Big news Sunday as the US Fed slashed its rate again. By a full 1%. To zero. Plus it’s throwing $700 billion into the liquidity pot through bond purchases. Breathtaking.
On Monday our Big Banks will lower their prime rates. Or not. Could take days. Despite the central bank’s panicked move on Friday there’s nothing compelling the Royal, TD or the other guys to cut. And if they do, the drop could be less than the half-point Ottawa delivered.
In fact, did you notice that some mortgage rates have increased? How could that be?
Well, the whole world’s getting weird. About to become weirder, too. If you thought last week was nutso, just wait for this one to be finished. The financial gods know this. It’s why the Bank of Canada delivered that steep and shocking reduction on Friday. It’s why Morneau just handed over $10 billion to the same small business dudes he was trying to eviscerate a year ago. And it’s why the bank regulator relaxed controls and urged the big guys to shovel $300 billion in loans into the economy. It’s also why Ottawa will soon announce how it’s going to send money to people to pay rent and buy groceries. Plus why CMHC is allowing a six-month mortgage holiday.
These are desperate, emergency measures to deal with the economic effects of a pandemic which has turned normal citizens into Tpaper-hoarding, self-isolating, social-distancing, zonked-out zombies. I mean, have you checked out the grocery store lately? Wal-Mart’s food area? Costco? Politicians, the media and the Internet have managed to alter human behaviour in less than seven days. The amount of disruption that stressed-out people are accepting is immense. Next up are sealed borders, grounded domestic flights, personal travel restrictions and the shuttering of every public institution save hospitals.
This by the way, is happening in the midst of an historic piddling-match between OPECers and the Ruskies which collapsed oil and decimates Canada’s main export commodity. What a perfect storm for this nation of little beavers – crude collapsing, travel and tourism gone, big sports closed, supply chains busted, businesses without customers and a for-sure recession starting. Good thing MPs are on the job in the House of Commons. Oh, wait…
So, this is why interest rates aren’t cascading lower at the banks. And why some home loans are going up. Cuts are not happy events for the banks, already lending money out for five years at the inflation rate. As the central bank was hacking on Friday one big bank jacked up its VRMs by exactly the same amount, for example. Low rates mean lower profits and a harder time matching the cost of borrowing with funding sources. Thus, some fixed-term rates increased on Saturday.
Recessions hit banks as well as workers. If you recall, mortgage rates were up a dozen years ago when the credit crisis was raging and CBs were slashing the cost of money. Same reason today. Low rates bring more banker risk. If you need a mortgage, go get one. Even if the Bank of Canada moves to zero (increasingly likely, now that the Fed is there) it doesn’t mean you borrow for nothing.
Next?
Widespread, drive-in virus testing in the US will probably bring shocking results. Trump will send the country into virtual xenophobic lockdown. The media will have a cow. The odds of a global recession will mount. Mr. Market will not be happy. The bottom of that bear market Ryan talked about here on Saturday could arrive swiftly. Of course, the pandemic will fade in a few months, the oil war will mitigate, pent-up consumer demand will explode and the trip back up for financial assets will likely be explosive. Don’t miss it by giving up and cashing in now. Bad idea.
And what about the real estate market? After all, this is rutting season. Realtors expected cheapo mortgages and thin listings to send prices skyward. Still on?
Don’t count on it.
People desperate to buy a $6 package of toilet paper, worried about their employment and being told every twenty minutes by CBC that they’ll soon die, are not exactly motivated to dive into debt. It doesn’t matter how low the cost of a loan goes if your workplace is quarantined shut and your job looks dicey. Meanwhile owners don’t want to list and open their homes to potentially infected strangers (especially if they rent. Yuck). Remember that in China during the virus attack real estate sales collapsed 98%, something which agents and brokers are seeing in Covid hot spots like Seattle and parts of California.
As for high-end properties, well, kiss them off until stock markets are restored. And condos? Pffft. Who wants to ride in stuffy, little, airless elevators with barbarians from other floors who hurl all their greasy germs on the buttons?
So, nah, forget the interest rate thing. This spring will be a real estate write-off. What comes after that, however, may knock your socks off.