Interest Rates are Rising… and Expected to Continue… But!

Rates have been rising gradually over the past six months following several years of historically-low rates. There should be no surprise that rates are rising – it was bound to happen. But, we can be thankful they’re not predicted to spike. It’s much easier to deal with – and plan for – gradual increases.

Benjamin Tal, Deputy Chief Economist of CIBC World Markets Inc, spoke last week about his predictions for rates and a bunch of other economic indicators. I’ve been following him for 15 years now. He’s one of the few economists whom I respect, as his forecasts have proven very accurate. So, let’s pay attention!

FEDERAL ELECTION COMING…

While rates are expected to gradually increase over the next two years, there could be a pause – or even a period where they briefly come down again – as we head towards a federal election in October 2019.

Historically, interest rates have been known to come down leading up to an election year.

And now here’s what we heard at least week’s Housing Outlook presentation from Benjamin Tal…

OTHER POSSIBLE DERAILMENTS and more…

Two huge threats to economic stability are Donald Trump and NAFTA. These are the main things that could slow our growth and, therefore, halt the increase of rates.

When Trump was elected, there were blips in the US market, but it has since returned to more normal levels. Bonds were up… and now they’re back down. The US dollar went up… and now it’s back down. The stock market is up all around the world, so this has nothing to do with Trump. Overall, the global economy is doing better.

The US labour market is on fire. While the unemployment rate is low, wages aren’t increasing. Something’s broken in the market. US companies have job postings they can’t fill… yet, people are looking for jobs they can’t find. There’s a definite disconnect in employment that Trump needs to address.

NAFTA uncertainty is keeping Tal up at night. Trump could literally wake up one morning and decide to kill the deal! Chapter 19 is a dispute resolution system used when Canada and the US can’t agree. Canada has won 75% of dispute resolutions, but there’s a deep disconnect when it comes to NAFTA. Trump wants NAFTA abolished and Justin Trudeau wants it left intact.

NAFTA uncertainty is a huge factor for the North American economy. Mexico has benefitted the most from NAFTA. The Peso was down after Trump was elected, and now it’s back up, but Tal believes the Peso is overvalued. The Canadian dollar, sitting at 80 cents is all overvalued. The Bank of Canada is weary, as are investors.

STILL… WE NEED TO PLAN FOR INCREASES

Tal predicts there will be three rate hikes in 2018. We already had one in January and two in 2017. He believes the two latest hikes were required to counteract decreases that shouldn’t have happened back in 2015.

I’m still advocating for short-term products. They’ve proven to be the best way to save money and pay the least amount of interest to own our homes. And let’s not forget that, even with the potential for (or expectation of) rate increases, our payments will only increase about 10%.

UNAFFORDABILTY

Rentals are what make Toronto affordable. But rent controls will shrink the supply of rental units, ultimately increasing rents. Homeownership in Toronto is unaffordable.

Once again, government intervention in Canada’s housing market is causing more harm than good! Why not just let the market dictate price? This is the only way to determine fair market value.

Tal is predicting that 2018 will see prices drop and sales decline (the exception is the Toronto condo market, which is still active). This doesn’t mean a housing collapse or price free-fall. Supply issues will be significant. A recession is possible within the next five years. One message, in particular, stood out: If you think Toronto is unaffordable now… just wait!

In 2019, more than 50% of Canadians will be impacted by rate hikes. It takes time for the market to adjust to rate changes, so the government needs to be careful to see the full results – don’t try to correct a problem that doesn’t exist!

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca