Entries from May 2015 ↓

Little piggies

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So, would you stand outside for six hours, in the dark, on concrete, for the chance to get five bucks? Or maybe a thousand? Damn straight, if you’re a downtrodden #DontHave1Million Vancouver Millennial.

On Wednesday a local bank and mortgage flogger (Coast Capital) anonymously alerted the media that 300 little piggybanks full of coins and bills would be handed out the next morning, starting at 7 am.

“People are facing pretty hefty housing costs in the city and we want to give them a bit of a break – a little extra to help with other important financial goals,” the message said. “Tomorrow morning it might be $5 for their morning coffee, but it could be $100, $200 or even $1,000. We want people to start thinking about the larger picture of their financial well-being. A mortgage is a large part of that but there are other goals that set you up for success in the future and we want to help people reach those too.”

Well, the lineup started at 1 am. Chris went by and quickly saw it was a promotion for the bank’s new 2.25% variable-rate mortgage.

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“Marketing staff assured me everyone would walk away with something such as $1,000 off their mortgage, and likely other swag. I didn’t stick around long enough to find out,” he says. “From what I could see the line-up stretched 3/4 of the way around the block and contained possibly close to a thousand poor souls. Many certainly looked like they could use the money, and most appeared under 30.  It’s all a pretty sad state of affairs if you ask me.”

When the identity of the shameless self-promoters was revealed, the bank spokesguy added this: “We realized that housing costs in this city and around B.C. continue to rise, and we wanted to do something that symbolizes that people need help.”

Little piggies. Can anyone possibly find a better symbol for the delusional, house-horny, real estate-obsessed, price-swelling fanatics of YVR? Impressive. But in a sad way. Remember how we all felt so superior to Americans stampeding through public places to find caches of cash hidden in various cities last year?

Penn Park in Whittier, California suffered more than $5,000 of damages to trees, shrubs, fences, and sprinklers after more than 800 people got wind of the free money stashed in Pez containers by the creator of the @HiddenCash Twitter account, The Whittier Daily News reports.

Turns out we’re not so different, except we form nice lines when we stampede and swarm for freebies. Of course the bottom line is that yet another mortgage lender has victimized people, taking their intuitive greed and turning it into a marketing tool. In return for consuming their dignity, the company said it’s helping people.

It must suck even more than I thought, to be 30 and live in Vancouver.

Well, speaking of mortgages, CMHC just released its annual in-depth survey of borrowers, and so we have more proof that emotion, not logic, is the key motivator. The federal agency found that majority of people renewing their mortgages (60%, in fact) have actually been doing so before the term expired – which, in many cases, would mean forking over a penalty payment.

Now, why would they do that?

The main reason – “to avoid a perceived increases in rates.”

As we now know, US rates will creep up a little this autumn, then continue that trend for the foreseeable future. Canadian rates will follow, but the first change will probably not occur until some time in 2016. As mentioned yesterday, RBC thinks the Bank of Canada rate could be a point greater by the end of next year. Currently you can get a five-year floater for as little as 2%, then lock the rate up with a phone call if central bankers actually pull the trigger. However, about 80% of borrowers have now locked in to higher rates. Yes, scared.

This is why people buy stock in the banks. Did you see the profits? Those are the big piggies.


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Let’s start this post on a happy note. It comes from Michael, a thirtysomething whom I have not met, but apparently reads this pathetic blog.

“I am for one glad I listened to your advice, stayed off housing and invested heavily into ETFs, stocks with returns over 20% per year,” he says (seriously). “Now I have an amazing offer from the UN and I am moving to Copenhagen leaving all the craziness behind. I wouldn’t have been able to do this with a strangling debt. Looking forward to a richer fuller life.”

See, kids? There’s more to this life than getting a 650-foot condo, a swollen mortgage, property tax bills and elevator thumb. Besides having a landlord subsidize you – since renting is absolutely cheaper than buying – not being shackled with real estate yields freedom and mobility. You can chase a job, a dream, or a hottie and make the most of the one asset you’ll never recover. Time.

Besides, like Mike, you can use that extra cash from renting to invest and help finance those experiences. Or, you could borrow from the Bank of Mom and be obligated forever, embrace epic debt, buy property close by (so she can watch) and little by little, bit by bit, turn into your parents. Obedience. Sounds fun.

It’s a daily revelation to me how many young people want exactly that. We need more Michaels.

Okay, let’s review the latest big news. The Bank of Canada on Wednesday decided to do nothing. No change to its key rate. This is big because a bunch of people, like Capital Economics’ David Madani, have been beating the drum saying the economy’s so bad that money has to get cheaper. He’s predicted (and still is) that the 0.75% bank rate will be 0.25% by the end of the year.

But that’s not likely to happen unless things get really, really worse. For the poodles to hack rates would take a plunge in oil prices to the $40 level, an entire summer of serious job losses, plus an unexpected plop in the all-important US economy. Any of those things might happen, of course, but all three would probably be necessary for such a drastic reaction in Ottawa – especially with a federal election barely four months away.

Here’s what the Bank of Canada now thinks: our economy will slowly grind its way back to capacity by the end of 2016. The American economy will grow nicely after a rotten winter-from-Hell first quarter. The biggest shock to the economy (oil) is in the rear view mirror. Our economy will expand for the rest of the year after stalling badly since last autumn.

So, no need for more stimulus – a position just about every Bay Street economist has lined up behind. For example, here’s how RBC’s assistant chief egghead, Paul Ferley, reacted:

“Our forecast assumes that sufficient evidence of above-potential growth being sustained will be evident by the second quarter of 2016, thus returning the central bank to tightening mode. With core inflation expected to trend closer to the Bank of Canada’s mid-range target of 2% during the forecast horizon, we expect the pace of tightening to be gradual with the overnight rate finishing 2016 at a still stimulative 1.75%.”

What does that mean? Well, ‘tightening’ equals raising interest rates and making money less available in the process – removing stimulus, in other words. So the country’s biggest bank is telling us the core interest rate in Canada will rise by 1% between now and the end of 2016.

One per cent? Big deal?

Actually that would mean the cost of a variable rate mortgage – now available for about 2% – would rise by half. It would also set the scene for a few years of gradual rate normalization meaning anyone taking a 2.5% five-year mortgage should budget to renew that at 4%, or maybe a point higher. And because there is an inverse relationship between interest rates and house prices, we should all expect any increase in the cost of money will mean a decrease in the value of real estate.

Of course, that would also suggest this is the bottom for the cost of a home loan.

This week the lowest number for a five-year VRM is 2%. A fiver fixed can be had for 2.5% and the banks are offering 10-year loans for about 3.7%. How you borrow depends on what kind of premium you’re willing to pay to avoid higher rates later. A woman I spoke at length with today just signed up for a 10-year loan, thinking she was so clever to lock in. But maybe not. Since the ascent of rates will be slow and measured, paying a premium of 1.7% over a variable rate, which won’t hit 3% for a couple of years and can be locked in at any time, is probably too much.

Remember, if you have investments and also have a mortgage, making 7% on your cash is going to build wealth faster than paying down a 2.5% loan. The time to sink money into the house is when the borrowing renews, not every month through increased payments. That’s so Jar Lady.

Well, this is all irrelevant to Mike. Screw a mortgage. He’s off to Copenhagen. Now tell me you’re not a little green.