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Infinity & beyond

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Just three business days (if those still exist) after the last bank rate hike and we have big issues, kids. Yeah, it was a measly quarter point. And it was number nine – so hardly a new thing. But the impact has been outsized. We have to ask: why?

In the course of a week the housing market has slowed precipitously. Showings have dipped. Deals diminished. Fewer over-asks and more price reductions. No torrent. But it’s in the air – like the smoke last week, you can taste it. Was this quarter point the one that broke the dromedary’s back?

So, what happened since last Wednesday?

Well, the prime rate at the chartered banks went to 6.95%. One more wee nudge (looks like that’s coming next month) and it will course through the 7% threshold. It’s been more than two decades (2001) since the prime was there. By the way, the average house price in Toronto that year was $251,508. Now it’s $1,196,101.

Mortgages were up, too. The big banks now charge from 5.04% to 6.49% for a five-year fixed. All the variables begin with a “6”. The stress test is solidly north of 7%. The yield on Canada five-year bonds spiked after the rate announcement, and has basically stayed elevated.

Variable-rate people were whacked again. Those with non-fixed payments will face immediately higher monthlies. The rest will see a longer amortization on their loans, as dictated on March 28 by our non-financial federal finance minister. That means little, if any, principal paid. More interest accumulating. And negative amortization for many with accrued (and unpaid) interest added to the outstanding debt. When renewal time rolls around, ouch.

The big deal about last Wednesday was capitulation. The Bank of Canada admitted with its hike that strength in the economy had not been sapped by higher rates, the housing market was acting irrationally and irresponsibly, too many new jobs were being created, too much new debt being taken on and, as a result, sticky inflation. While the US Fed kept hiking (and appears ready to stop), things here got out of hand while our guys moved to the sidelines.

And remember what the banks are telling LOC holders? Prime + 1% is turning into P+5 for lots of folks. Many never realized their lines of credit have rates which float and can be changed on a banker’s whim, or that they are actually demand loans and completely callable without notice. Surprise. Meanwhile HELOC payments, on average, have increased over 150% in little more than a year.

Canada got cocky. Now we get slapped.

“Will real estate market worries From 2022 come roaring back?” wonders Ron Butler, the canary in the mortgage coalmine. “Back to the same old worries:

– Pre-Con Condos and Low Rise New Construction closings coming up against much higher rates
– Variable Rate Mortgage payments hitting the “Last Straw” breaking point
– Static Payment Variable Lenders asking for some sort of payment push
– Fewer Buyers in general because the jump in Fixed Rates has pushed them out of any affordability
– Private Mortgages and Alternative Lending return to 2022 higher rates making payments more difficult. No definitive call yet it but the chance of a slowing RE Market ramps up.

Looks like we’re almost there.

“I made a huge error,” says realtor Robert Ede. “I thought the market prices in GTA were too high and would settle down from lofty 2022 in the course of this Spring …. when a glut of new listings flooded the market. But, no glut. No decrease in prices … in fact a mini-boom in March April & May at 30%, then 20%, now 3-8% BELOW the  5&10 year averages for Sales that month. A ferocious mini-boom fought by a diminished # of buyers over a diminished # of listings. Number of registrants who are members of Organized Real Estate? — all time high.”

It’s that’s mini-boom, fueled by a shallow pool of buyers, that has helped deliver higher rates – making housing that much more unafforsable. Upping rates.

Last week an RBC analyst said we are ‘past the point of no return’ for housing. It’s never going to become possible again for the average family to afford the average house. And former CIBC mortgage executive and industry honcho Vince Gaetano again offers his only viable solution:

“The next generation of mortgage products will have an inter generational assumption clauses whereby children and grandchildren will be allowed to take on remaining payments. The “Toy Story Mortgage” where everyone can participate in the “infinity and beyond” amortization.”

Now, behold this. It’s the family savings rate for Canada. If you need any confirmation we’re spending excessively, borrowing too deeply and husbanding dangerously, here she be:

Household savings: back on the road to zero

“The round trip back to the bottom is almost complete,” says financial author Doug Hoyes. “The household savings rate: 2018: 0% (we saved nothing); 2020 Q1: 26.5% (lockdowns, couldn’t spend, so big savings); 2023 Q1: 2.9%.”

His prediction: “As the recession takes hold, the savings rate will be close to 0% by year-end.”

A quarter point and three days. Tells you something.

About the picture: “Cats!, writes Ted, in Calgary. “Emmy and Huey scan for squirrels, magpies, chickadees, burglars etc.”

To be in touch or submit a picture of your beast(s): [email protected].


Source: https://www.greaterfool.ca/2023/06/12/infinity-beyond/


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