Since I reached out last month (May 2022), new inflation data has been released. The press, drunk on crisis, has switched from beating the FOMO drum to drumming up fears about stagflation, recession, and Canadians losing their homes. Are they right?
No. But that doesn’t mean things are rosy.
The breathless headline, ‘1 in 4 homeowners say they’ll lose their home’ is everything you need to know about media coverage and how seriously you should take it. The press got out of the truth business and into the attention racket years ago. First they jump on a bandwagon, then they burn it. Don’t live in the wreckage of their future.
This is what we know.
Inflation is high. As long as it stays up, rates will go up.
Core inflation in the US hit a 40-year high of 8.6% in May. The Federal Reserve reacted by boosting their interest rate – the largest bump in 30 years. A month before, the Fed dismissed the idea that such a bump would be necessary. Their reactivity suggests they don’t have control of the situation.
Even before the May inflation number, the Federal Reserve and the Bank of Canada told us to brace for higher rates well into the future. I don’t think they expected to raise rates this much, this fast, but inflation is not going to take away your home – or your neighbour’s.
Fixed-rate mortgage? Inflation will have to wait
Canadians are risk-averse, careful little beavers. Even though variable rates tend to be cheaper in the long run, fixed rate mortgages are the most common. The majority of these fixed-rate mortgages renew every 60 months, so most Canadian households won’t be impacted by an interest rate change for several years. Because of this there can’t be a system-wide event where little green interest rates come for our children. The most vulnerable homeowners are those who overspent four years ago and/or borrowed against their equity. Large mortgages make even modest increases painful.
Rates can impact price immediately, however, as homebuyers have less purchasing power at every bump. This seems to have happened in Toronto and the GTA, with the caveat that believing that prices will go down is more powerful than a rate change. Buyers are sitting on the sidelines. If prices continue to decline, they’ll wait some more.
Will inflation come down? The R word says ‘probably’.
Covid forced global governments to create and share an enormous amount of money. Now, they are scaling that spending back. This has affected stock markets and cryptocurrencies and has everyone talking about a recession – before one is actually confirmed. Like homebuyers waiting on the sidelines as prices dip, recessions can be a self-fufilling prophecy. Anxious homeowners and buyers spend less, businesses reduce headcount because of lower spending, people fear for their jobs and spend less. Rinse and repeat.
The issues that covid caused still remain, as factories, already backlogged, close during flareups. Containers wait at ports or on ships, bottlenecked. Inflation will continue to be driven by the fact that you simply can’t get stuff like new cars. Recessions have less activity and less spending, so that will ‘help’. The price of commodities like oil could drop and bring overall inflation numbers down. If that happens, rates will hold or drop.
The risk is that if inflation stays up, then prices will drain pocketbooks, rates will squeeze borrowers and affect new construction (a huge part of our economy) and recession will be unavoidable.
It may not be fun to read this, but recessions are actually good for economies. They remove the excesses, make job markets more meritocratic and punish bad corporate actors who were propped up for too long on margin or debt.
“Everybody wants to lose weight, nobody wants to go on a diet”
We all complained that home prices were too high. We got what we asked for. There is room for prices to drop more. but this by itself won’t change much. The average homeowner in Toronto owes $650,000 on their mortgage. They can handle the rate increases. They don’t have to worry about lower equity in their home affecting their ability to renew or refinance their mortgage. Again, there’s not much systemic risk.
The core of the housing market is, to use the British phrase, ‘safe as houses’. Corrections affect the risk-takers and speculators. If interest rates continue to make homes unaffordable despite the drop in price, the government can adjust or remove the stress test.
Should you break your mortgage to renew now? My last answer was ‘no’ and they had a variable mortgage. Contact me and we’ll go over your situation.