Going bush

Would you like the good news first? Or the bad stuff?

Okay. The good news is that the Fed’s document this week showed US interest rate increases will probably be slowing. After a spat of crazy-big 75 bps hikes, the next one is expected to be a halfer. Markets like that. Investors have been buying as a result. The American economy is strong. Employment is robust. The midterms were no disaster. Corporate profits are okay. Elon is getting spanked. All good.

The bad: the peak in rates, Mr. Market suggests, will be higher than previously thought. The CB rate will hit 5% before it halts, up from a range of 3.75-4% now (the highest in 14 years). This suggests there is a full 1% to go before we get a pause.

Whazzat mean for us?

Our guys move again a week from Wednesday and the expectation is a 50-pbs increase, to 4.25%. Over time our central bank has followed the Fed more than 90% of the time. If we don’t do that, our currency gets shellacked – and already it’s battered. So you can pretty much count on us hitting 5% if the Yanks do. Ergo, another three-quarters of a point to come in early 2023.

The chartered bank prime is now 5.95%. On December 8th it will be 6.45%. If the above is correct, by the Spring real estate rutting season, it will sit at 7.2%. HELOCs will be close to 8%. Reverse mortgages could be pushing 10%. Variable-rate loans will be north of 6% and five-year fixed about a point above that. A lot depends on the bond market, the odds of a recession plus inflation and employment data.

As we detailed here over the last two days, we already have a big, hairy problem. A third of Canadians with a mortgage have VRMs. Last year over 50% of all new loans went variable, just to get the cheapest rate. Now half of them have hit the trigger point where payments don’t even cover interest. Next year it will be two-thirds. And policymakers are worried. Either something big breaks, or these grasshopper homeowners get a lifeline.

Count on this to be one of the biggest stories of the next six months. Plus what happens to Zelenskyy.

By the way, a blog dog named Garyll sent me a mortgage statement with this note attached: “I Thought you and your lovely viewing audience might like to see this. It’s what happens when you have a VRM that goes from free money to now. $50 is going to the principle instead of $500. Feel free to share.”

Here it is. Have a look at how long it will take to pay off a loan of less than $200,000 at a rate just over 5% with a VRM payment that is almost all consumed by accumulating interest. Sisyphus, baby. You just never get there…

Now, trust the politicians to make everything worse. Atop negative market sentiment, plunging sales, falling prices and increasingly-freaked-out homeowners, we have a plethora of new regs and taxes designed to crash real estate in a generational way. Do not underestimate how some of the following will play out:

Ontario has an anti-foreigner levy (NRST) of a stunning 25% of the purchase price. Plus land transfer tax and other charges. It effectively ends the trickle of offshore money hitting places like the GTA.

BC, of course, has its own 20% non-resident buyer tax, plus a speculation tax conveniently aimed at untrustworthy Albertans.

The empty-house tax in Vancouver is about to explode from 3% to 5% in a few weeks. That’s 5% of assessed value each and every year, on top of property tax, condo fees and all other ownership overhead. This is how a regional city guarantees it will never be an international business centre.

Sadly Toronto is following suit. Its ‘empty house’ tax also clicks in soon, unless you live in a unit full time or rent it to tenants (who can actually stop paying rent, live there for free for many months and face no consequences). BTW, Toronto is ripe for an epic property tax hike in ’23.

In NS, where that province needs every dollar of non-local investment capital it can get, there’s a new anti-CFA (Come-From-Away) tax. It means anyone from Ontario, for example, must pony up an extra 5% of the purchase price on closing just to have a deed transferred. So much for citizenship.

Of course Toronto has its famous double land transfer tax in place. So to buy the average slanty semi worth $1.5 million, you have to pay $52,950 for… nothing.

It gets worse.

In five weeks Canada becomes one of the few nations on earth where a non-resident buyer is banned from purchasing residential real estate. Yes, banned. Go away. The impact will be felt most in those luxury markets which depend on international wealth and where Canadians do not participate. No, houses will not get cheaper. But our country looks bush.

And now, just when nobody is flipping houses and families are hanging on by their rate-ravaged fingernails, Canada is getting an anti-flipping tax likely to snare a lot of incredulous citizens in the CRA web. The intent of the new rules is to “reduce speculative demand in the market place and help to cool excessive price growth.” Yup, exactly when we don’t have any FOMO to curb.

So, if you sell a house purchased less than a year earlier – and cannot prove the sale was because you had to relocate for work, got divorced or died – any gains will not be covered under the PR exemption, But added 100% to income. Ouch. In fact, as my tax-buddy Jamie Golombek detailed in a media story the other day, the CRA is already chasing people they think need Hoovering.

Sadly, none of the above will make a house cost less, as the price of money rises. Elect clowns. Expect a circus.

About the picture: “Sad days here Garth. Sending a picture of our gentle giant Wyatt,” writes Jillian. “These are from his younger days, in his happy place hiking through the North Shore Mountains. He was with us for 12 years, which is a lot for a Greater Swiss Mountain Dog. Made the hard decision to put him down this week, had to let him go…You were the best dog ever, we love you Wyatt. From long time regular blog readers, and friends. Thanks for everything – to you and the whole team.”