Entries from February 2021 ↓

The young & the pooched

In case you’ve been arousing yourself with MLS temptations lately and missed the big news, here’s a recap.

Six out of six big Canadian banks have posted fat profits, beat the Street and slashed their loan-loss provisions. In the middle of a pandemic and recession, what does this mean? Simply that the virus is so done – at least as the main determining macroeconomic factor. We now know where we’re going. Only the speed is uncertain. Several implications flow from this. They all support the themes a certain pathetic blog has been proselytizing for a weeks now.

Our reptilian Bank of Canada boss, for example, is admitting that as the herd is dosed (and that will erupt come April) the economy will rebound. The central bank rate will stay low, but sentiment is growing the CB will start ratcheting back its bond buying – also in April.

Put it together: (a) corporate profits jumping, (b) vaccinations ramping up, (c) infections and hospitalizations falling, (d) economy reopening and rebounding, and (e) the slow retreat of monetary stimulus. And this is what you get…

Yes, I know we published a chart of the bond market erection two days ago, but the growth since has been dramatic. The return on 5-year G0C debt has now tripled in three months. The bond market ain’t blind. It sees growth, wage pressures, retail therapy, less stimulus and more inflation. By the way, StatsCan says payroll employment rose by 44,200 in December after decreasing by 64,500 in November.

So, you can expect mortgage rates to begin their ascent momentarily. Hope you locked in. As suggested.

Now, some people wonder – if Covid’s being crushed, workplaces will reopen, offices repopulated and herd immunity achieved – why this insane nesting real estate boom would continue. Pandemics are temporary, after all, but moving your family to Marmora or Comox is not. How come public officials, like the central bank governor, keep denying the speculative FOMO fever that’s embraced the land?

It’s wilful blindness. The CB wants growth, no matter from whence it comes. The big banks are entering a critical spring housing market and want to sell a slew of mortgages. And floggers like Royal LePage just want to, well, flog.

Did you see the latest survey that outfit published? What have we done to the children?

LePage says 48% between ages 25 and 35 own real estate with half of those having bought during the pandemic – yes, when prices were at an historic high. Among those who have not purchased, 84% say they will soon. And when asked if real estate (now the most expensive it has ever been because of a unique set of temporary circumstances, already passing) is “a good financial investment”, 92% stick up their hands in joyous agreement.

Yes, we know the nation’s biggest real estate marketing company creates media interest with these pieces of ‘news’ routinely fed to journalists now working in their basements and broadcasting over Skype. But this is a scary as it is suspect. We’re also being told that the young cohort believes WFH will last forever (because they want it to), which gives carte blanche to go rogue-suburban and borrow their brains out. “The pandemic provided an unexpected prize for young Canadians,” says the company’s CEO mouthpiece, “a path to home ownership.”

Some prize. It also allowed this generation to spend more than any previous one on accommodation, increase household debt by a record amount ($100 billion+) in a single year, restrict mobility, suck up scarce liquid assets, become less diversified or flexible and – in many cases – physically remove them from workplaces where advancement, recognition and career potential are achieved.

Hey, but that’s just the Boomer in me talking, right? Houses will go up forever. Mortgage rates won’t double in five years. The boss will keep giving you raises and job security even when you don’t come to work. And putting 100% of your net worth into a single asset a suicidal commuting distance from the office is a “good financial investment”. Coz, of course, everybody wants to live there. With the chickens.

Well, time will tell. But experienced eyes see a generation embracing risk, betting on a one-asset strategy and mistaking a weird little (but intense) chapter in modern history as an inflection point for the future. It’s not.

The last gasp?

Pete and Julie called to ask if they should list their Mississauga detached house (after eight years) this summer. “I figure it’s worth about $1.6 million now,” he says. “We can hardly believe it and, man, we sure need the money.” Covid stole Pete’s food importing business. No surprise since three-quarters of his clients were restaurants. Now all closed. Julie only works half-time these days in the office at the dental clinic.

“So,” he queried,” is this a good plan?”

No, I said. List now.

It’s becoming evident the market cannot sustain its velocity. Things are too nuts. The world is changing too fast. Even our vastly out-of-touch and wooden central bank boss, Tiff Macklem, is starting to get it. Here’s what he said yesterday: “We are starting to see some early signs of excess exuberance. What we get worried about is when we start to see extrapolative expectations,” he said. “That’s when homebuyers believe that past strength will carry on indefinitely.” You bet. However he then added: “but we’re a long way from where we were say in 2016, 2017 when things were really hot.”

Really, Tiff?

Let’s review recent detached home sales in Toronto, for example (and things are even more torrid in Woodstock, ON, Kelowna, Oshawa or Halifax). This chart from Scott Ingram, account and property guru, clearly shows the volume of properties selling for over the asking price in 2021 is running neck-and-neck with the insanity of 2017 – that brought down emergency government action.

We’re doing a GoFundMe page for the Tiffer so he can get some new glasses. Are you in?

And, yikes, are you watching what’s going on in the steamy bond market?

Traders are dumping debt because they smell inflation. That’s jacking yields and ensuring mortgage increases are closer at hand. There’s no mystery why this is happening. Commodity prices are shooting higher (there’s serious talk of oil at $100 again); we’re on the precipice of a major inflow of vaccine and mass inoculations (the US has now romped far ahead of schedule); the Biden White House will soon have a $2 trillion Covid stimulus package in place; the infections/deaths/hospitalizations have plunged across North America; over 70% of US companies are beating earnings estimates so far this season; when it comes to profits our banks are crushing it; demand for borrowing has hit a crescendo.

All these reasons combine to deliver this…

The bond market sees what’s coming…

That’s what five-year Government of Canada bonds are doing at the moment. The yield has almost doubled so far this year- and it’s still February. The same is happening with long US Treasuries, where a tripling is within sight. (Inflation and rising rates are one reason tech stocks got thumped recently and poor Tesla was road kill.) All this means it really doesn’t matter if the Bank of Canada says its key lending rate will stay low for the next two years, because the bond market has already rung the bell. Up she goes. Canadian fixed-rate mortgages are not set by the CB but rather by the commercial market, so increases seem inevitable. As we told you, the days of 1.5% (or less) five-year home loans are doomed.

Some smaller lenders have already started to swell their rates. “Others are threatening to hike rates imminently,” says mortgage broker/blogger Rob McLister. “There’s still no sign of increases from the big guns (major banks), but if this yield climb persists, it’s just a matter of time.”

And there’s one more chart the Pete and Julie need to consider. It plots the extent of house lust in our nation, showing conclusively that the Boom of ’21 is far more dangerous than that of ’17 because families are chowing down on record debt at rates we now know are destined to rise. Ouch.

…while Canadians chow down epic mortgage debt

During a time of global pandemic, recession, double-digit unemployment and no inflation Canadians added almost 8% to overall mortgage debt. Between home loans and LOCs we now owe $1.97 trillion, equal to the entire Canadian economy. It’s the fastest rate of debt accumulation in a decade, and the first time ever we embraced over $100 billion in a single year in fresh household debt.

This is why Peter and Julie can probably get $1.6 million. Now. Most people will never read the 700 words above. They think houses will go up forever because rates can’t rise. They see swelling prices. They get FOMO. They panic buy. How can you blame them? It’s a cash cow.

But don’t feed it. Milk it.