Gobs of media in the last few days about mortgages at .99%.
No wonder. It’s historic. This nation of house-horny colonials has never seen such a number. It stirs loins. It turns pillow talk from cuddles to amortization. We’re smitten. Sign me up.
So let’s dig into this for a few graphs, before turning to you-know-what.
This is an offering by HSBC, the most carnivorous of lenders when it comes to market share. The 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’re the financial equivalent of push-up bras or bicep tats. Who can resist?
Well, the .99% home loan ain’t for everyone. The rate is variable, which means it can (and will certainly) increase over the next few years. Plus, it’s 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 in the ditch?
Because the economy’s in deep trouble. Central banks have pulled out all the stops to counter the effect of that slimy little pathogen. Our guys dropped rates to the lowest-ever level, and have been spending $5 billion a week buying up bonds – increasing the demand for debt, which sustains bond prices and keeps yields depressed. It’s all artificial. If market forces were in control of interest rates, you’d be paying HSBC four times as much to use its money.
The upside of low rates is people forget what a mess we’re in, become aroused and go buy a property they probably don’t need for an inflated price that they could not otherwise afford, from a vendor reaping a windfall. That’s what the central bankers want you to do. They entice borrowing. So as Covid sucks the guts out of airlines, restaurants, retailers, tourism and the service sector, 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. But in 2020 the economy has crashed, four million people are still on the dole, almost a million stopped making mortgage payments, the government is awash in red ink and our biggest metropolitan area is in lockdown with a 93% 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 WFH is presaging an overall income decline.
Enticement. It’s a dangerous experiment. 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?
Nah. Me neither. 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.
The way out?
It’s not more Trudeau/Chrystia handouts, even-lower rates or central bank stimulus. This is making stuff worse (even as it plumps investor portfolios). There’s only one door for society. It’s marked ‘Vax.’
Whether they erred or not, politicians turned off the economy to quell social contacts and 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. But only with the vaccines. Otherwise the virus could linger for a generation. Wait and see what a house is worth then – if you can find a buyer. Without herd immunity there’s no recovery. Conditions will worsen. Assets will decline. Income supports will drop. It’s not an option.
Ask yourself: would immunity from this disgusting bug 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. If the outcome is universally beneficial, everyone has a duty to be part of it.
Only a coward, and a selfish one, would ride on the back of this immunity. And this is why no anti-vax comments will be tolerated here.