Say goodbye to free money
The Bank of Canada has announced that it will not raise interest rates to address concerns of a Canadian housing bubble. Unfortunately for those counting on a .25% base rate, that doesn’t mean rates will stay low indefinitely, just that they won’t be raised immediately to cool the housing market. The BOC points out that too many other sectors of the economy would be impacted by raising rates to cool the market and there are more direct ways to affect only residential real estate.
Finance Minister Jim Flaherty has also mused about such measures, including raising the minimum down payment requirement above five per cent, or reducing the maximum length a house can be amortized from the current 35 years.
Reuters points out the interest choice of David Wolf to make this announcement, his opinion on the matter seems to have shifted dramatically:
Wolf, a former chief economist in Canada for Banc of America Securities-Merrill Lynch, was appointed as adviser at the central bank in April 2009.
When he was still in the private sector, in September 2008, Wolf had warned that the Canadian housing market was headed for a U.S.-style meltdown due to household finances that were in worse shape than in the United States or United Kingdom.
At that time he said his bank feared “it may simply be a matter of time” before home prices start plunging.
At some point in the near future stimulus measures will recede and rates will start to inch back up to historically normal levels. How are you preparing for higher rates? If you hold a mortgage are you locking in or are you counting on the low rates of today continuing for a lot longer? If you’ve got cash, where are you sticking it? Do you hold equities in markets that will be negatively affected by higher rates?
Are you profit taking, loss cutting or bet making? It’s time to get ready for the end of free money.
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January 14th, 2010 at 12:59 pm
@Hrm @logic – it would be better to put the $1500/month towards princpal, but if housing prices come down significantly, I’d like to have the option of having a large downpayment for another house.
“We have a savings account we call our “higher interest rates in 2014″ fund. We save about $1500/month into that.” « Vancouver Real Estate Anecdote Archive Says:
January 13th, 2010 at 8:51 pm
[...] VREAA know that we owe many of the anecdotes archived here to posters at VCI. In a recent article, ‘Say Goodbye To Free Money’, the pope asked a series of questions aim to assess how people were preparing for future tighter [...]
January 13th, 2010 at 2:30 pm
@DP: How are you preparing for higher rates?
We have a 30yr amortization period on our mortgage (which is $500K), but do monthly payments as if it was a 25yr. We also have a savings account we call our “higher interest rates in 2014″ fund. We save about $1500/month into that.
Hmm, rather than put $1500 month into a savings account wouldn’t it be better to put it against the principle? Aren’t you allowed to put down an additional %15 of the value of your home evey year. Even if you find you couldn’t afford the payments in 2014 you could renegotiate for a longer term then.
Just a thought…
January 13th, 2010 at 1:11 pm
And check out their even more deluded–and wrong!–forecasts for 2008.
http://bwnt.businessweek.com/i....._forecast/
January 13th, 2010 at 1:10 pm
@Dave: The vast majority of economists weren’t expecting a recession in the first place, let alone the most sustained, and deepest, economic downturn since the depression. Economists’ forecasts are always biased to the upside. If you don’t believe, have a look at the link below.
There’s a reason people who trade against sentiment make big money–when everybody agrees on something, then they’re probably wrong. That’s why I’ll know the time to buy real estate in Vancouver is when my cab driver tells me that he’d never, ever, invest in real estate.
http://www.businessweek.com/ma.....015038.htm
January 13th, 2010 at 9:15 am
@Dave: Correct me if I’m wrong, but didn’t most economists not expect the first dip as well? The big money in aggregate certainly was betting against it. The forecasting from ‘most economists’ is worth less than a coin-flip. I believe it was only the minority opinion that ever made money off the US housing market crash.
January 13th, 2010 at 8:28 am
@mino3:
Most economists do not expect a double dip. The big money in aggregate is betting against a double dip. Laugh away, but your opinion is a minority one.
January 13th, 2010 at 4:19 am
@Dave: On rare occasions you have a valid point. This is not one of those times. What little credibility you had just went out the window. What else can we do but laugh?
January 13th, 2010 at 2:43 am
Logic,
Disgusting indeed.
I also heard an interview with a volunteer for the Olympics.
What did he volunteer for?
Well, he stands for a few hours at some venue’s entrance and makes sure people are not wearing the ‘wrong’ t-shirts, like, Pepsi logo. The guests cannot wear the Pepsi shirt.
I don’t know if this specific volunteer was of the type of ‘city employee forced to volunteer during taxpayer payed work hours”…
Yak…
My little one just puked in her bed tonight, roughly one liter of ‘value’, and it smells better than this ‘sponsorship’.
Regards
arit
January 13th, 2010 at 2:14 am
rp, my thoughts exactly…
January 13th, 2010 at 1:15 am
#37 @logic: What kind of Nazi shit is this?
