Entries from January 2021 ↓

The impossible

Recall that poll noted here yesterday showing 65% of Canadians are unconcerned about interest rates? They don’t care because they think the cost of money cannot rise. Ever.

And the steerage section agrees. The belief that mortgages at just 1.5% (the lowest in history) will endure seems almost universal. And the arguments are consistent: (a) higher rates are impossible because everybody’s picked in debt, (b) that would trash the economy, (c) the real estate market would crumble and the government won’t allow that, (d) public debt servicing costs would explode (so the government won’t allow it), and (e) higher rates are a Boomer scare tactic and we hate you.

So Wednesday – the final hours of the Trump experiment – is decision day for the Bank of Canada. Some people have speculated lately that because of Covid’s second wave, the lockdowns in Ontario and Quebec and the big job losses last month, that the central bank would cut its key rate a little. But that seems unlikely.

In fact, here’s a new survey of 16 leading Canadian economists by Finder supporting that – 75% say a cut isn’t warranted. That’s because 2021 is the Year of the Vax and as the months roll by more and more folks will be inoculated, allowing the economy to re-open, restoring growth and kindling monetary demand without more stimulus.

But what comes after that?

What about all those people swallowing huge new dollops of debt to buy houses at record-high prices with financing at well below 2%? What happens to them in five years if they have to renew at a higher rate, especially if rate increases mean house values will moderate or even (gasp) decline?

Here’s what the economists predict:

Will rates rise? 87.5% of these economists say, yep.

Source: Finder

So almost 90% believe the next move by the central bank will be up, not down. Two-thirds of them (69%) say the increases will start within the next two years. The rest say they will commence the year after. Thus 100% of them state the cost of money will be greater than today by the time a five-year mortgage term is up for renegotiation.

Why?

Today is not normal. That’s why. These home loans rates are weird. Unsustainable. The rate structure in place is the result of a once-in-a-generation, global pandemic, emergency recession, holy-crap reality that a year ago nobody expected. And now nobody expects it to last.

What comes next? The majority of people, Ottawa says, will be vaxed by September. Lockdowns will be lifted once case numbers start to decline (seems to be happening already in Ontario and across the US). Service industries will open again. Workplaces will resume. WFH will be under pressure. Half of economists say many people will be expected back at their places of employment by this autumn. Another 25% say it will be in the first three months of 2022. But it will happen. Concurrent with this will be more spending, more consumption, commuting, travel, child care costs, GDP growth and price inflation. As the cost of living creeps back to 2%, for example (it was 1% at the end of 2020), you can be sure the bond market will have pushed yields up in advance. And it’s here that fixed-rate mortgage costs are set.

How about Biden?

Big news, with (probably) a big impact. There will soon be a $2 trillion Covid stimulus plan coming out of Washington now that the Dems control the White House and all of Congress. In fact, expect a lot more spending than would have been the case during a second Trump tenure. Plus an accelerated agenda for vaxing the nation – 100 million people in the first hundred days. That will help economic recovery and, yeah, fuel inflation with all that new stimulus.

Now, all this is good. Better than the alternative. Normal is a long ways off, but 2021 will surely be beating a wide path in that direction. The last ten months have been a long, dark, depressing anomaly. They were not harbingers. They will not frame the long-term future.

Even the Bank of Canada’s former boss said it a few days ago: “I think there’s going to be a boomlet when we come out of this crisis, later this year.”

So, in conclusion: houses jumped 17% in value across Canada during the 2020 pandemic because mortgages cost 1.5% and people could borrow more while paying less. So they did. They pigged out. FOMO and YOLO ruled the land.

But the virus will soon fade, taking with it the reasons money was cheap and why you got to stay home for a year. How is this not simple, and obvious?

Lock in. Set up a weekly-pay mortgage. Start saving for renewal day. Oh, and get new tires.

The infected

John says he started worrying after his buddy picked up one of those irritating snowmobile-on-water things that had been purchased back in November. At that time the dealership said it had already chewed through a third of its 2021 inventory.

