substantially after you buy it.
Renting for now is a no-brainer.
Until next time – Cheers!
” Four years later prices were down 28%.” – Garth
———————————————————-
And twenty three years after that prices are up 400%.
oh man!! if only can i find propty too levrage all savings whitch I could never even have dremt of owning house, not even condo…or cabin rental for all that matters!! Maybe prices go waaay down, then can buy.
Yes, Sobey’s… Time to clean up, 50 stores:
http://www.cbc.ca/news/business/sobeys-closing-50-stores-across-canada-1.2688366
90+ pages on the blended payments yet every other section is overshadowed… that says a lot considering the mentality today.
Is it me, or does taking a HELOC mean that you have not properly allocated your money?
Word to the wise: In the late 80s we bought a cottage at the height of the market and sold it in a downturn in the late 90s. Lost $70,000 if you include the improvements we made, which included fixing the interior to make it four-season and adding a septic system and well. Still, we were glad to get rid of the commute over the top of Toronto to get there. Rent a cottage, don’t buy.
It is far more dangerous for a home borrower when interest rates rise, than for someone looking to invest in Bonds. (As Canadians have adjustable rate mortgages).
That said, if you own bonds, or a bond fund, and interest rates rise, your bonds lose value, the longer the duration (length of time until maturity) the larger the loss. As the bonds mature and are replaced with higher yielding bonds your values recover.
I am not a particular lover of bonds, at least no long term bonds at this time. I hold some short & intermediate term bonds but, mainly for balance against stock & REIT holdings not because they add a heck of a lot to the mix.
While interest rates are unusually low right now, how many Canadians holding an adjustable rate mortgage (renewable 2-3-5 yr term) are working to pre-pay principal to offset rate rises at renewal?
To me, that would be a big key to keeping your life in balance., educate this dumb American.
#9 LH on 06.26.14 at 6:59pm
Even the US Fed is saying rates will go up.
http://www.zerohedge.com/news/2014-06-26/stocks-slip-dovish-bullards-hawkish-tone
I’ll listen to the fed instead of you
Mr. R.
Re: #5 Fish a little on 06.26.14 at 6:47 pm
The future will likely be a mixture of the great depression part 2 and the dark ages part 2. Interest rates will likely drop and trough for the next 10 to 20 years.
Great blogging today & thanks Garth .
So yesterday was the Squamish developer gone into full bankruptcy.
Today, investors lose nearly $370,000,000 ( yes 300 & 70 million$) an ambitious Victoria based “League Assets Group . C/O Vancouver sun paper June 26,2014. $279 million dollars is completely unrecoverable ! As for the rest, stay tuned if that happens. Wonder what the salaries were there?
But, but, it’s sooo different over there in Victoria ! Anyone doubt realestate as a risky investment….in Canada.
Regards All
This sounds like Dollar Cost Averaging in reverse! Instead making fixed purchases regularily (causing you to purchase low on average), you keep purchasing while prices go up and stop while prices go down (causing you to purchase high on average).
Your blog is so pathetic….
Houses went up so much, economy is very good….and what are you talking about….??
get and buy a house , still not to late…
And we return you now to our regular programming. — Garth
I called this press release a month in advance. The restriction on cmhc insurance for second properties introduced last month had the same influence on the market that the threat of rising rates does: anyone on the fence dives in before the deadline. I hope they report the cottage crash happening in the following months. I’m sure they’ll come up great excuses, like “Italy got bounced from the World Cup early” or “Mosquitos were really bad this year” and of course “welcome to Kathleen Wynne’s Ontario”.
#12 prairie person
If you used a loan against your home to buy a cottage on the Gulf Islands, BC, and needed to sell, you’d be in serious trouble.
——————————-
I did exactly that in 1994. That is, I took a loan against my principal residence in Vancouver to buy land in the Gulf Islands upon which I built a 1300 square foot cabin (or ‘cottage’ for you easterners).
I shudder to think the kind of risk I’d be taking if I tried to do the same today. Even in 1994 it was somewhat risky but it all worked out in the end. I sold to Albertans in 2006 and actually made money.
In hindsight, if I am honest with myself, I can see it was more a matter of dumb luck than smarts. Timing really is everything. Note: the time is not now.
Re: #16 Andrew Woburn on 06.26.14 at 7:42 pm
You’ll never see 6 percent mortgages again if only for a brief blip when the U.S. dollar loses its status as the world’s reserve currency. The middle class is growing poorer and thus the birth rate is falling in most countries. The demand for money will only continue to fall in future years.
The game is rigged.stop. Can’t see that sucker in the room? No matter if the rates stay where they are or even go lower no one will buy jaguars:
http://www.elliottwave.com/freeupdates/archives/2012/01/10/Jaguar-Inflation—A-Layman-s-Explanation-of-Government-Intervention.aspx#axzz35nQDSbRG
DELETED
(Peachland, BC) Ponderosa Peachland Development et al files for bankruptcy.
Current phase 67% SOLD!
To other people you are other people…
The beat goes on in North Nanaimo. MLS 375933 and 375946 just both sold around $550K but both currently assessed at $450K. This isn’t millenial country and no real signs of HAM so I assume it is boomers cashing out of Vancouver and Alberta. These are typically 2,500 – 3,000 sq ft 2-floor homes, not the bungalows preferred by earlier retirees.
I like the photo. She is so happy that they
own a house. He, the breadwinner, is also happy because of the great sex he gets now but as a result he starting to have a hard time breathing because he is under the water most of the time.
leveraging one asset to buy in the same asset class=Insanity. Who ever does that believes they are in the class of the rich and famous and are having delusions of grandeur. No exception.
