When the people balk

Weird times. What do Canadian mortgage rates and Trump have in common?

Lots, it turns out.

The cost of fixed home loans will be rising by ten or twenty beeps by Tuesday (budget day). For a while we can kiss adieu anything with a 4-handle, as five-year mortgages all cross over to the mid 5% range (or higher, depending on the lender).

The bond market did this. The yield on Canada five-year debt is back at the level of last November. This week it jumped from 3.6% to 3.8%. In the bond world that’s a Beyoncé. It reflects a big bounce in the yield on US Treasuries after the latest American inflation number came in a tad hotter than anticipated.

Says celebrity mortgage dude Ron Butler of the impact: “House prices which showed some life in January & February on hopes of immediate falling mortgage rates will stall & likely return to a downward grind VERY important outcome: new home construction starts for homes to purchase continue to be non-existent outside of Alberta.”

Why is the cost of living higher in America than the Fed wants?

Because that economy’s expanding with the latest GDP pop at over 3% (we’re flirting with zero). Unemployment has been below 4% for two years – a record unmatched since Nixon was president. The stock market soared to 22 fresh record highs so far in 2022. AI is the new Internet. Corporate profits have been on target. Wage gains have surpassed inflation for most American workers for an entire year, and especially at lower-income levels. In short, the US economy is peachy.

But wait. People aren’t buying it.

Polling shows almost 70% of Americans think the economy is “not good” or “poor”. And who’s the best guy to fix it? More polling says Trump 76% and Biden 24%. Combined with Joe’s no-win stance on Israel-Hamas and the death of 32,000 Gazans, plus his age, the 2024 presidential election is looking like tough sledding. The ascension to the Oval Office of a guy found guilty of sexual abuse and fraud, facing 92 criminal charges and vowing a blood bath if he doesn’t win, while denying he lost the last time, is a thing.

So, this week’s slightly-steamy US inflation report has assumed epic stature. In the boiling political environment it’s being used to show Biden cannot control essential prices that families face. The Fed will be careful about the timing and size of cuts during the presidential slugfest. Mr. Market this week dialled back expectations. It may be a month later, maybe two, before the cost of borrowing falls.

Okay, so what?

Well, this week our central bank kept its rate on pause (as expected). And while its message was a little more dovish, we have no timetable yet for rate changes. Most people are sticking with June, but the odds of that went from 70% to about half in the space of a few hours. Now government debt yields are rising and mortgage price hikes coming. Polling also shows the current Liberal government is in freefall, thanks mostly to housing affordability. Ironically next week’s budget may itself fuel inflation as Trudeau tries to assauge the houseless by reinstating insured 30-year loans.

This comes after more than $10 billion has been committed by Ottawa – all of it borrowed money – to ‘accelerating’ home construction and facilitating cheap loans for developers of rental units. The feds have caused municipal zoning rules to be trashed, brought in a bizarre new tax shelter and a bevy of historic real estate taxes and sales bans.

But the people aren’t buying it.

Here’s a new survey (done by CIBC and the CBC) showing 76% of those without real estate think they’ll never get some., regardless of what governments do. Markets are overpriced. Saving for a downpayment is impossible. Over half say they can only afford a home if family finances it – and almost as many already with mortgages state they’re planning on cutting back spending to afford a renewal.

So many angry folks. Such political consequences. And what a bevy of policy mistakes being made. Without a rate cut in Canada we’re certainly heading for negative growth and a sustained affordability crisis. But with lower rates we may see a coiled-spring of buyer demand push real estate even higher.

And now chunky mortgage rates in April may mercilessly rain on the spring market realtors were counting on – for survival.

The year 2024 is shaping up as predicted. Take cover.

About the picture: “This is Zorro at 6 months,” writes Dan. “The little punk had pushed the 16 years old lady out of her bed and was very satisfied with himself. I cannot say if it is a story of cat versus dog or young generation versus the old one. As usual, please receive my respect for calling the things as they are in these strange times.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.