January 12th, 2010 at 11:33 pm
Delusional Dave
Unemployment has stabilized and everything is good again hooray. I guess we can all watch RE start heading toward the stars. I think I know a song for Dave
Dreamer nothin but a dreamer. Supertramp
January 12th, 2010 at 11:25 pm
OT
http://thetyee.ca/News/2010/01.....ign=120110
Anyone for a Pepsi and DQ picnic during the Olympics? I’m buying.
January 12th, 2010 at 10:17 pm
albertas falling apart
suncor laysoff 1,000 more
January 12th, 2010 at 9:34 pm
@Dave: Dave, you’re deluded if you believe even 1/4 of what you wrote. The historically unprecedented (and coordinated) global burst of spending and liquidity saved us from a very deep recession. It has done very little, however, to extirpate the sources of economic decline and has done even less to provide a solid foundation for economic growth moving forward. Anybody who doesn’t see this is either not looking hard enough or has his eyes closed shut.
January 12th, 2010 at 9:21 pm
There has only been one double dip recession in the past century. Most recessions are single dip. Most of the economic stimulus money has yet to be spent. Confidence is back. Oil prices are down from the start of the recession. Unemployment has stabilized. The central banks are on top of bank liquidity issues. The Fed killed deflation and has many tools to ensure that will be the case going forward. I think we are going to be fine.
January 12th, 2010 at 9:04 pm
that was my post above.
January 12th, 2010 at 8:43 pm
Thank P.
“it came out in 1985… album “Brothers in Arms”
And that year I was 16-17 and hitchhiking through out Europe and I think every trucker had that Dire Straits CD
January 12th, 2010 at 7:51 pm
@Firmaa:
“Chances of double dip recession?”
Quite high I think. Note the early 80′s recession was double dip.
“What is the worst case scenario for unemployment?”
Similar to the 80′s I think, double digit for a half dozen years. Save for all the boomers leaving the work force it would be worse.
“How long this debt deleveraging will last? (it could last quite a few years in my opinion)”
A couple of decades I think, i.e. until the last boomer house is sold. I.E I don’t see a housing market turnaround as soon as 6 years after the bust like in the 80′s.
Now go play that video.
January 12th, 2010 at 7:42 pm
@jesse:
The BoC should either refuse to comment at all on asset bubbles (on the grounds that asset prices are not part of its mandate) or be honest about them. Its present footsie playing on the housing bubble which anyone with any sense knows we have now is insulting.
January 12th, 2010 at 7:33 pm
@Anonymous:
It would surely have to be “Money for Nothing” by Dire Straits. Even contains rude remarks tailor made for Bob Rennie.
Note also the timing – it came out in 1985, which was the real bottom of the last great Vancouver bust.
The video was also the very first computer animated rock video TTBOMK, and the first computer animation to see wide media distribution.
http://www.veoh.com/browse/vid.....81Gmta9Kdw
And the CD of the album “Brothers in Arms” was the first CD which everyone seemed to have bought, i.e. it marked the end of dominance of the vinyl album.
And finally, it was the first song to caustically comment on the rise of MTV, which marked the end of the golden age of rock IMHO.
January 12th, 2010 at 6:44 pm
patriotz:
very educative explanation of deflationary force of assets bubbles.thanks
Could you provide little bit of your insights for the future in the short term. (or anyone else)
(I don’t)
Chances of double dip recession? What is the worst case scenario for unemployment? How long this debt deleveraging will last? (it could last quite a few years in my opinion)
and do you see any lights at the end of the tunnel?
January 12th, 2010 at 5:48 pm
@DP:
“Probably should have opted for the variable rate and locked in when rates started going up and benefit from a year or two of low variable rate.”
Not really, the banks set the fixed rate on projected future rates. If you’d waited the fixed rates would likely have gone up and taken your couple of years of benefits away.
January 12th, 2010 at 5:10 pm
Dp, just a query – wouldn’t you be better off hitting that extra 1500 a month off the mortgage principal?
I assume you’ve thought of this, but am wondering why not?
January 12th, 2010 at 4:36 pm
great job DP – trust you are one of very few
January 12th, 2010 at 4:29 pm
Blog theme song? (NSFW)
http://www.youtube.com/watch?v=7KNUnLaRekg
January 12th, 2010 at 3:46 pm
How are you preparing for higher rates?
We have a 30yr amortization period on our mortgage (which is $500K), but do monthly payments as if it was a 25yr. We also have a savings account we call our “higher interest rates in 2014″ fund. We save about $1500/month into that.
If you hold a mortgage are you locking in or are you counting on the low rates of today continuing for a lot longer?
Locked in. 4.05% until end of term in March 2014. Probably should have opted for the variable rate and locked in when rates started going up and benefit from a year or two of low variable rate. Live and learn.