What has helped me tremendously over the years is not only seeking financial knowledge, which is critical, but very very importantly, never acting on thoughts of either fear or greed, and never acting on a case of the wants. These are extremely dangerous.
ReMax=Extreme Danger. Do not let them think for you. No exception.
I walked away from my condo when interest rates were at 17%.
My interest rate was only 12% but it didn’t matter, that $64,000 condo I bought dropped to $25,000 and I had a $57,000 mortgage.
I went to see a lawyer about my situation and he pulled out a printed procedure to follow from his desk drawer.
You have six months without making payments, don’t answer your phone, don’t answer your door, keep the curtains closed, don’t trash the place and leave the keys on the counter when you leave.
and that’s exactly what I did.
The Leafs should move to Muskoka as well…..can cut down on the heavy real estate costs of Hogtown by playing/practicing on frozen lakes…..then they are also real close to nice golf courses/cottages when they fail to make the playoffs….
OSFI deputy Mark Zelmer blames CMHC and Banks for the coming mess ‘who may end up left holding the bag’.
http://www.cbc.ca/news/business/osfi-deputy-mark-zelmer-warns-of-housing-risks-1.2688750
Here’s what caught my attention: “highlights the increasing trend of younger, wealthier buyers investing in vacation spots as they profit from housing booms in major cities. “Families and investors have more cash to buy a second home as a booming real estate market increases the value of their residences, according Re/Max”
Who exactly are these “younger, wealthier” buyers, and really, is this increasing as much as we keep hearing? Of course not!!! And, “families and investors have more cash”??? Sorry, but they do not…they have more leverage, and this is not the same thing. People need to seriously understand money; what it is, and what it is not. And then take their collective heads out of you know where!!! Oh well, not my problem anymore. I sold my house, bought a cheap condo cash, and am saving like crazy. I sleep much better at night too.
The “market” is so varied, it is hard to make general statements. it is not just that it is varied among regions but there are strange anomalies locally. A condo development sold out in hours not too long ago; a newer condo has not sold a single unit. All are rented. That’s extreme. Prices haven’t dropped. The units are all owned by the developer who is waiting for things to pick up again. It was supposed to be a slam dunk, a home run, a quick profit. So far this summer, the weekend weather has been dreadful. Empty streets in a resort town. Impossible to tell if people are cutting back on spending when rain and wind instead of sunshine leave places empty. Retail may get murdered. The big chains are cutting back (Sobey’s, Best Buy, etc.). If they can’t make a buck what of the small independents? Mortgages, gas prices, grocery prices. Doesn’t leave much to spend. How many 60″ TVs is Future Shop selling? How much groceries was Sobey’s not selling? By this fall there could be a change in mood.
Looks like Poloz is worried about US bond yields.
Read the report not meant for consumers who watch the 6 o’clock news.
Financial System Review , June 2014 by Poloz et al.
http://www.bankofcanada.ca/wp-content/uploads/2014/06/fsr-june2014.pdf?utm_content=buffer17f7b&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
#38 Brainsail ; you nailed it. The poor schmuck is going under.
For those that tried to click the link in today’s blog post about the “34 glossy page” report and which got an error message; here’s the link: http://stream1.newswire.ca/media/2014/06/25/20140625_C8642_DOC_EN_41713.pdf
Oops. — Garth
As someone who drives all around the Muskoka/Parry Sound region with his job I am shocked at how many “For Sale Signs” there are and how few “Sold” signs there are. Houses languish on the market in this region. One of the reasons why I have been hesitant to buy a home that is located on a lake is because in my opinion, allot of these cottages are owned by extremely heavily leveraged middle class families. Guess what will go first when crunch time comes? That’s right, cottages galore would flood the market in my opinion.
Dear Pathetic Blog ; since you are reminiscing about the days of yore when men were men and women became house horny at +18% mortgages. I bought our first home for $48K in ’83 south of Calgary @ 19.5% interest VAR from our friendly small town credit union. I needed 25% down because I could not insure it with CMHC because it was a very old home. It was ’94 when rates were 14% that I signed up for a 10 year term. Ah those were the days. Those rates sure put a damper on home prices.
Garth, would you consider sometime, a segment about how to make a will that will be properly executed. My mother, now 94, recently made one with what I think is an ambulance chasing lawyer at a senior citizen’s center for a $100. Problem is that I live in the US and my brother lives in Australia. There are many tax implications.
I am about to receive an inheritance from a relative and had a conversation with the attorney and she said “I don’t make a lot of money doing wills but I sure make a lot money from wills that were improperly made’.”
Want to see a chart that will blow your socks off:
‘222 Years Of Long-Term Interest Rates’
( Go to page #3 and see interest rates from 1790 until 2012. )
http://media01.commpartners.com/CFA_Chicago/resources/Presentation011812.pdf
Congrats, Ian and Marilyn! Take the money and run, maybe leave a bouquet of flowers and a bottle of wine for the Millennials who have so handsomely funded your retirement by buying your house.
I wonder what calamities would have to take place (or be threatened) to drive interest rates near that high again. Here’s hoping we can continue to use our imaginations and never have to actually find out.
#31 Mister Obvious on 06.26.14 at 8:47 pm
#12 prairie person
If you used a loan against your home to buy a cottage on the Gulf Islands, BC, and needed to sell, you’d be in serious trouble.
——————————-
In hindsight, if I am honest with myself, I can see it was more a matter of dumb luck than smarts. Timing really is everything. Note: the time is not now.
