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To the bottom
On Tuesday Bank of Montreal will drop its five-year fixed mortgage rate to (drum roll, please), 2.79%. That’s twenty points less than it was on Monday and 30 bips below the nearest big bank (the green one). To get a rate lower than this, you have to become a customer of an unknown mortgage outfit some guy runs out of the trunk of his Cordoba.
Seriously. It’s a race to the bottom.
This is the regrettable consequence of the goofy move by the Bank of Canada to lower its key rate a quarter point in January, when it freaked out at the slide in oil prices. What’s already happened – and which BeeMo will accelerate tomorrow – is the creation of two distinct and fragile economies within the bosom of a single nation.
In the oily part, low rates mean nothing. They won’t rescue anyone’s job, raise the price of crude, save any truck nutz or keep a single energy project from being mothballed. And they sure won’t help the suffering real estate markets in Calgary, Edmonton or Fort Mac.
Mike Fotiou knows that. For a realtor, he’s an astute dude. The tsunami of new listings in Calgary has subsided so far this month, and while sales are still down by a third, he says nobody can say the housing market has bottomed. It’s all about jobs.
“Why is it too early to be calling a bottom in Calgary’s market? Because Alberta’s economy hasn’t found a bottom. Last month, employment fell by 14,000 giving back the 13,700 jobs gained in January and then some. Since there haven’t been any developments to suggest there aren’t more job losses on the way, we can expect a slow market for the short-term at the very least.”
Demand for houses has shrivelled like a corner-store banana in those places where people are worried about their paycheques. The same oil patch that was showering 22-year-olds with $200,000 payouts has taken away the riches just as quickly. Camps are closing. The free flights have ended. The layoffs are swelling. So the buyers are gone.
But in the last two bubble markets in Canada, the absolute opposite. As interest rates get shoved lower by desperate policy-makers (seven months before a federal election), people are pigging out on the cheapest debt of their lifetimes. The consequence has been a spurt in sales, prices and hormonal secretions, pushing YVR and the GTA into uncharted waters.
You know the numbers. Outstanding mortgages just shot up another $80 billion as we hit a new debt record. Savings are falling, spending is rising, and it’s all based on borrowing. We’ve now blown past the debt levels of those crazy Yanks just before their real estate market blew up.
Here’s a no-crap warning from Capital Economics; David Madani:
“Lower mortgage rates… will only result in greater imbalances in terms of housing overvaluation, household debt and overbuilding. Over the past two years, increasing numbers of higher-risk home buyers have turned to smaller banks and other non-traditional lenders. As the Bank of Canada warned in its last Financial System Review, mortgages provided by these “less regulated” institutions have grown rapidly. Since much of this lending is essentially sub-prime, we fear that this type of lending and its support to home sales in the short term will only lead to even greater problems and more painful adjustments in the longer term. Exactly the same thing happened in the US housing bubble with the rise of lenders like Countrywide Financial. These excesses are another reason why we believe housing is overdue for a major correction.”
As this pathetic blog has argued for so long it’s now painful, the inverse relationship between mortgage rates and house prices is all the evidence anyone needs of why beater houses now cost a million in these two cities. It’s not Chinese moneybaggers. It’s not the economy. Instead it’s the insatiable appetite delusional Canadian families have for financing. If five-year mortgages were 5.49% tomorrow, instead of 2.79%, houses would still be affordable.
So, look at this chart. Here’s why real estate costs what it does:
Warns US-based Wolfstreet.com:
“And if interest rates ever rise even by a smidgen? The blue line would do what it started doing in 2006. It would roar higher. With consumer indebtedness at these levels, even a small increase in interest rates will make a big difference in the interest expense consumers would have to fork over. The Bank of Canada will have trouble ever raising rates, regardless of the distortion and mayhem near-zero rates are causing. Households can no longer afford higher rates. They have too much debt and not enough income. Higher interest payments would eat into spending on other things. Higher mortgage rates would crash the still magnificent home prices. Consumers would buckle under their burden and default. Not to speak of the already struggling oil companies. And then there are the banks that have lent with utter abandon to all of them.”
Lots of logic there. Higher rates, even marginally increased, will push many people to the wall and materially impact the overall economy. This is why the Bank of Canada’s No.2 person told MPs a few days ago our central bank would not necessarily move in lockstep with the US Fed, which will be pulling the rate trigger later this year.
But, rates will go eventually go up. And houses will go down. Just stand on your head and look at the chart. Madani is sticking with his prediction of a 25% price decline nationally – which will mean a lot more in you-know-where. Adds the Wolf Street economist: “Gravity is already and very inconveniently inserting itself into Canada’s incredible housing boom.”
You should get ready for this.
Or you can post a comment below saying rates will never rise. That’ll protect you.
Source: http://www.greaterfool.ca/2015/03/16/to-the-bottom/
