After allowing even myself, a fiscally conservative individual, to drink the Kool-Aid on these low mortgage rates, I am again at my wit's end and have the need to share a couple of points.
First of all, these low mortgage rates are unprecedented in our history. Our future selves will look back at Canada during this pandemic and will have opinions about right and wrong, but one thing is true: we will look back on and say “WTF were they thinking?” with these stupid low mortgage rates and the oh-so-obvious outcomes they produced by the mass amounts of house horny speculators.
I know our readers have seen them. Many banks in the last few days alone have been advertising mortgages at .99%-1.50%.
I am not writing to suggest it is a good or a bad thing. What I am suggesting is that you take a good long look at your various options before you go diving into the near top of the largest housing bubble in Canadian history. Balance your wealth and consider other types of hard assets, such as gold or silver. But I digress.
HSBC, the most carnivorous of lenders when it comes to market share, is a prime example of these advertised “catch your eye” rates. Their .99% extreme rate is designed to get attention (done) and attract customers to a bank which would love to also have your RRSP, TFSA and LOC. Mortgages are ‘relationship products.’ They are the financial equivalent of model homes full of upgrades you can’t afford or commercials showing the next greatest technology being used in fascinating ways you end up never using yourself. Who can resist right?
Well, the .99% home loan isn’t for everybody. The rate is variable, which means it can (and will certainly) increase over the next few years. Plus, it is only for CMHC-insured mortgages on properties with financing of 80% or more (and worth less than $1 million).
If you want a five-year fixed-rate mortgage on a house with more equity (not insured), HSBC will give you a loan at 1.59%. Still ridiculously cheap. And in the last few days, CIBC has moved to almost match it, with a 1.49% price on a four-year fixed borrowing.
Why are interest rates so low?
Because Canada’s economy is in serious trouble, central banks have pulled out all the stops to counter the effects of our little much-hated COVID-19 enemy. Rates dropped to the lowest-ever level at the same time our Government has been spending $5 billion a week buying up bonds. This is increasing the demand for debt, which sustains bond prices and keeps yields depressed. It is all artificial. If market forces were in control of interest rates, you would be paying HSBC 4x’s as much to use its money.
The advantage of low rates is that people tend to forget what a muddle we are in, spend on things they don’t need such as real estate they probably do not need for an inflated price that they could not otherwise afford, from a vendor reaping a windfall. That is what the central bankers want you to do. They induce borrowing. So as Covid-19 sucks the guts out of airlines, restaurants, retailers, tourism, the service sector, and more importantly, the little guy, this real estate activity helps mitigate the mess.
But cheap money (naturally) augments debt. Borrowing these days is increasing at the same pace as back in 2017 when a robust economy was thrusting house values higher. In 2020 the Canadian economy has crashed (whether you realize it or not). Four million people are still on pogey of some sort, almost a million stopped making mortgage payments, the government is awash in red ink and our biggest metropolitan area of Toronto is in lockdown with a 90%+ drop in commuter rail ridership. It looks increasingly like temporary job loss may become structural. Four in ten small businesses – the biggest employer – will likely not survive the virus, while widespread working from home is foreshadowing an overall income decline likely already started, but nowhere near the worst it will be.
Inducement. It is a dangerous test. Now that a mortgage has dipped below 1%, it probably gets worse. Higher house prices. Way more debt. But no more productive economic activity since we’re all just selling each other properties at ever-higher costs with increased financing. Does that sound sustainable to you? I already know the answer…
Every month it gets worse. We will emerge from this eventually with broken governments, higher taxes, less affordable homes, historic family debt levels and yup, gradually increasing rates. So how do we balance? What is the method out of all of this?
It is not more Trudeau/Freeland handouts, even-lower rates or central bank stimulus. This is making stuff worse (even as it plumps investor portfolios). There is only one door for society. It’s marked ‘Vax.’ It is happening whether you like it or not.
Blunder or not, politicians turned off the economy to quash unnecessary social connection and to slow the spread of the virus. Now we have a global economic crisis to go with the health disaster. Our closest neighbour is the epicentre, where millions of people still think wearing a mask is socialism and enslavement (thanks to you-know-who). The next six or eight weeks may be grim.
We will get through it. Do not panic buy. Do not let fear be your guide into assets and portfolio change. Be self-taught. Learn where your wealth is and what it is doing for you.
As much as a mainstream planner or advisor would say to you stay away from “relics” or “hard to sell cumbersome” things like physical gold, realize that these are the exact opposite type of fear tactics that even “gold bugs” on social media have been doling out for years. There are two sides to every argument.
Keep your traditional assets and leave them with people you can trust. Do not inadvertently dump gobs of your portfolio to own some gold or silver. Keep it reasonable. History tells us that there is room for it in our day-to-day wealth planning. Keep it physical and from experts that do no make fear part of the offer. Put it in your 401K, your TFA or RSP and use every advantage you can to be part of something that can offer increased diversity in your wealth.
Conditions will worsen. Some assets will decline while others will flourish due to their inherent nature (such as gold and silver). Income supports will drop. It is not an option.
Ask yourself something simple. Would immunity from Covid-19 be good for your neighbourhood? Your kids and their school? Your city and downtown? The province and nation? Of course, it would. And how do we achieve this? Yup. We get "vaxed". All of us, especially when the outcome will be universally beneficial to everyone.
In the meantime, keep panic out of your vocabulary and education in. There is a justified sense of change in the structure of wealth. Allow assets such as gold and silver to be part of that. To each their own.
Yours to the penny,
Delta Harbour Assets.