===========================
Depends. We have beachfront on a popular Gulf island not served by BC Ferries. We have been told by local realtors that we could get 5 or 6 times what we paid for it 25 years ago. Activity was very slow from 2008 until last year but sales are now happening. However the realtors say that cheaper lots in the wooded interior are hard to sell and may decrease in value. They also say that the major market for the pricier properties is Vancouver, not Alberta.
That said, I would never mortgage my principal residence to buy a vacation property that is usually highly illiquid. Use your equity to buy dividends which can rent you a cottage/cabin.
“Re/Max fabricates it. The Globe repeats it. Must be true.”
Churchill was the Master of that trick. From the book ‘Churchill’s War’:
Churchill had perfected a propaganda method that might be called the Circle Line. He would declare that the Germans had spent a staggering £800 million on arms during 1935. (Hitler had set aside approximately that amount in 1935 for all three armed services including armaments and the SA: after all, their cupboard was bare. His defence budget for 1936 would be smaller.) The figure would be reported by the Morning Post, in this case on June 25. An unexpected bonus would be that Neville Chamberlain, chancellor of the exchequer, publicly agreed. Less unexpected was that Ralph Wigram at the F.O. also minuted agreement: ‘The information in our possession, which generally coincides with that given by Mr Churchill and the Morning Post, shows that in 1935 the Germans spent on armaments . . . about £800 million; and are likely to spend as much, if not more, this year.’20
On July 20, speaking to the House, Mr Churchill would cynically include both the newspaper and Mr Chamberlain as authorities for his £800 million figure. Thus his figure completed its circular trip and nobody spotted the sleight of hand.
#22 R
Depends. HELOC draws on equity, which otherwise just sits there. Or rather earns you whatever you’re saving in rent, minus taxes and expenses, which today means you’re getting 1-2%, if you’re lucky. It helps alleviate the “one asset strategy” problem, but at the cost of leverage. HELOC is not like cash from an ATM, it’s a loan, and costs interest.
Another reason high house prices are a drag on economy. Would you rather have tons of equity and a money sucking HELOC, or have that money free and clear, saved and invested?
God help you if you’re HELOCing for consumption.
Garth ,I don’t know which “all nude beaches” you go to but I find it interesting that your next line of thought was”take it in the rear”.Good times!
RE: #27 Spectacle on 06.26.14 at 8:32 pm
Today, investors lose nearly $370,000,000 ( yes 300 & 70 million$) an ambitious Victoria based “League Assets Group . C/O Vancouver sun paper June 26,2014. $279 million dollars is completely unrecoverable ! As for the rest, stay tuned if that happens. Wonder what the salaries were there?
You can read all the details here:
http://www.pwc.com/en_CA/CA/car/leagueassets/assets/leagueassets-264_062414.pdf
You can see just how screwed most League investors are in detail starting on page 98.
On page 49, you can see that the two founders of League were payed $5.5 million to mismanage investors money over an 8 year period.
#40 Porsche on 06.26.14 at 9:25 pm
My god, were you one of my neighbors at Grandin Village in St Albert, AB in 1982?
A lot of interesting talk about interest rates. So let’s talk about it.
For one thing, we’re at historic lows and we don’t have a lot of room to lower them. That means neither the Bank of Canada nor the government can lower the rates further. At least not to any appreciable extent. Well, unless we want to try doing what the EU is starting to do, which is explore the unknown by attempting to bring rates into the negative. Simple logic tells you that when rates start heading below zero, a lot of incentives that are at the heart of modern economic theory might not work the way you think they will. It doesn’t take an economist to wonder how the hell can capitalism survive if someone can take out a loan with a negative interest rate, when all they have to do is not pay it for long enough and it wipes itself out.
All of this however is intellectual masturbation, because the bond market speaks and it’s already begun talking, for those who care to listen.
Tell me Garth, has there ever been a time of deflation and rising interest rates both at the same time? No? Oh, my… this is going to be interesting.
#59 brainsail
My god, were you one of my neighbors at Grandin Village in St Albert, AB in 1982?
……………………………………………………………………….
I was in Millwoods
#31 Smoking Man on 06.25.14 at 8:51 pm — “Is the world ready for an in edited Smoking Man? [Stop it. Right. Now. — Garth]
— add —
#51 Nemesis on 06.25.14 at 10:19 pm — “#Synopsis:AfterTheTalkingPenisPrologue.
— multiplied by —
#29 jim on 06.26.14 at 8:43 pm — “. . . economy is very good…get and buy a house . . . [And we return you now to our regular programming. — Garth]”
Which culminates in a grand total of The Penis Song, a variation of The Gong Show.
#20 Andrewski on 06.26.14 at 7:47 pm — “Yes, Sobey’s…
Perchance, Sobeys bought a lot of Safeway stores not too long ago, and possibly the Safeway stores will go first. Plus Whole Foods gouging.
Day off from the WC tomorrow, but the game is far better since the ball was re-designed. I’ll have to think of something else to do for a day.
China Bank Syndrome, Mark Carney in action, ISIL — CIA-funded, Yemen — Blacked out, Austria – Russia pipeline deal, New Pop-up Solar Power Station, ZB again, ISIS + NATO and Fracking = ‘Quakes.
why you want higher interest rates?????!!!!!!!!!!!!!!!!!!!!!
answer this one….please
#61 Porsche on 06.26.14 at 10:39 pm
Wow, we share the same story!
A lot of readers of this blog have not experienced an economic shift like we did. We have done well after several changes but looking back we would never live in a place that did not have a diversified economy.
“why you want higher interest rates?????!!!!!!!!!!!!!!!!!!!!!
answer this one….please”
Its not a matter of ‘want’. Interest rates, and more importantly, risk premia as applicable to individual asset classes that comprise the universe of lending, are indications of the optimism, or alternatively, the pessimism of investors as to repayment of a loan.