“I’m in the market for a new boat myself,” he tells me, “so after hearing that I went straight to the King Fisher dealership (also Canadian made) and was told that the inventory they had on site was all they were getting for 2021 due to insane demand. That was Jan 10th and they had 10 boats for sale at the time. I called the sales person back on Jan 15th and they were down to four. I was told that if I didn’t buy this week I probably wouldn’t be getting a boat in 2021.

“That was on January 15th, 2021. Keep in mind, these boats cost between $70,000 – $400,000… Either the world has become obsessed with water sports (the outdoor kind) or isolation has driven people nuts. I bought a boat, so it’s possible that I belong in one of those  two camps myself…”

Well, our dude is not alone. RV sales have gone through the roof in the last ten months, keeping pace with the boat guys. And check out what’s been happening with bikers. The Canadian Motorcycle and Moped Industry’s latest report (November) says sales soared 55% year/year, with off-road recreation bikes up a dizzying 194%. And how about quads? Ditto. Sales before Christmas were coursing higher by 48%, and in 2020 an additional 12,000 units had been spoken for.

Meanwhile we know all about real estate. Home sales in December jumped more than 7% from November – which is unprecedented. The number of deals last month was a record across Canada. Compared to the end of 2019, the bump was 47%, pushing prices ahead 13%. For the Year of Satan as a whole, Canadians bought an amazing 550,000 properties.

The places with the biggest price gains? Wow. Small Ontario cities and cottage country. You know – backwater, hayseed, cultural wastelands like Brantford, Barrie, Peterborough, Woodstock, Welland, the Kawarthas and Muskoka – where crazy people buy quads, cruisers and jetskis.

It’s a pandemic spending revolution. No wonder. Airline bookings are down 90% and those people who do flit off to Mexico or Florida are being shamed in an era when ‘non-essential’ travel is a big sin. In parts of the country you can’t even cross a provincial border without being forced into a soul-sucking two-week quarantine. In Ontario it’s impossible to get out of the house for a nice meal or (my fav) to go clubbing and boogie all night to Tiësto or Pascal Letoublon.

So what are we doing instead?

Consuming. Spending. Indulging. Nibbling through that $104 billion pile of chequing-account cash that came from Mr. Socks plus not having to spend money on commuting, childcare, dogwalkers, gas or fresh undies and pants. We’re also borrowing as never before, with household debt levels jumping to a new historic high. No wonder. Five-year mortgages are 1.5% and the longer this damn virus hangs around, the cheaper those loans get.

In a word, change. Societal change. WFH has altered everything for many people. Urban depopulation is a thing. Small town house values have been jacked by Covid refugees. The price of a 2×4 or a sheet of drywall has scaled new heights as home renovations explode. Personal indulgences, as epitomized by $200,000 boats and $15,000 bicycles have turned mainstream. And the slimy little pathogen has done a big number on home affordability, forever locking a generation out of real estate.

Investing? Pfft. This is all about consumption.

And look at this – the latest debt survey from MNP shows just how much Covid has screwed with our heads. Four in ten say they’re not confident they can survive until the vaccine rescues society and their finances without going further into debt. But at the same time, 60% think cheap interest rates make this a great time to borrow more! Especially stuff they couldn’t previously afford! Like an $18,000 quad! Almost half (47%) state these low rates make them feel ‘comfortable’ about carrying an increased borrowing.

But what happens when the cost of money inevitably rises from these all-time lows? Well, according to an RBC survey, it ain’t evah gonna happen. Two-thirds of Canadians have convinced themselves that emergency, once-in-a-lifetime, global-pandemic-induced interest rates are here to stay. The new normal.  They say they’re completely ‘unconcerned’ about an increase.

Of course. That makes just as much sense as saying offices will stay shut and you won’t see the boss again. Other than on Zoom. Waist up.

Did you ever think a spike protein could do all this?

So many surprises in store.