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They’re back

Friday, January 12, 2018 15:17
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Ten years ago when Lehman Brothers collapsed and the lights started to go out, money fled into safe stuff. Bonds. US debt. Yields shot higher, taking the two-year Treasury over 2%. By 2011, with the Fed rate at zero, those bonds had dropped to 0.14%, or next to nothing. Even two years ago they sat at just 1%. But as of this week that yield has doubled.

In the bond world, this is like T2 getting a standing ovation for giving $10 million to Omar Khadr or the US president calling all-black nations ‘shitholes’. It’s hard to make this stuff up.

But here we are. Yields have spiked and markets now give 80% odds US rates will rise again in March after being hiked four times in the last 13 months. In the brief period of Trumpenomics stock markets have raced higher, bond prices have plopped, inflation has returned, joblessness is gone, debt yields have spiked and interest rates are barreling higher faster than anyone could have imagined a year ago.

Are you ready?

This week (so far) RBC, CIBC and TD have raised their key five-year mortgage rates. The yield on Justin bonds has popped despite the fact we seem pooched on NAFTA. It also looks pretty certain the central bank will raise its key rate on Wednesday. That would be the third time in little more than half a year, and will be one of three – maybe four – such increases this year.

So rates are normalizing. This pathetic but shapely blog told you more than a year ago this was bound to happen, and here we are. Not even half way there yet. Four years ago there were 1.89% short-term home loans available and last spring fivers were going for barely over 2%. Now the RBC five-year posted rate is 5.14%, and by this time next week all the banks will be at, or close to, the same level.

This is a big, hairy deal because of the stress test. In order to prevent us from being devoured by debt, the federal bank regulator has a new hurdle every borrower must clear. You have to qualify to carry a loan (with payments that do not exceed a set portion of your income) at the greater of the posted benchmark central bank five-year rate (4.99% – see here) or the rate your lender is offering you, plus 2%.

With another Bank of Canada move next week, that benchmark will drift above 5% – to 5.14%. In other words, that’s the minimum level for borrowing and would only apply to someone who is offered a bank mortgage at 3.1%. But the best discounted five-year mortgage rate currently being offered (BMO) is already at 3.34% – soon to be higher. At RBC it’s already 3.54%, putting the stress-test bar at 5.54%. So you can see you can see where this is headed.

Logic dictates when the qualifying rate for a mortgage travels from a little over 2% to 5.5% in less than a year that there will be consequences. Mortgage dudes have been warning for months that the stress test alone would reduce the amount people can borrow by about 20%, and kick the crap out of the bottom of the market. Less extreme analysts have pegged the damage at 5% to 15%. The Bank of Canada itself said about 100,000 families would be impacted this year and at least 50,000 of them knocked out of the market.

Of course, that was before this – the jump in bond yields, mortgage costs and central bank rates. Now it’s a guess as to how the market reacts when borrowers face sticker shock. The fact is people will be able to borrow less and spend less. Either sellers reduce prices to accommodate that new reality, or languish on the market.

As mentioned recently, listings have started the spring explosion. They’re up more than 170% in the GTA, with a surge being seen this past week from Halifax to Kitsilano. Over 670 new For Sale signs sprouted in the Lower Mainland in the last four days. This early-2018 market will be defined by excess supply chasing distressed supply as sellers try to bail at year-ago prices while buyers run into the reality of bankers who’d rather hunker than lend.

Of course, all real estate is local. In some places there are incredible bargains opening up (an iconic NS property listed for $2.25 million a year ago is now $995,000) while in others, prices are sticky and will take months to budge. The B20 stress test is still a shock to most borrowers, while a whole genset of Tweeters and Snapchatters think interest rates can never really rise from the absurd levels they grew up with.

But this much is no longer in doubt: the bottom’s in the rear view. Next stop is Wednesday.


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