For instance, you can borrow to buy a house at 2.5%. BCE borrows at 3.5% to fund their telecom/media business. Someone borrowing from a credit card putting nothing down probably is charged 19.9%.
What these interest rates tell us is that investors feel that housing is a better bet than Canada’s largest telephone operator. And that credit card borrowers of all sorts are deadbeats.
They’re right, to an extent. The thing is, opinions, like the times, change. Even if the BoC leaves the policy target rate at 1%, investors could wake up tomorrow and decide that houses are just as risky as credit cards, and start charging a high rate. They could decide that Canada needs to re-capitalize its telephony networks, and thus lend BCE funds at cheaper than 3.5%. All of this against the backdrop of the BoC keeping its policy rate at 1%, or even lowering it in response to domestic deflation.
So those who think that ‘interest rates’ are just ‘interest rates’, they only are looking at half the picture. As assets peak (which Canada’s housing market clearly did last year), and go into decline (which has been the case for housing in most of Canada over the past year), the desire to lend decreases. CMHC subprime mortgage insurance has been tightened and will continue to tighten, the result of a feedback loop of deteriorating valuations, and higher demand for CMHC subprime insurance. Which will in turn force housing valuations down even more. Many markets will revert to 1-1.5X median household income. One thing is for certain, Canadians who have over-leveraged themselves into one asset class are going to be in for a world of financial pain.
http://www.wtsp.com/story/news/nation-now/2014/06/26/housing-americans-finance/11438809/
ozy – is this an obesity marketing blog now…
could u take that pic down, it’s down obscene
“Tell me Garth, has there ever been a time of deflation and rising interest rates both at the same time? No? Oh, my… this is going to be interesting.”
I’m not Garth, but please see my earlier post. Even in a “deflation”, interest rates as applicable to specific types of collateral can, and do change.
The Canadian economy, as a whole, is mired in deflation, with house prices falling. But certain sectors are far worse than others (like high-tech), while some are probably overheating at this point (like oil and gas).
If you’re in one of those overheated sectors (which includes housing), then you rates may rise, while rates in those under-performing out of favour sectors may very well fall quite substantially.
The problem for most Canadian “consumers” is that they’re heavily exposed to the sort of lending that has been abnormally inexpensive over the past decade. So while the broader economy deflates, and while policy rates may actually fall, retail rates as applicable to not-very-credit-worthy consumers probably will rise significantly.
This happened in the 1930s, BTW, when farmers and “consumers” couldn’t obtain credit, after an orgy of credit expansion in the 1920s. While certain sectors that were out of favour (gold mining for example), and other “risk-free” assets (ie: government bonds) saw their rates fall to very low levels
They had a remax guy on cknw several days ago. Trumpeting a 4% increase in price.
His first paragraph was, since 2010 the price fell 10 to 15%. Now were seeing a rebound. And he expects it to keep on rising.
But note, it went down by 15% and cottage homes/vacation homes are second homes and no longer supported by CMHC. Since June.
I’m sure they fabricated the number too
#32 Tony on 06.26.14 at 8:51 pm
You’ll never see 6 percent mortgages again if only for a brief blip when the U.S. dollar loses its status as the world’s reserve currency. The middle class is growing poorer and thus the birth rate is falling in most countries. The demand for money will only continue to fall in future years.
===============================
How will the U.S. dollar loses its status as the world’s reserve currency and what will replace it?
A reserve currency is one that is held as a safe asset by central banks and is used as an international trade currency. On average the USD amounts to about 60% of global central bank reserves and is used as the reference currency in 80-85% of international trade. Its dominant status depends mainly on its stability relative to other currencies. There is no reason for foreigners to trade with each other in USD other than they can be reasonably confident that the contract value in USD will not change much from signing to payment. They can choose to hold their cash received in the world’s most liquid and stable currency. This is why Russian oil is sold to India in USD, not because they especially like America.
It can be expected that as China grows its trade, the yuan will rise as a reserve currency and the USD could drop to 50% of trade and 30% of bank reserves. The notion that it will suddenly crash and be dropped as one of the major reserve currencies is not credible.
I suspect a lot of the hype about the coming USD crash originates on gold bug websites. The theory seems to be that foreigners will refuse to use USD because of America’s debts. This overlooks the fact that China, Japan and Europe are in worse shape and have far less resilient economies.
China and Japan have huge USD foreign currency reserves. They did not accumulated them for investment purposes but to suppress the exchange value of their own currencies v. the USD. If they tried to supplant the USD in a hurry, they would only blow up their own economies.
#60 Not an economist on 06.26.14 at 10:32 pm
A lot of interesting talk about interest rates. So let’s talk about it.
=============
Great topic. If the rates are negative, a person can borrow infinite $$ and move the cash to something that can make interest.
For savers, your money will eventually go to zero so if rates are -1 most likely you will be losing -3 percent. So why keep your money in the bank. Gold sure looks good at this stage.
So a run on the banks to empty all account will occur, a run on the banks can occur and most likely the currency value will drop, So empty your account an invest in another currency.
And that is why interest rates cannot go negative for long.
Hmm what happens in Vegas stays in Vegas.
#blogdogCarney
Despite what REMAX says, today the Office of the Superintendant of Financial Insitutions was warning the banks that they should be careful about who they are lending to, because in the event of a downturn, they (the banks) could be left “holding the bag.”
http://www.cbc.ca/news/business/osfi-deputy-mark-zelmer-warns-of-housing-risks-1.2688750
#63: Jim.
