The wuss

So a fixed-rate five-year mortgage is currently available for just 2.3% at places where they also sell beauty supplies and occasionally serve souvlaki. If you prefer an actual bank, the best rate currently is about 2.6%. Either way, it’s dirt-cheap money.

Inflation is 2%, thus the traditional fiver mortgage is about as close to free as you’re ever going to get. When houses are rising in value as many have been, why not load up on as much debt as possible? In fact, with semi-conservative, nerdy balanced portfolios yielding more than 8% over the past year, why would you pay off a mortgage these days even if you had enough cash lying around to do so?

Incredible. $500,000 borrowed at 2.6% costs about $2,200 a month to carry and after half a decade, you’d have reduced the principal by about $75,000. In contrast, the first mortgage Dorothy and I had in the late 1970s was over 12%. So payments on a half million would have been $5,200 a month, requiring an income of roughly $185,000. At the time I think I made $30,000. But I could still buy a house.

The biggest reason properties cost what they do is the price of money. As it’s trended down for the past two decades, real estate has floated up. The real drama started in 2009 when central banks everywhere – ours included – adopted “emergency” rates following the credit crisis. The acceleration of house prices since then has been historic. Right along with that has been an unprecedented romp in personal debt – because only by swallowing giant loans can people get what they want. Houses.

As you probably know, households in Canada now owe more than $2 trillion, which is a bigger number than the whole economy. And 65% of that is in residential mortgages.

Because money’s so cheap, it’s encouraged borrowing on a scale not previously seen. Even back in the 1950s, families were paying 5% to borrow money to buy houses – twice the level of today. Higher interest rates can be a bitch (when I was sitting in Parliament during the early 1990s my mortgage was again over 12%) but they have one compelling benefit. Real estate gets cheaper when borrowing gets harder.

Here we are nine years after “emergency” rates were invoked. The country is not in recession any longer, the economy’s growing, the latest jobs numbers are satisfactory, the credit crisis is long past, the US is expanding and global growth is around 3% – not bad. Stock markets have ripped up into near-record territory, federal taxes have increased and inflation’s back. So why is the Bank of Canada’s official rate at the lowest point in history – 0.5%?

Cheap money – not Chinese or Iranian dudes – have given us Vancouver Specials at $1.4 million and 1980s particle board 905 clunkers at $1.1 million. They’ve created bidding wars, hollowed out RRSPs and savings accounts, given unearned windfall profits to house-owning Boomers and decimated the finances of house-horny moisters and GIC-adled retirees. Rates never this low before have given prices never this high. Now every level of government is fussing and fretting about ‘what to do’ amid a blizzard of new regs and taxes – on foreigners, speculators, renovators and empty houses. Since 2011 everything’s been dicked around with. Amortizations shortened. Downpayments increased. Stress tests created. Insurance premiums upped and coverage capped. Nothing has slowed the bloat in prices, stemmed the tide of buying or quelled demand.

And nothing will, save higher rates.

This is what the bank CEOs and their economists are now telling Ottawa’s politicians and those running the Bank of Canada. There was scoffing and derision days ago when central bank boss Stephen Poloz said 2% mortgages had nothing to do with real estate speculation. This is what happens to your brain when you ride around in a black limo inside the National Capital Region.

Poloz is afraid higher rates would damage the wider economy, but with each month he delays, the nation becomes more dependent on an irrational and delusional housing market. Now making up almost a quarter of Canada’s GDP, this is a bomb ready to detonate. No wonder that bankers are leading the charge to defuse it.

Meanwhile there’s a whole generation of Millennials, now outnumbering the Boomers and in their house-lusty years, who have grown up with cheap money. They know  throwing another $50,000 onto the pile during a bidding war will cost them only two hundred bucks a month. Three Starbucks a day.

Will it happen? The odds are growing. US rates will rise three times in 2017. Higher inflation and better growth here will rob Poloz of more excuses to be the wuss. Millions of people who never thought mortgages could be 5% again, will be shocked. Houses will fall.

Or, then again, he might do nothing. Fear that.