The odds are 92% that US interest rates will rise in four weeks less a day. So, pay attention.
On Thursday the Fed boss, Janet Yellen, made it abundantly clear the path is now clear for more expensive money, Trump or no Trump. The American economy continues to improve, she said. There’s almost full employment. Inflation is green-shooting all over the place. So it’s liftoff on the 14th. Meanwhile several of her central bank colleagues have added if Congress goes along with Trumponomics (lawmakers were warned this week to prepare for ‘sweeping legislation’), cutting taxes and voting for big spending, rates will continue to rise into 2017.
As the duck said to the actress, of course, it’s all about stimulus. When politicians lower taxation or hike public spending, that’s fiscal stimulus. So central banks can normalize rates, withdrawing monetary stimulus. Right now, that’s da plan.
Meanwhile, did you notice TD raised mortgage rates? Again? All of the major lenders will soon follow RBC’s lead, adding between 10 and 40 basis points to their home loan costs, as well as gluing on a premium for amortizations over 25 years. It’s the direct result of the Trump tantrum in the bond market we’ve been telling you about for the past few days, combined with Wild Bill’s October changes.
So what should we reasonably expect? Best case and worse case scenarios? Is all this post-Trump stuff just another example of a pathetic blogger crying wolf on a distant ridge, or could this come to wash over your family and your financial life?
Beats me. I just come here for you deplorables. But let’s conjecture a little.
Scenario A: Fixed-rate mortgages move up about half a point in the next six months (already happening). Between 10% and 20% of first-time buyers are knocked out of the market by higher mortgage costs and the new stress test. (Again, already started.) The Fed raises its rate a quarter point in December and another half in 2017 (assumed now by financial markets). Vancouver pushes ahead with its vacant-house levy (passed this week) and foreign buyers disappear thanks to the 15% tax (already occurring).
Projection: YVR real estate drops 40% in sales and 20% in price by the end of 2017. Toronto housing sales reduce 10% to 15%, prices decline 5-7%, then enter a long corrective phase. Smaller markets suffer disproportionately. Nationally prices reduce 15%.
This assumes the economy stays about where it is, oil doesn’t drop to thirty bucks, the US does not shred our essential free trade agreement, the loonie remains above 70 cents, governments stop diddling with housing regs and Adele plays no more concerts at the Air Canada Centre for at least fourteen months.
Scenario B: now, this sucks. But instead of this blog making up bad stuff to worry about, let’s turn that job over to the federal government’s housing agency – where they have actual forecasters, fancy economists, risk assessment officers and more powerful modelling tools than my iPhone4.
CMHC just finished assessing what might happen if the SHTF in various forms. For example, a big mother of an earthquake – which would jump unemployment to 8.4% and probably shave less than 1% off the value of Canadian real estate. Hmm, not so bad. The agency also looked at a collapse in commodity values and a plunge in the price of oil to just $20. Ouch. That one would be devastating – the jobless rate jumping to near 9%, and real estate values toppling 7.8%.
But the worst thing the fed eggheads could imagine is what more people believe might actually come to pass, given recent events – a rapid increase in mortgage rates. If that were to come to occur, here’s the expected outcome: unemployment rocketing to 12%, home prices dropping 30%, and a hit to taxpayers (through CMHC losses) of $2.1 billion. Scariest – the potential failure of “a major financial institution,” aka, a bank.
For comparison, when the American real estate bubble popped, houses declined 32%. That robbed the middle class of $6 trillion in equity, caused a clutch of Wall Street giants to fail, created a global credit crisis and ushered in a recession which today (nine years later) we’ve still not fully recovered from (plus gave us POTUS Donald Trump). Also recall the last Canadian real estate dump (circa 1990) brought down Toronto prices by 31% – and it took 14 years for the average house to recover.
Property values and mortgage rates move in opposite directions. They’re perfectly negatively correlated. It’s why crap houses now cost $1 million and Canadian mortgage debt tops $1.2 trillion. But you know that. You just don’t know what’s coming.