I bet you wish you had 5-6% mortgage interest rates back then.
Yeah, but then the houses would have been way more expensive. I know this is shocking, but when people by houses, they are typically doing so via the monthly payment they deem affordable. Interest rates, prices and term all seem to be secondary for a lot of people. Another reason the "40 year mortgages to increase affordability" was one of the most asinine things we've ever seen, and actually makes me wonder if it was done to line someone's pockets.
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Those that lock in for 5 years at ~5-5.50% like we've seen over the past 6 months are in for a rude awakening should rates come back down and they want to switch to lower rates. IRD penalties are going to be through the roof. This will be the trend come 2024/2025 in my opinion.
We've been in a (relatively) low interest rate environment for so long, I wonder how many people even know what an IRD is, or more likely, how high it can be if we see subsequent drops in posted rates.
We bought our first place in 2006/07, and it wasn't long after that when interest rates dropped. Yeah it sucked paying over 5% at the time when rates were much lower, but you take the good with the bad. I hope people understand that if they go fixed right now, that's probably what they are going to end up paying for better or worse as there'll be no backing out without a big IRD penalty.
Yep exactly. I explain to my clients that if you're locking into a 5-year fixed now, you have to be comfortable staying at that rate for the entire 5 years, as it'll likely be far too expensive to break moving forward.
When rates dropped sharply during Covid, we were seeing this to some extent too. Many people looking at breaking their mortgage, but were facing stiff penalties. It wasn't as drastic as I anticipate it to be moving forward though.
2-3 years seems sensible for anybody locking in right now.
This has been an interesting time where a lot of people have had their risk-tolerance challenged. TBH its a hard thing to really honestly evaluate beforehand, especially riding a decade plus of stability. I think something easy to miss when thinking about these things is the multi-factorial changes:
1. I'll be fine if rates rise because I have a good job
2. I'll be fine if I lose my job because I've got good investments
3. I'll be fine if my [higher-risk] investments crater because I've got a good job and my mortgage rates are low...
It seems obvious now, but I'm not sure the fatal flaw with those 3 statements would have jumped out to me (or most others) a couple years ago...it's much easier to imagine a singular cause-effect scenario (one of those things happening) than the interconnected scenario that we've seen play out.
CIBC and other banks are widely reporting that they expect the central bank to pause at the current key rate for a while, but hold it through to 2024. Now, they're opinions might be as valid as Yoho's, as they have been quite wrong about this multiple times in the last 2 years.
Looking at macro indicators though, I think it's a safe assumption. Canada's inflation relative to peers is tapering off quite well, reports are indicating that most of the inflationary pressure is due to external economic factors, and the interest rate increases have tempered some of the heat in the hottest housing markets. If we hit a sharp economic downturn, they're going to want to reduce rates really quickly again. In order to do that, they'll need rates at a reasonable level to then cut into for stimulus. That all means likely hold until the economy looks really bad, then cut from there. But I'm less knowledgeable than CIBC.
CIBC and other banks are widely reporting that they expect the central bank to pause at the current key rate for a while, but hold it through to 2024. Now, they're opinions might be as valid as Yoho's, as they have been quite wrong about this multiple times in the last 2 years.
Looking at macro indicators though, I think it's a safe assumption. Canada's inflation relative to peers is tapering off quite well, reports are indicating that most of the inflationary pressure is due to external economic factors, and the interest rate increases have tempered some of the heat in the hottest housing markets. If we hit a sharp economic downturn, they're going to want to reduce rates really quickly again. In order to do that, they'll need rates at a reasonable level to then cut into for stimulus. That all means likely hold until the economy looks really bad, then cut from there. But I'm less knowledgeable than CIBC.
Question - If rates hold while others (namely the US) continues to rise, or we lower our rates ahead of others, that will likely cause the dollar to tumble, which will increase the cost of many goods and cause... inflation, no?
Question - If rates hold while others (namely the US) continues to rise, or we lower our rates ahead of others, that will likely cause the dollar to tumble, which will increase the cost of many goods and cause... inflation, no?
The dollar and currency is so hard to predict though. If everything else was equal, that might be the outcome. But, with currencies there are a lot of factors and it's not purely interest rates. Case in point, Canada raised rates earlier this year than the US and it made almost no difference.
Aside from that though, the consensus view seems to be one more hike in the US and they'll hold the rates as well.
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The inflationary pressure of a weak cdn dollar relative to USD is somewhat buoyed by the likely increase in total export to the US due to increased purchasing power. It's a weird relationship.
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The inflationary pressure of a weak cdn dollar relative to USD is somewhat buoyed by the likely increase in total export to the US due to increased purchasing power. It's a weird relationship.
It was always a major gripe that the USA had with China that they artificially kept the value of their dollar low in order to maximize profits from their exports.
The USA, I assume, is pretty vigilant about Canada, as a major oil exporter, doing the same. As you say, the Canadian dollar can only drop so low, before other economic factors, caused by it's close relationship with a much larger economy, begin to keep it up.
Just curious, where do you predict interest rates will peak?
For those interested this is a fantastic YouTuber out of Calgary (looking to leave Canada and go to Mexico ) that has some amazing insight on the economy and the central bank policies great stats facts and figures that people can subscribe.
I'd guess we see another 25bps increase (or two, at the most) and then a wait and see approach. I don't believe our economy is built (due to 15yrs of cheap debt) to be able to withstand an overnight rate of 5.5%+ today. It would take years and years of borrowing behaviour change before Canada could survive that financial climate.
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LOL at Yoho's "fantastic Youtuber" who seems more like a bull#### expert. He asks "why aim for 2%? Why not zero percent inflation? Nobody bothers to ask why! it's mad!"
On that alone I can assume the rest of the content, even though I am not an expert, is probably completely inaccurate. But I did pick up a few other things that had me going wha? Listen to this guys advice at your peril.
I've lost faith in Tiff and the BoC and I don't think they really care about the pain that they can be inflicting on Canadian households. Between this and his anti-worker, anti-pay comments he seems very out of touch.
Quote:
Tiff Macklem says he'd rather raise rates too much than too little
The BOC is supposed to protect Canadian interests, no? Not just Canadian households, but the economy as a whole (imports and exports). Not that I just say I trust them with every decision, because in hindsight they've made mistakes just like any other government entity, but to say they're out of touch or that they don't care is a bit presumptuous. They're affected with this just as much as we are.
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It's a tough call, either people spend more because of inflation, or more because of interest rates. But I think they have to do it.
The government could have increased taxation broadly as a means to fight inflation and then the measures could have been targeted more and rather than banks and bond holders getting the money the government would to pay down debt. That is the way MMT is supposed to work.
Whether that’s better or worse for the average person and whether it works is up in the air but they did have another choice.
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