Last week RBC jacked mortgage rates, following an earlier move by TD. The latest increase was about a third of a point (people taking loans with longer ams will pay a premium). It doesn’t seem like a big deal, but probably is. This increase, as you know, does not stem from any jump by the Bank of Canada, and flies up the nose of all the macroeconomists who come here to tell us the cost of money can never increase, because nobody can pay more.
Here’s why this increases has legs:
That’s a chart of the yield on a 5-year Government of Canada bond, and depicts what happened last week. Bonds become a lot less valuable than they’d been the week before, with prices selling off and yields surging. It’s not that bonds are suddenly trashy and cheap, like Survivor: Millennials vs Gen X. It’s more a return to normal, as bonds had become so inflated in value with inflation scant and economies limp. Yields – and interest rates in general – had descended into the unknown. In 300 years of record-keeping, for example, the Bank of England had never seen a day when money was so cheap to borrow as, oh, two weeks ago.
The US election changed a lot, fast. Now markets expect 4-5% growth in America (double that of the past year), big government spending, elephantine deficits, higher costs thanks to new tariffs and trade walls and (as Ryan detailed here on the weekend) inflation. As this blog explained, that will help portfolio components like equities, real return bonds and preferreds. It will deflate assets like government bonds with long durations.
The biggest impact, however, could be on residential real estate. That’s because the mortgage increases we’ve just seen, reflecting the five-year bond yield, are but the first moves. The expectation now is that the Fed will restart the normalization process with an increase on December 14th, then at least two more during 2017. The central bankers will do that in order to keep US inflation within the narrow band of acceptability they’ve established. A December increase was already in the cards before November 8th. Now it’s a certainty. The bond market’s reflecting that, and adjusting in advance.
So, uncertainty fills the air. If the new gang in Washington steps on the gas the way they promised, the greatest bull bond market in history will continue to unravel. US public spending will balloon, the debt ceiling will be raised, America may get a credit downgrade, the greenback will rise, trade skirmishes will break out (especially with China) and meanwhile Canada may see a painful rewriting of NAFTA.
It seems likely, then, that by April our dollar will be lower, commodity prices under pressure, the trade deficit rising and mortgage rates plumper, even if the Bank of Canada sits on its thumbs. By then we should know what impact the MST has had on the market, and how many first-time buyers were told to go back to their parents’ basements.
In short, how could you not think the bottom in rates is behind us? If our central bank did cut its key marker next year, while the Fed was raising and Trump hyperventilating, it would be a sign of monetary desperation. Canada would be pooched. And good luck selling your $1,888,888 Richmond McMansion to a Chinese dude, let alone a sucker from Etobicoke.
Of course, things could get better, too. The US economy might bloat like your nephew after that unfortunate bee sting on the nude beach, Keystone could get built, our exports south could explode and Canadian corporate profits plump. Inflation, too. It would be a recipe for higher interest and mortgage rates.
In short, when you live next to the biggest economy in the world, which has just decided to spend whatever it takes to be great again, well, put your coat on. We’re going, too.
This could end badly if the deplorables start erecting tariff walls between us – a sputtering economy and higher rates. It could end a lot better if common sense prevails – a better economy and higher rates. But it will not end smoothly.
The advice? Stick with the balanced and globally diversified portfolio, as Ryan told you. Returns are likely to rise. Lock in your mortgage rate, because money is still (for a while) ridiculously cheap. Delay buying any real estate, because there’s no valid scenario under which rates fall. And if most of your net worth is in residential real estate, you’d best change that. This coming spring market will long be remembered.