Personally I’d LOVE for us to go back to interest rates of 10% or higher!
Imagine that, getting 10% back on your SAVINGS without the risk of investing!
Sounds bloody brilliant to me!
I too have a mortgage tables book and it is dated 1978. The lowest rate is 8%! The highest rate is 24%.
@#38 brainsail
———————————————————————–
I dunno. To me she looks like most women 3 or 4 years into their marriage.
#129 maxx
No, spoken like someone who know what they are talking about. $360 a year on $30k is a pittance. $360 you find laying on the street is a lot of money, as a 1% return on your money it’s terrible.
It seemed like a lot of money to the kid, because to him it is. The $30k was not his and he can’t touch it. But that’s what happens when you’re playing with other people’s money or suddenly come into an inheritance or a large gift.
It’s simple. Rates won’t be 6%, which is nothing more than a guess by you. You think you know more than the Fed and BoC? Look at the 10yr and 30yr rates. Everyone guessed it would be higher this year and were all dead wrong.
Think the house as an utility and not and investment. We are good.
With interest rates so low, there’s no wonder that the media continues to have stories of people paying off their mortgages while still in their 40s and 30s.
Don’t be jealous. Be congratulatory. Hate is bad for your soul. haha
All the real estate bears on RFD have been banned or left in disgrace. The bear threads are years old and contain the funniest posts 5 years later. People reading this blog should really visit the site and read some of the old posts. It’ll make them laugh and heaven knows everybody needs a good laugh now and then ;)
#63 jim on 06.26.14 at 10:47 pm
why you want higher interest rates?????!!!!!!!!!!!!!!!!!!!!!
answer this one….please
Why?
People waiting on the sidelines to buy a house are hoping that rising interest rates will make mortgage serviceability more difficult and hence will trigger a reduction in house prices. However, based on modern monetary economics, rate rises would accompany low unemployment and increased wage growth, thereby allowing households to cater to higher borrowing costs.
Savers with interest bearing savings accounts are hoping higher rates will allow them to outpace inflation. However any interest rate based on the overnight rate will be reactionary to inflation, meaning that the faster rates rise the faster the purchasing power of their savings is eroded by inflation.
According to monetary economics, rising economic productivity and low unemployment are signals to increase the cost of money to keep inflation within the defined target range. Although inflation is evident in consumer prices today, central banks view inflation as a function of economic growth and employment. Therefore they will aim to keep the cost of money (interest rates) low until the slack in economic productivity and unemployment is reduced and sustainability is evident.
Why 6%? I don’t know why this number is considered a normal rate of interest. In the short term, given current economic conditions, I think Canada is likely to see a drop in the overnight rate before any subsequent rises.
why dont people simply drive down 3 hours from toronto south instead of north and buy a nice place on the lake in upstate new york or into PA. for say $100grand.
Instead all ships rise in a rising market, all rising real estate prices in Canada lift the garbage properties in the middle of nowhere with no amenities. There are thousands of lakes around, they are basically all the same, the whole area from muskoka down to tennessee is very nice in the summer.
Garth is right not only on the borrow against an appreciated asset to buy more of the same asset. If you want to do it, make sure its not six figures. You can get a nice place for sixty grand. Old school numbers, not these crazy prices people in Ontario pay for junk.
Had a friend sold a shack, ya its a shack, for $245,000. last year, no hydro no water. That is my shed, other than it being bigger than my shed, I have no idea why anyone would pay top dollar to live near the water. If you want, do it on the cheap. Ya there not building more beachfront property, so buy it cheaper on a lake 3 hours south then north. Simple.
Morning news from London… MARK learned his lesson in Canada
Too many Canadians own properties without a mortgage and those with a bloated mortgage are defaulting at a rate around 0.3%. Don’t get me started on the bloated incomes so many people have… It’ll require more than a rate increase to cause a correction.
US experience showed it takes only a small minority of over-extended people to precipitate a general decline in house prices. The rationalization on this blog is starting to amuse. — Garth
As I indicated earlier:
http://www.bbc.co.uk/news/business-28053045
News flash: Canada is not Britain. I’m watching the Fed, not the BoE. — Garth
Garth,
Please post more on investing, i.e, when might be a good time to load up on ETFs, reits, bonds again, etc. Thanks.
http://finance.yahoo.com/news/china-builds-own-manhattan-except-093125506.html
@82: actually if you are willing to go north of toronto and out of york region prices seem to drop dramatically if you don’t want to buy brand new. Of course then you have to learn to live with tornados, colder winters, and a lot more snow.
What frightens me is that I work with people who assess all kinds of complex insurance and financial investment risks for a living (and some of them are quite good at it) and yet the moment you mention house buying all the training and logic go out the window. I just don’t get it.
News flash: Canada is not Britain. I’m watching the Fed, not the BoE. — Garth
The BOC, BOE, BOJ, ECB and the Fed have been taking coordinated central bank action since 2011. Watching the Fed is not going to make any difference.
‘Coordinated’ means the Fed calls the shots. The others are merely interesting. — Garth
Paying Off Mortgages? Good Luck With That!
Cha Ching at 79 says:
With interest rates so low, there’s no wonder that the media continues to have stories of people paying off their mortgages while still in their 40s and 30s.
****************************************
I have not seen the stories but yes I congratulate those who do it.
But keep in mind a mortgage at 1.5 times income at 10% interest was a LOT easier to pay off and there was WAY more incentive to do so as compared to a mortgage at 4 times income and 3% interest.
I have long said that today’s jumbo mortgages are almost immune to getting paid off early.
