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And then there were eight.

On Wednesday the central bank fluffs the cost of money for the eighth time in ten months. Last March, when houses were rising in value more than 20% a year and mortgages were 1.7%, the Bank of Canada’s benchmark was a quarter of one per cent. Almost nothing. This week it hits 4.5%. Yes, a 1,700% increase. The kids never imagined this could happen.

As you know, and as a certain blog has pointed out with nauseating repetition, rates and houses move in the opposite direction. Now we have a crisis because, while real estate is 20% cheaper, the cost of carrying a place has exploded higher.

But are things about to get worse? Like, a lot worse?

The meme on the street is all about pivot. Descend into the Reddit housing swamp and you’ll hear it. “Rates will be slashed later this year,” they cry. The echo of last year’s, “Rates can never rise because everybody’s in debt,” is unmistakable.

Lost here is a simple fact. Houses were unaffordable when mortgages were 2%. Now they’re still unaffordable after becoming a fifth cheaper, because loans are 5%. If CBs start reversing (the pivot), sales and prices will bubble higher fast. Yet it’s unlikely we’ll ever get home loans back down to less than 3%. The end result: real estate becomes more rarified. Covid valuations will return. Borrowing will cost more. Meanwhile OSFI will have tightened the rules. Lose, lose.

Oh, kiddos, be careful what you wish for.

But wait. Mr. Market seems to be equally smitten. Too many investors, traders and analysts are expecting that quantitative tightening will once again become QE, especially if this debt crisis thing spirals. Recall the chart published here two days ago, recounting OIS expectations. The central bank rate will have dropped by almost half within 24 months, it indicated.

And check this out – the disparity between what the US Federal Reserve has clearly said it would do, and what the market thinks it will actually do. Somebody’s zooming us.

Investors have unrealistic expectations for rates

Why would the Fed pivot?

Two reasons. First a deep, painful, layoff-riddled recession. The tech guys are slaughtered. Elon catches the last rocket to Mars. Unemployment spikes and the American economy shrinks, just as the 2024 Presidential cycle kicks off in earnest. In this scenario, the Fed would add stimulus by reducing the cost of borrowing.

Or, politics really unravel. The Republicans absolutely refuse to increase the debt ceiling unless the White House agrees to slash spending. Biden says go suck a lemon. Crisis ensues. The market reacts badly. US credit is threatened. Until a resolution is found (like the Treasury issuing a $1 trillion coin, and handing it over), the Fed seeks to mitigate damage. The benchmark rates goes down.

Are either of those scenarios likely? Hmmm, maybe. But remote.

The labour market in Canada and the US is robust. Analysts are forecasting positive economic growth in the next few quarters, not a contraction. Tech layoffs are good because they will reduce upward wage pressures and help corral inflation – which has been steadily, slowing fading. Meanwhile debt ceiling crises have been with us in the past. They were scary. The headlines were huge. The rhetoric vicious. But they always got solved. Why would American politicians destroy the economy and idle millions of people? Voters would seek revenge. It’s a losing strategy.

In short, why would monetary authorities give up so fast? Rates have been crazy low since the GFC of 2008-9, and central bankers have wanted to get them back to normal levels since. Will they turn tail now, just as inflation is starting to decline and excesses in real estate and other assets are moderating?

Nah, not happening. At least not as quickly as stock cowboys and Redditers think.

So the BoC hikes Wednesday. The chartered bank prime moves higher on Thursday. VRMs reflect this immediately. Reverse mortgage rates touch 10%. And we sit there for a while. Likely the rest of 2023.

A pivot is out there. Somewhere. But before that, mortgages, loans and GIC rates go up. Houses go down. Govern yourself accordingly.

About the picture: “The best thing that happened to our family during covid,” writes Adam, in Calgary, “was Zoey! Photo is from Christmas 2021 just after we got her and she’s been melting hearts ever since. Long-time reader and have learned a lot. Also, proud to say that shortly after I found your blog I promised myself to never read the comments, and haven’t looked at them since. Thanks for educating (and entertaining!) the masses.”


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