Bank of Canada holds the line
Those with variable rate mortgages can breathe a sigh of relief as the Bank of Canada held the line on interest rates today, as expected, keeping the overnight rate at a paltry 1%.
Despite rising gas prices, the BoC sees inflationary pressures as “subdued” and nothing more than “short-term volatility” despite the fact that they acknowledge that inflation could reach 3% in Q2 of this year. We’ll see how true this proves to be.
The press release is largely balanced, though on the surface it does seem to indicate that a round of rate hiking may be in the cards earlier than predicted as they see economic growth improving while the output gaps is predicted to close earlier than forecast. That being said, the Bank clearly is not feeling significant pressure to start hiking rates. While the consensus remains that a July rate hike is most likely, I’ll suggest that this is far from assured.
The 5 year bond yield, by far the most important interest rate to watch, has been see-sawing higher since November. It fell modestly on the news of the rate hold. As I suggested earlier, due to new rule changes, the housing market is increasingly at the mercy of the bond market, over which Mark Carney and the fine folks at the BoC have little control. While these press releases from the Bank are certainly interesting, particularly as they offer insights into future movements of the overnight rate, the real market maker right now is the 5 year bond.
Royal LePage releases ‘report’…
Royal LePage (yes….the realtor group) has released a housing report (the Globe called it a ‘study’) outlining their view of future price movements in housing. Far from a glowing forecast, it is actually fairly muted:
“We expect house prices will continue to creep up, but most of the excess demand created by the initial drop in interest rates has been satisfied, and affordability continues to erode slowly, allowing the listings supply to catch up. In most markets, lower single digit percentage increases are more likely for the balance of the year.”
At the risk of beating a dead horse, I’d say that this is a best-case scenario over the next few years. Housing is unarguably richly priced by virtually all measures of fundamental value. Should the stars align perfectly, housing may well manage to pace inflation going forward….But I have some serious doubts. With the days of loosening lending standards seemingly in the rear view mirror, interest rates hovering near all-time lows, and a strong prevailing bullish sentiment still intact, it suggests to me that housing is sitting in a precarious position.
As usual, the report/study was carried in all the big dailies as news. *sigh*
In their defense, there was a bit of a barrage of bearish editorials and articles in some of the big dailies over the last few days providing at the very least a counter position to the eternal sunshine in LePageville:
Signs point to a severe housing correction in Canada– Globe and Mail
Canadian Real Estate : The Ignored Election Issue -Financial Post
“Canadian 30 year olds are screwed!”
That’s the title of a great newsletter from Kurt Rosentreter. I have to say that a number of my friends in this age bracket are exactly as clueless as described when it comes to their finances. Here are a couple of good snippets:
“Today’s young even look at these wise old folks as backward, “cheap” and out of touch. Frankly, it is the young people who are on the road to financial ruin – today’s attitudes are almost the complete opposite of our grandparents where “put it on plastic and pay later”, take as much debt as we can get, pay off mortgages over 35 years, lease cars, $20,000 vacations and $300 shoes or concert tickets is a norm.”
Indeed…..our staggering complacency with consumer debt levels should be a huge concern. As I’ve previously highlighted, our aggregate consumer debt as a percentage of our GDP is at a historic high and has now matched the peak seen in the US prior to its credit bubble.
Tough times are great teachers. What lessons would this consumer-driven generation have learned if the deleveraging that began in 2008-2009 had run its course rather than having been halted by emergency interest rates and massive stimulus programs. The necessary lessons have not been avoided….the painful reality of these high debt levels will become obvious, but likely not until it is too late for many.
“People have gone real estate crazy in the last decade as the low cost of mortgages has caused a frenzied market for the purchase of detached homes, condos, cottages and spurred massive renovations to existing properties. “Starter homes” in major Canadian cities can cost more than $500,000 today – prices that twenty years ago were considered only available to the wealthy. Now 30 year old kids making $60,000 a year are getting mortgage approvals to carry massive mortgages and think nothing about amortizing it over 35 years – ridiculous. Further, thirty five year olds think nothing about dropping $50,000 on a kitchen upgrade or a bathroom because, after all, it has to be done – we can’t live like this. On top of the monster mortgage, these kids are carrying sometimes six figure lines of credit as well. All these 30 somethings are leveraged to the hilt. No wonder the papers are full of stories of how Canadians now have some of the highest debt levels in the world – I have seen this happen over the last five years – my life has been full of dealing with everyone’s 30 year old kids. The story has been the same every time: recently married or a baby on the way and they want to buy a home. I ask them what they have saved for a deposit – often no more than $10,000 between them both…..
…The stage is set for disaster now. When a couple commits to a huge mortgage that commits more than one third of their net cash flow to debt servicing and fixed costs of ownership, the cracks in their life will start to appear after a few years. Unless they have huge annual incomes, there may be no extra money for vacations, for renovations, to buy new cars or even basic furniture. Inevitably these costs end up on lines of credit, adding even more debt, well, because, they have to have it.”
“The average Canadian family without pensions cannot afford big real estate investment and hope to achieve their other goals- plain and simple”
On this last point it is worth remembering just how anomalous the current sense of entitlement really is. Real estate as a form of conspicuous consumption has financially crippled many families for a lifetime, yet we continue to view it as normal. However, the large McMansions are still salable; there is still a market for them. My suspicion is that as our perception of what constitutes ‘normal’ and ‘comfortable’ realign either willingly or by the forced realization that the McMansions that dominated the past decade are simply not affordable or practical, that window will shut rather quickly.