When rates were high and mortgages were no more than 1.5 times income, a 10% bonus in salary or 10% saved took a big chunk off your mortgage. (6.7% lopped off if the mortgage was brand new, more as it got paid down)
If the kids today take a mortgage at 4 times income and 3% interest and then save 10% of their income, and pay that on the mortgage it amounts to just 2.5% paid off. So it hardly puts a dent in the mortgage and yet it is immensely hard to save that 10% while paying a mortgage and so VERY few people will quickly pay down today’s jumbo style mortgages. (Which is maybe why it would be a news story if it happened.)
But yes, congratulations to those who can do it.
USDCAD 1.0687
Off 6 cents my call in March to reverse..
Poloz, now here is bastard between a rock and a hard place.
Let it appreciate, kill exports and job, talking dollar down CAD hard when the US GDP in the toilet…
Time for a rate cut……
I guess I can toss my Little Blue Book now. Nicely bound, well presented, but absolutely no useful information in it.
Even the pension plan financial adviser at my work finally said the same thing that Garth has all along. Real estate in Canada is in a bubble and be wary of a drop.
BEIJING, June 27 (Reuters) – Sales of new homes in China dropped 23 percent in the first six months of 2014 from a year ago, a private survey showed on Friday, underlining a sustained downturn in the housing market after a weak start to the year.
http://finance.yahoo.com/news/chinas-home-sales-fell-23-084639298.html
#91 Smoking Man on 06.27.14 at 9:33 am
USDCAD 1.0687
Off 6 cents my call in March to reverse..
Poloz, now here is bastard between a rock and a hard place.
Let it appreciate, kill exports and job, talking dollar down CAD hard when the US GDP in the toilet…
Time for a rate cut……
……………………………………………………………………..
Smoking Man just returned from business in New York city, US is still in the toilet, you are correct but its not only the people its the financials. They are trying to figure out how to screw everyone out of their cash. Bad idea as they are shooting themselves in the foot. Don’t do anything to hurt yourself, don’t be your own worst enemy, don’t act against your own interest, etc. Canada always reacts to USA, when they shit we wipe their ass, when they win, we jump onto their float in the parade. We need to not react here but to be proactive in steering our own monetary policies.
Hey shift happens guy. Is this you?
http://www.youtube.com/watch?v=1gYE5TyijxE
#93 Dupcheck on 06.27.14 at 9:53 amEven the pension plan financial adviser at my work finally said the same thing that Garth has all along. Real estate in Canada is in a bubble and be wary of a drop
……
Oh, the same guys that missed the market meltdown in 2008/2009
You people give far to much credit and trust to masters of obedience certificates when under your noses, a few clicks away, all mysteries of the world, and markets solved…
‘Shouldering the massive shortsighted glut of another brought about by greed and selfishness is manageable as long as you can keep your head above water.’ ~ Fully nested (nestled) husband 2014.
“Great topic. If the rates are negative, a person can borrow infinite $$ and move the cash to something that can make interest. “
Policy rates can go negative, but “retail” rates, rates that actual people can borrow at (not just mega-banks placing T-bills as collateral for overnight repos) probably won’t. A negative rate environment would be typically associated with a higher risk of default, hence, real lenders, and not just central banks, may very well want higher than a zero rate of interest. Actually, its pretty much a certainty, as obviously nobody other than a central bank engaging in policy action would actually bother to lend for less than 0% (they’d simply let the cash pile up in their vaults!).
As for the comment that rate cuts are needed at the BoC, couldn’t agree more. Canada being in a housing-driven deflationary environment has been quite evident over the past year and the BoC is likely now behind the curve in engaging in stimulatory policy action.
Do not expect housing price going down…..
As long as jobs will be there the price will stay for ever!!!
Whoever wanted to find a relief at this blog is in state of delusion!!!!!!
“Well there ya go. Re/Max fabricates it. The Globe repeats it. Must be true.”
The same logic applies to all other financial sector claims.
#74 – Blobby
”Imagine that, getting 10% back on your SAVINGS without the risk of investing!
Sounds bloody brilliant to me!”
Yes, but your house would be worth a third of what it is now.
Another sign of the apocalypse. I still can’t believe how things worth hundred of thousands of dollars “sell out” in a matter of minutes. This happened last Saturday in Burnaby:
FIRST BRENTWOOD TOWER’S 247 UNITS SELLS OUT IN UNDER 5 HOURS, BUYERS CAMP OUT FOR 3 DAYS
http://www.vancitybuzz.com/2014/06/brentwood-tower-sells-out-buyers-camp-three-days/
#60 Not an economist on 06.26.14 at 10:32 pm
“…has there ever been a time of deflation and rising interest rates both at the same time?”
During 2008/2009 yields spiked higher as bonds were dumped along with most other assets. Only Gov’t bonds rallied.
It all depends on the level of confidence and trust in the financial system. If the crisis is serious enough, yields can spike during a deflationary period.
“All the real estate bears on RFD have been banned or left in disgrace. The bear threads are years old and contain the funniest posts 5 years later. People reading this blog should really visit the site and read some of the old posts. It’ll make them laugh and heaven knows everybody needs a good laugh now and then ;)”
Yeah its rather amusing that only a bunch of liars and crooks are left on the RFD forum. Some of the highest quality resources on the entire forum were basically trolled out of existence. One poster in particular, someone with my same namesake, predicted a fairly significant reversal from the declining Canadian dollar, to quite a strong one. Turns out he was right on the money, although the sort flack he received simply for looking at the CoT reports and coming to such a conclusion was quite epic.
Yet another person trolled the same individual over the definition of a ‘capital gains reserve’, and continues to troll with incorrect and misleading advice.
