Careful

Quelle difference a day makes. Yesterday this blog suggested the cost of money will be going up in Canada a lot sooner than your 26-year-old, condo-lovin’ daughter ever expected. October probably. September maybe.

But here we are 24 hours later and markets are talking July. The 14th. Three weeks from now. The odds of a Bank of Canada increase then have exploded higher to 50%. That doesn’t mean it’ll happen, but it’s sure a quantum leap from, say, last week.

This popped last night when the contents of a meeting between the central bank head, the federal finance minister and all the provincial treasurers leaked out. Stephen Poloz was there to yak about the threat of a housing downturn, given the certainty that interest rates will soon be going up. “It’s something that’s he watching as a risk to the economy,” Bill Morneau said.

A risk? That’s putting it mildly. With about 20% of our GDP related to housing and family debt off the charts, higher interest rates will be as painful as they are inevitable. How much? The indie Parliamentary Budget Office started to answer that in a report issued just hours after Poloz and Morneau held their conference. The PBO points out we voracious little beavs have borrowed so much (while our incomes have flatlined) that the family debt service ratio has climbed above the 25-year average. That’s a big deal since interest rates are in the ditch, and in 1995 a five-year mortgage cost 10.6%. In fact the 25-year average is 6%. Tell your kid that.

So if we’re already in the soup at today’s rate levels, just imagine what the consequences would be if we added, say 2% or 3% on top of current rates.

“Based on PBO’s projection,” the report says, “the financial vulnerability of the average household would rise to levels beyond historical experience. Households that are required to devote a substantial portion of their disposable income to service their debts are vulnerable to adverse income and interest-rate shocks, and are more likely to be delinquent in their debt payments.”

In short, 2.5% mortgages are, like this blog, a freak of nature. Abnormal. If you budget the next five of ten years of your life based on that, you’ll regret it. So stop. The PBO is estimating the central bank rate, now 0.5%, will be going up six-fold within the next two-and-a-half year. But, it could be more. Mr. Trump will have a fair amount of influence over that.

Meanwhile, time for another small update on the housing market. No gutters running red yet, but the GTA is no longer in a house porn mood. According to Realosophy, sales continue to croak. In the first week of this month detached deals collapsed 44% year/year while 22% fewer condos changed hands. Last week was worse –  the declines were 47% and 24% respectively – and this is at a time when no interest rates have yet increased.

As previously reported, in May there was a 20% sales plop, which led to a 6% monthly price decline. The next numbers are due out in about 14 days, and they will be telling. Here are the charts for detached and condo results the company just tweeted out:

Weekly detached sales tumble 47% in GTA

Condo transactions decline 24%

Finally, a word about poor BC.

The province’s realtors just won’t quit, and this week forecast a 4.2% surge in Van prices next year, along with a 5% swell across the province. They claim the impact of provincial moves to cool the market is being overcome and – despite a lefty, interventionist government about to take office plus looming rate hikes – everything is returning to normal. In other words, buy now, kids, or buy never. And they are.

Bottom line: things may hit the fan soon. You might wish to buy a slicker.