The trigger

One more sleep until the nobs at the central bank take back another bit of stimulus. With the BoC rate increasing a quarter point this week, that’s three increases in a handful of months, with more on the way. The implications could be epic, especially if you borrowed against your house to buy Bitcoins.

But what are the odds Stephen Poloz will pull the trigger? Yuge, apparently.

Of the 26 know-it-all economists surveyed by Bloomberg this week, 23 said it’ll happen. Overnight swaps are giving it 92% odds. And the thinking is this hike on Wednesday will be one of three that we get in 2018.

So that would increase the bank prime to a hair under 4%, and boost the cheapest HELOCs to 4.5%, with five-year mortgages advancing to 4.25%. Add in the stress test added it and borrowers must qualify at 6.25% later this year. Yes, that’s a 300% increase in 12 months. Our bankers have turned into rate-normalizing hawks. Or Buzzards. Opening the door for vultures.

Rising rates and B20 pose a combination that cannot be ignored. Yesterday this axe-wielding blog told you a mere 77 detached houses sold in all of the six-million-person GTA in the first two weeks of January. Yeah, it was brutally cold and this month so far is a bucket of suck, but that’s a disaster by any measure. Prices for detacheds fell over $90,000, or 9.1%.

A similar story is being told by Zolo (recall that realtors suspended their mid-month reports months last year, lacking the stones showed by Calgary). According to that site, monthly prices have declined in Toronto overall by 8.8%, and for the last three months the erosion is almost 14%. So imagine what happens when a five-year mortgage breaks 4%. Ouch.

Of course there are reasons the rate escalation might stop. Commodity prices (oil) plop. NAFTA blows up. Hawaii blows up. Trump blows up. Massively indebted Canadian households blow up. But in the absence of that, everybody should expect the normalization of the cost of money to continue. Never again in your lifetime will 2% five-year mortgages be available. Everything changes. Bond prices fall. Real estate comes back to earth. All variable-rate and demand loan costs rise. Mortgage credit restricts. And yet that heaping pile of debt is undiminished.

Who will pay the wages of sinful borrowing?

Many. For example, 14% of all households in the GTA, the nation’s largest market by far, own multiple properties. Typically that’s a principal residence which rose in value like a horny fungus, plus an ‘investment’ condo financed with a HELOC against the main house. The trouble now is the condo will be dropping in value and can’t be rented for enough to carry it. So it eventually gets dumped at a loss, bringing down its peers.

There are untold numbers of flippers, speckers and dumbass amateur landlords who have poured all their liquid net worth into leveraged properties, now facing a tough 2018. They may have bought at peak house last year and have already lost 10-15% of their capital. They may have purchased before selling an existing home – now turned illiquid. They may have financed condo-lusty spawn through Bank of Mom loans, but junior can’t afford the condo fees, plus the place is worth less than the financing. They may have taken mortgages from some dodgy company that, thanks to B20, won’t be renewing them. Now they face a stress test they may not pass.

Or perchance they’re one of the 49,000 realtors in Toronto with leased Audis and no income, whose idea of financial diversification is to own two condos, instead of one. Of course, there are the 48% of Canadians (as mentioned yesterday) who would be in deep trouble if their monthly expenses increase by $200 – almost guaranteed to happen as Poloz turns the screws. Unless he doesn’t.  But Mr. Market says, 92%, that he will.

So, in summary, it’s not different this time. It never is.

Ask the moisters who bought Bitcoin on Visa or with lines of credit against their condos a few months ago at almost $20,000. As I write this the cryptocurrency is worth less than $12k, and the chart suggests it has a good chance of sinking further. Zero might be a reasonable bottom. As you may know, China is cracking down on digital coin trading. South Korea used the hammer. The SEC has halted ETFs based on Bitcoin. Central banks, regulators and governments globally, as mentioned, will not allow an unregulated currency to undermine state-issued money. Like, duh. How is that possibly a surprise?

Bitcoin’s unearned ascent and worthy descent exemplify what a bubble is. Uninformed demand  and greed propelled it. Common sense and fear wrecks it. Faerie dust.

At least you could paper your bathroom with worthless Nortel certificates.

You get to live in a house that financially ruins you.

Bitcoin? Just a hole seared in your judgment.