Canadian RE is now in unmistakeable decline, so if you go back that 5 years, where such was predicted, probably coincident with a credit event (ie: CMHC subprime mortgage insurance being withdrawn), the predictions made were right on the money.
#100 JOe on 06.27.14 at 12:29 pm
“Do not expect housing price going down…..
As long as jobs will be there the price will stay for ever!!!”
House prices drifted lower during most of the 90’s while interest rates and unemployment were falling and the economy was booming.
” Don’t get me started on the bloated incomes so many people have… It’ll require more than a rate increase to cause a correction.”
Most “bloated incomes” are significantly correlated to RE, so as RE continues to slow down, those “bloated incomes” also become significantly un-bloated.
As for RE prices, they’re in decline and have been for the past year. Without “rate increases”. So nice theory, but it doesn’t match with real life.
If people want to talk about interest rates they really need to talk about the “real” interest rate:
Real Interest Rate = Nominal Interest Rate – Inflation
An interesting article on this here:
http://www.morningstar.com/cover/videocenter.aspx?id=652188
The guy does ramble on a bit, so you can skip the first 3rd of it.
I talk with dozens of people a week in my job. NOBODY thinks rates aren’t going to rise in the future. NOBODY! There is disagreement about the timing, and the amount of the coming increases, but everybody thinks rates will go up. Who the hell is Garth talking about when he says that nobody thinks rates are rising? Show us some polls that support that Garth if you’re going to make wild declarations.
I guess everyone who think rates will never increase hang out here. — Garth
“Imagine that, getting 10% back on your SAVINGS without the risk of investing!”
Actually that’s quite a horrifying proposition. As in order for the ‘savings’ rate to be 10%, inflation would probably have to be 8%.
If you figure a 35% tax rate, and the alternative being a 3% interest rate environment with 1% inflation (similar to what we have today), this is how it sakes out:
Real after-tax return @ 10% = 10% * (1-35%) – 8% = -1.5%/annum
Real after-tax return @ 3% = 3% * (1-35%) – 1% = 0.95%/annum
Basically put, if you look at the math, savers have never had it better. Seniors as well, benefit not only from low interest rates and low inflation, but they also benefit from very large government spending programs, such as OAS, and medicare, that are funded through cheap government borrowing. And if that’s not enough, the low interest rate allows “seniors” to sell their existing interest rate sensitive assets for top dollar.
“There is disagreement about the timing, and the amount of the coming increases, but everybody thinks rates will go up. “
There’s two components of “rates”.
Policy Rates, sometimes called “benchmarks”. These are set (or manipulated) by central bankers.
Risk premiums/spreads, sometimes referred to as “retail rates”. This is how much above the policy rates that a given loan will cost.
The evidence is that spreads for household, consumer borrowing have been abnormally low. A corollary to this fact is that rates on other sorts of loans, such as business loans and investment loans, have been abnormally high.
As we go forward, the BoC could very well keep itself on hold for a while, or maybe even drop the policy rate. But the rates as applicable to your mortgage may very well rise. While business rates drop, so as to actually start the machinery of the Canadian economy outside of the RE sector back up again.
The more one understands these mechanics, the better. The BoC has little to no ability to ‘save’ a particular asset class from price destruction once it goes into overcapacity, and evidence is significant this has been happening in Canadian RE for the past year.
Leamington ont. 25k pop . Heinz work force 750 full time employees , 500~ seasonal . Shut down after 100 + years . Moving production to the states . Nafta at work ? So sad for leamington . On the other hand Heinz products are mostly sugar and I never eat any of them .
#110 Mark on 06.27.14 at 1:45 pm
Risk-free saving account rates are right now mostly around 1.3%, slightly higher if you pick a smaller credit union or such. Inflation is at LEAST 2% lately, if you factor in fuel and food, I’m thinking it is higher. I don’t agree with your 3% risk free saver interest rates and 1% inflation figures. You’ve got it backwards.
http://business.financialpost.com/2014/06/20/canada-inflation-forget-about-gas-bacon-prices-have-gone-parabolic/
#110 Mark
”And if that’s not enough, the low interest rate allows “seniors” to sell their existing interest rate sensitive assets for top dollar.”
Absolutely. And this will no doubt prove to have been the best time for those boomers and their parents who are now retired to have cashed in their lottery tickets (their overpriced homes). The thing that I hear more and more from those in my age group (over 65), is that they are ready to get out of the big house with all the time consuming chores and maintenance, and move into something much smaller, preferably within walking distance to downtown, but not necessarily a condo.
RE:#110 Mark on 06.27.14 at 1:45 pm
Basically put, if you look at the math, savers have never had it better.
I think that should read:
Basically put, if you manipulate the math, savers have never had it better.
Huh had a cottage many years ago, sold it for a small fortune. Loved the cottage, hatted the drive through the heart of Toronto out east. Everybody nearly crapped when I told them that I bought a boat. Bad investment and such. Sitting on the boat now in Oakville harbour, blue sky, gentle breeze, just came back from a 3 hour sail. Steak is on the barbie, beer in the hatch, good old rock and roll tunes playing, staying on the boat overnight and going to do it again tomorrow. I can walk to my boat from my home!
Bad investment my ass, now this is living!!!!!!!!!!!!!!!
And you’re reading this pathetic blog? — Garth
I know this is from MSN but the CAD is whacked,
http://money.ca.msn.com/investing/news/business-news/loonie-rises-amid-us-economic-concerns
51% of Canadians and 73% of Albertans think houses will keep rising 8% a year because??? … if they don’t they are royally screwed. They have no idea how the system works and all the shaky intangibles in play to get Canada’s RE where it is today. They have buried themselves in debt and set up the next 20 or 30 years of their financial lives (and their families financial lives) to variables they have no control over. Variables that can only go one way … to the worse.
