The turning

Next Wednesday. Ten o’clock. WWTD?

(That’s ‘What will Tiff do?’)

The Bank of Canada’s first interest rate announcement and Monetary Policy Report of 2022 will be dropped then in Ottawa, and speculation is rampant. Will the bankers do what Bay Street and most economists think/want and pull the trigger on a rate increase? Or will it wimp out, decide to let inflation rip, wait for Omicron to crest and not steal thunder from the coming federal budget?

Here’s the latest. Then we get to Angela.

Eight times this year the BoC will decide if rates are to increase or stay the same. The first is January 26th. Currently the bank’s benchmark rate is just one itsy-bitsy, weenie  quarter of one percent, and has been there – at an emergency and historic low – since Covid came to town almost two years ago. Rates get cut when the poohbahs who run the place think the economy needs stimulation, lest it slump or succumb to a crisis situation. The virus was a disaster. Unemployment soared to 14%. We were locked down. Inflation was negative. The bank slashed.

In 2022 we still have Covid, but no sick economy. Stock markets are near record highs. Jobs have flooded back. GDP is growing smartly. Wages rising. Corporate profits are peachy.

But the cost of this has been monumental. Now inflation has soared from less than zero to about 5%. Government borrowing has exploded higher. Annual deficits are epic. Household debt has erupted, led by a binge in mortgages. No wonder, when five-year money was available for less than 2%. And we all know about real estate.

In 2019 the average house across Canada sold for $454,776. Five-year mortgages were 3.5% and home prices were stable. The central bank rate was 1.75%.

Two years later the bank rate is 0.25%, mortgages are still available at 2% and the average house costs $713,500. That’s a 57% escalation in values in two dozen months. CREA’s index went up 26% in twelve months. A record. Some of that was due to Covid-induced nesting, leading to serious social FOMO. A lot of it was because of cheap money. And that was 100% fomented by our central bank. Stimulative monetary policy may have helped save the economy from the slimy little pathogen, but it also may have forever made buying a detached house in an urban area the purview of the elite. In turn, real estate inflation has jumped the cost of living, which now threatens to spiral as the pandemic ends. Worse, because nobody can afford to move, listings have crashed. Demand overwhelms supply. Quel mess.

This brings us to Wednesday next. US banking giant JP Morgan says (categorically) the Bank of Canada will start tightening – raising rates a quarter point in the first of five such hikes in 2022. That will yield a BoC benchmark of 1.5% by Christmas, jack the chartered bank prime to 3.7%, increase HELOC payments 50% and push five-year mortgages towards 4%.

The Bay Street guys are rooting for this to occur, saying the CB is already behind the curve and has allowed inflation to pop amid excessive monetary stimulus. Not good. “We need rapid action this spring as a series of rate increases,” says RBC. The Bank of Canada is. “out of step with red-hot housing, record equity markets, decades-high inflation, and employment back at pre-pandemic levels,” states BeeMo. As for buying a house now, “there is a risk of getting into the market at today’s rates,” says CIBC.

Remember the inverse relationship between rates and prices. It is probably about to flip.

Now, Angela has been waiting patiently, so let’s hear her tale.

I’ve read your blog faithfully for years.  In that time we’ve gone from newlyweds with $80K in student debt and a puppy to middle aged parents with a 13-year-old senior dog and a $1.5M investment portfolio. Today our story takes a turn like so many that have gone before us: the house we’ve rented for four years in a neighbourhood we’ve lived in for 11 years is being sold.

$800,000 doesn’t get us much house and there are slim pickings out there.  Moving further out means a longer commute and more gas.  I just never wanted to own a house honestly, but we’ve come to a point that it seems like our only choice because rents are so high for so little.  We’d be downsizing further into a 2-bed purpose-built rental.  I’m not even sure the kids would fit in one room, never mind me setting up a desk in a quiet space.  I never cared about granite or landscaping.  Vinyl, lino and dandelions are fine with me as long as I have freedom.  I feel less and less free at the mercy of landlords, even with our chubby portfolio.  How stupid is that?  Do we move into another rental and hope for the best or just buy what we can afford and get on with our lives?  On a scale of 1 to 10 how much will we regret buying in the next 2 months?

Since we’ve followed your advice about a BD portfolio, I wondered if you have some words of advice or encouragement for us.  I’m crying out the same words as many others:  they’ve said this market would crash for years and it never comes!  What should we do?  Keep up the good work on your blog.  It’s a dose of sanity in these crazy times.

Logic vs emotion, Angela. Logic tells us a two-year CB tightening sked will hit sales, weed out buyers and increase listings. Prices would fall. Maybe not a lot. But some – depending on the city. People buying in the winter of 2022 with high leverage could be under water. Others might have to wait several years to get their original investments back. And meanwhile new laws might really derail the market, as they shack investors who have helped push prices higher.

Logic also tells us no matter what your rent, or how much you pay, it’ll be cheaper each month than buying once the surety of a capital gain is removed. Ownership overhead, along with buying costs, are extreme. Everything – insurance costs, property taxes, renos, building materials, trade fees – are inflating. If accumulating liquid wealth and gaining the freedom a fat, diversified portfolio brings are your goals, eschew buying at this time.

But emotion drives residential real estate, and there’s plenty of that in your note. You can live in a better place, and ultimately cheaper, by renting. It’s worked for you for 11 years. The proof is there. You’re now millionaires. If moving once a decade is the price for freedom, early retirement and wealth, is it so high?

Think about it. At least until next Wednesday.

About the picture: “This is Bronson, our 12 year old Rescue Dog,” writes Michael, in Waterloo. “He came out of the Bush up North as a 6 month old – in very rough shape ( open gash on his neck – most of his muzzle furless from mites. This is him this past Aug enjoying our Georgian Bay pad up Wiarton way. “