If you’ve got cash, where are you sticking it?
Extra top-up mortgage payments (about $250/month), savings account (about $1500/month), and investing in index funds (only $200/month). Losing out on investment returns now, but it’s worth it for us. The trade-off is in 2014 when mortgage is due, we have security of having about $450K left on our mortgage, with $90K sitting in cash which we can use to reduce mortgage to deal with higher interest rates.
Do you hold equities in markets that will be negatively affected by higher rates?
Of course.
January 12th, 2010 at 3:33 pm
@Anonymous:
If this blog had a theme song, the lyrics would go:
Crash Crash Crash, PLEASE CRASH so I can buy a house!
Let’s sing together and hope we can afford a house!
Oh no, up another 10% in the past 6 months, please crash!
Oh no, up another 10% in the past 6 months, I missed out!
Let’s keep waiting, eventually rates will go up!
I’ve given up!
My name is Scullboy and I’ve moved to Halifax!
Scullboy says, “I’ve been priced out in Halifax also!”
January 12th, 2010 at 3:12 pm
If this blog were to have a theme song, I think ‘House of Cards’ by James Keelaghan would be it:
http://www.amazon.com/House-Ca.....amp;sr=8-2
January 12th, 2010 at 2:24 pm
Actually, rereading the transcript makes me think the government won’t be touching mortgage requirements for a while yet. One must wonder what conditions must occur for the BOC to call a bubble. From what I see, that will happen only after it pops.
January 12th, 2010 at 2:19 pm
@patriotz: “Which is nonsense. Price/rent and price/income at the levels currently seen in BC are ALWAYS followed by busts.”
Even if he decided there was a housing bubble, it would be incorrect to raise interest rates when other more surgical tools are available to the government. He did not say there was definitely no bubble or that there was no danger of one forming. Given he’s suggesting the government take action, the BOC wants to be sure it has a safe exit and housing is obviously on its radar, bubble or no.
January 12th, 2010 at 1:58 pm
@jesse:
Which is nonsense. Price/rent and price/income at the levels currently seen in BC are ALWAYS followed by busts.
Perhaps some kind soul can email Mr. Wolf the following link. He can charge the $5 to his expense account, I’m sure.
http://www.economist.com/busin.....E1_QDSJDNS
January 12th, 2010 at 1:42 pm
@taylor192:
That’s backwards – asset bubbles are deflationary outside of inputs to the asset itself, and then to the inputs after they burst, whether it be the stock market bubble of the 20′s, the dot-com bubble, or the current RE bubble.
Two reasons:
1. Asset bubbles supply cheap capital which means cheaper output from capital due to overinvestment. In the 20′s, all sorts of newfangled consumer goods got cheaper. The dot-com bubble is the reason why long distance calls got so cheap, and the RE bubble is the reason why real rents have been decreasing. In short, overpriced assets result in cheaper consumption. This is offset to some extent during the bubble by inflated wages and input costs in the bubble sector.
2. Asset bubbles result in lower income due to miscallocation of capital, particularly when debt is used to buy capital which has a lower yield (e.g. overpriced houses), which results in lower consumer demand, which is also deflationary. This effect is mostly delayed until the end of the bubble because while prices are rising asset holders can still borrow demand from the future.
Add 1 and 2 together and you get too much productive capacity and less income – the classic deflationary scenario.
Note that the period of the highest consumer price inflation we’ve ever seen, the 70′s, saw major busts – i.e. asset price deflation – in stocks, RE, and of course bonds.
January 12th, 2010 at 1:13 pm
@pricedoutfornow:
“Ponzi schemes collapse when there aren’t enough new entrants to the market.”
Not entrants necessarily but new money, and, more importantly Ponzi schemes require an exponentially increasing amount of money to continue operating. So not only is it inevitable that it WILL crash but the longer it goes on the higher the probability it will crash sooner rather than later. I’m prognosticating that we’ll be in serious nose-dive territory by the end of summer and my bet with Dave says we’ll be below our 2008-09 trough by the end of spring 2011.
January 12th, 2010 at 1:05 pm
When the Fed stops its MBS purchase program, interest rates are going up. What the Fed, does, the BoC does. All this means is that they aren’t raising rates before July (we knew that already) and he’s pointing the finger at Jimbo/CMHC, and rightly so as far as I’m concerned.
January 12th, 2010 at 1:01 pm
No matter what they do to interest rates, housing prices will crash regardless. Ponzi schemes collapse when there aren’t enough new entrants to the market. And that’s what will happen soon enough. It seems ridiculous for anybody to insist that, at this point in the game, “there is no bubble”. How on earth can you then explain why house prices followed the same path upwards as the US, Ireland, Spain etc…which then crashed? Do we have higher incomes? No. Can you really afford to buy a $700k house with a $80k family income? No. Do we have a government-sponsored easy mortgage credit program, which allows virtually anyone to buy a house with very little down, at no risk to the banks? Yes. Therefore….bubble. And bubbles pop. End of story.