“Risk-free saving account rates are right now mostly around 1.3%, slightly higher if you pick a smaller credit union or such. Inflation is at LEAST 2%”
Inflation is nowhere near 2% (closer to 1%, if even), and its not that hard to get a 3% 5-year GIC these days. But anyways, the point was, high rates are not automatically some sort of magic panacea for savers, as the real after-tax return may very well be substantially negative.
Basically put, if you manipulate the math, savers have never had it better.
Where’s the manipulation? Are you calling CPI a lie?
“I know this is from MSN but the CAD is whacked,”
What’s “whacked” about it? The evidence was fairly clear that the recent declines in the CAD$ were driven mostly by speculators. Housing going down and domestic deflation is very positive for the CAD$. High oil prices are supportive of the CAD$. Gold is ramping higher which is also CAD$ positive.
As I’ve probably written to the comments on this blog a few dozen times, the BoC is likely way behind the curve in lowering policy rates to reflect the reality of the deflationary Canadian economy and the strong currency that such brings. Canada is going to lose the worldwide currency wars, but a “loss” will not exactly be bad for us. Unless you’re involved in manufacturing, of course.
RE #119 Mark on 06.27.14 at 3:25 pm
Basically put, if you manipulate the math, savers have never had it better.
Where’s the manipulation? Are you calling CPI a lie?
I, and many others, do not agree with the numbers you’ve plugged into your formulas. Hence I do not believe the conclusions you’ve drawn about savers being better off today.
The CPI today is at 2.3% and not 1% as you claim:
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/cpis01a-eng.htm
Mark, if you play around with this graph:
http://www.tradingeconomics.com/canada/real-interest-rate-percent-wb-data.html
You’ll see that it hasn’t been this bad for savers since the mid 1970’s
Those rates weren’t *that* long ago. In ’99 we bought our first place, a bungalow just outside Halifax. For $75,000. Interest rate was 8.25 Sold the next year for $86k.
Won’t happen here in YYC for the next two years, but it’ll happen, I’m sure.
Through its effective psychological manipulation tactics, the Ontario Liberal Party destroys all sense of independence and individuality.
Everyone thinks the same mangina ideas, eats the same GMO foods, and lives in the same grungy expensive apartments and condominiums.
Life is uniform and orderly. No one can stand out, and no one can be unique.
To have an independent thought in Ontario borders on the side of a thought criminal.
For this reason, writing such as Tim Hudak’s claims of Wynnes allegations in real estate scandals and gasplant scandals have been outlawed.
Ontario people are only permitted to think what the Ontario Liberal Party tells them to think, which leads to what Syme refers to as “duckspeak.”
Independent thought can be dangerous, as it might lead to rebellion against the Ontario Liberal mafia.
Ontario Liberals society presents a clear dichotomy in living conditions.
The small segment of public sector union cronies live luxuriously, with servants and lush, well-furnished villas using taxpayers monies.
Party members, on the other hand, live in run-down single-room apartments with no amenities, and are fed the hope that one day they will reach great heights.
The rest of working class Ontarians live in absolute poverty. The chasm between poverty and wealth Tim Hudak’s political campaign is striking, and is most noticeable during Mike Harris forays into prole society. The buildings the working classes live in are decaying, and the city of Toronto is filled dilapidated glass condos and wealthy overpaid public sector cougars. While Kathleen Wynnes union cronies comforts themselves with luxury, the citizens of Canada suffer, getting by with the bare minimum in a housing bubble city called Toronto.
You had me at “lush, well-furnished villas”. — Garth
#70 Andrew Woburn
You could not be more wrong.
BRICS and Europe are the future engines of the global economy.
Norway alone has 1 trillion in reserves.
Germany has 10 trillion euros in savings.
Euro will go much higher.
USD will be weaker because of it’s reserve currency status which is clearly on decline.
US is 21 % of the global economy, projected to go down to 15-16 while dollar reserves are around 60 % of the bank reserves, clearly some decline is reasonable.
Note that this is without accounting for the structural deficits that they are running.
It would not be extraordinary for the USD to lose anywhere from 30 to 75 % of it’s purchasing power in relatively short time frame.
If you hold dollars only you could be devastated.
I think all the sane people left town an hour ago. — Garth
This blog is absolute absurd…………
not connected to present reality.
The reality is that Canadian Economy is in pristine health and housing market is the direct effect of great economy!!!!!
The absurd of overheated RE market is invention of the author of this blog!!!!
This is the tenth such post today, most of which I have deleted, all stating the same thing. This is your epitaph. — Garth
#125 Sheane Wallace on 06.27.14 at 5:04 pm
“USD will be weaker because of it’s reserve currency status which is clearly on decline.”
As long as oil and other commodities are priced in US dollars, there will always be demand for USD.
Unless and until another payment system outside of the US dollar becomes widespread, the US will enjoy an advantage that no other country has because it controls the world’s premier reserve currency.
That is why countries who want to hurt the US are always trying to come up with some other payment system (Russia, Iran, etc.).
I’m not saying that the US hasn’t been abusing the privilege it has, but at least for now, US dollar hegemony will continue until the market forces them to change.
As John Connally (US Treasury Secretary under Nixon) said to a group of European finance ministers worried about the export of American inflation, “…the dollar is our currency, but your problem.”
#102 Ronaldo
“Yes, but your house would be worth a third of what it is now.”
I dont own a house, which means my rent will be cheaper! Win win!