Garth Turner
The Turner report
Hang on, folks. Here we go again.
For the fifth time since September, the Bank of Canada has jacked up the cost of money.
This time, another quarter point is added, which also means the costs of variable rate mortgages, home equity lines of credit and business demands loans will also be higher.
And it's not over yet. According to the economists I skateboard with on all those stone steps around King & Bay, the central bank is going to take rates higher right through until late summer, adding another three-quarters of a point. That, fellow debtors, will bring the prime up to at least 6.25 per cent, or a full 2 per cent above the point where it sat a year ago when all this started.
Now 2 per cent might not sound like a lot - unless you have a variable rate mortgage, which will, by later this year, have increased from the 4 per cent range to the 6 per cent mark - which is a jump, in relative terms, of 50 per cent!
So, for people who have recently bought houses with big price tags (is there any other kind?) and little money down, this results in honking huge mortgages with substantially higher monthly borrowing costs.
Meanwhile, of course, the price tag on a conventional fixed-term mortgage has also been rising, with the latest round of increases taking place just last week. So, the question du jour is pretty simple: Are borrowing rates reaching the point at which affordability is eroded, or at which potential buyers are shut out of the market?
And the answer: No. Not yet. The increases in mortgage costs have been slow and incremental, giving the marketplace time to absorb them without sticker shock developing. I do not anticipate this week's move to make the phones in realtors' offices - buzzing now with Spring market activity - to suddenly fall silent. But that does not mean there will be no consequences.
The hike in borrowing costs has been substantial in relative terms. The effective doubling of the rate on a VRM will, for sure, take its toll at some point.
The Bank of Canada says it is concerned about continued economic expansion (only central bankers would see that as a problem), plus inflationary pressures, and that's why it will continue to ratchet money higher. Natch, they have the same situation in the United States, where the US Federal Reserve has increased rates more than a dozen times in an effort to cool the economy down and avoid anew boom-and-bust cycle from developing.
But, unlike the States, we are not fighting a big war in Iraq that costs $1 billion a week (our little war in Afghanistan has 'only' cost $2 billion in the past year). And unlike the US, in a world hungry for oil, where petro prices have spiked higher adding wealth to countries with the black gold, we have it. That's added to the value of our currency, which has soared to 88 cents US, and which should help to keep the lid on interest rates (since higher rates only increase the loonie more, which hurts our exports and kills off manufacturing jobs).
Nonetheless, there she goes. And people like me with VRMs should get used to the idea of monthly payments being higher again come the summer. So, again, will this have any impact on real estate as an investment?
Yes, ultimately, it will. Has to. Prices have hit historic highs, and show no sign of backing off. Meanwhile family incomes have not grown much, which means it is only the continued existence of cheap money which can sustain prices at current levels.
More increases will mean fewer buyers, and a slowing in demand will translate into softer selling prices.
And if that dismays people in the real estate biz, well, get a life. It's called "cycles," and normally the real estate market moves through one of these suckers every few years as economic conditions change. This time the cycle has been long indeed - almost eight years now - allowing prices to reach a level which would have been unachievable without the unique accomplishment of low inflation and cheap rates. But, ironically, the easier it is to buy expensive things, the more inflationary pressure mounts as demand pushes up values.
And, voila - the top. I have been saying for some time that the residential real estate market would hit a plateau from which there is only one way to go, and I do believe it is at hand.
No crash. No free fall. No 1988 carnage. No reason to drop off your new Mercedes on the way home. Just a healthy little correction. Handle it.
Garth Turner is a Canadian author and financial columnist. |