January 12th, 2010 at 11:55 am
NY POST reports that true unemployment numbers in the US are now at 22%. That means that all the ‘stimulus’ money has created nothing but a phony flash in the pan. Flaherty and the other central bankers know this. If the real estate buyers are stupid enough to get caught in this squezze then so be it. Every one else is concerned about the insane tax schemes that the government will dream out to bail out the losers when it all comes crashing down.
http://www.nypost.com/p/news/b.....Ci537pucaJ
January 12th, 2010 at 11:53 am
We finally know what Satv looks like!
January 12th, 2010 at 11:44 am
The US monetized 90% of it’s $1.8T deficit in 2009, doing long term damage to the American dollar. Will it be the same this year? Nobody is buying treasuries.
I just can’t make up my mind about how this will play out. Will there really be a return to normal, with higher rates and crushing taxes to pay down the debt? I’m not sure the Americans will go that route. The alternative is to monetize as much as possible and prepare for global conflict. When you can literally write checks that China must cash, why would you accept austerity and face an inevitable decline? For the sake of peace? Please. War is their national industry. I think the whole world has been incredibly naive.
January 12th, 2010 at 11:18 am
It seems to me that the Conservative’s hoped to win a majority while things didn’t appear to bad and were willing to sell their soul (fiscal prudence) to stay in power … problem is that Liberal ineptitude can’t bring down the gov’t so the Cons will stay on this path until they are forced off.
Avg saver/taxpayer will pay for it
January 12th, 2010 at 10:55 am
@jesse
They can curtail housing and the rest of the economy now, or later, yet it will happen. They are choosing later, and hoping someone else will pull the trigger. That’s passing the buck.
January 12th, 2010 at 10:51 am
I’m cashing out. My house in Ottawa goes up for sale this week.
Housing in Ottawa has been on a tear this year, developers unable to build fast enough and active listings selling within weeks of being on the market. This is unusual for conservative Ottawa, and can only be a sign of bad times to come.
January 12th, 2010 at 10:46 am
@taylor192: “The BoC wanted to be clear that other parties … are responsible for controlling real estate bubbles, while the BoC is only responsible for meeting inflation.”
That’s not really what he said. He said the BOC is concerned with bubbles because of their fallout on the economy. The BOC’s available tools cannot do much to affect a housing bubble without impacting other areas of the economy.
January 12th, 2010 at 10:40 am
This speech was about saving face and passing the buck. The BoC wanted to be clear that other parties (Minister of Finance, CMHC, …) are responsible for controlling real estate bubbles, while the BoC is only responsible for meeting inflation.
It was a solid move by Carney since Flaherty gave the opportunity for the buck to be passed.
Its disconcerting that real estate is the primary driving force behind inflation. I wonder what Carney has in mind to drive inflation if the housing market cools, taking the Canadian economy with it.
January 12th, 2010 at 10:19 am
@cik: “Look for higher DP’s and reduced amort’s and less taxpayer CMHC subsidies.”
Agreed. Let’s hope Flaherty isn’t intimidated by Wolf’s fairway drive.
January 12th, 2010 at 10:11 am
He’s saying central Canadian manufacturing is more important to Canada than RE speculators. Let’s face it, there are more voters that rely on a cheap dollar. I know David Wolf (good golfer), and he’s aware of the issues and constraints. Look for higher DP’s and reduced amort’s and less taxpayer CMHC subsidies.
January 12th, 2010 at 9:48 am
Read David Wolf’s actual speech here.
No really. Read it. He’s saying the BOC won’t raise interest rates to douse the housing market and risk damage to the rest of the economy. He suggests changing deposit requirements, mortgage and mortgage and mortgage insurance requirements, and loan-to-value and debt-to-income ratios.
In other words he’s saying: “There’s no bubble here (compared to the US) but we can’t predict these things very well and a housing bubble would destroy our economy. If we got it wrong and are in a bubble, or if we will soon be in a bubble, we should be VERY concerned. Instead of raising interest rates and causing problems with other industries, we can selectively tighten mortgage credit instead. Right, Flaherty?
Seems reasonable.
January 12th, 2010 at 9:45 am
What will we do when we can no longer devalue the CAD fast enough?
January 12th, 2010 at 9:42 am
The Economy: Optimism In The Face Of Deteriorating Circumstances
Irrational Optimism is not confined to the RE sector. A survey shows exporter optimism based on little more than the hope that things will improve, a rather circular argument. 80% of these exporters expect the Canadian dollar to strengthen, yet they are optimistic that their business will improve. This flies in the face of logic. But optimism has gotta be good, right?
http://tinyurl.com/y9s73d9