Sunday, January 20, 2013

Whither interest rates

Interest rates have been moving up. The question every year, for the last few years, has been is this the year that rates bounce back up from their historic lows.

Here is the graph from the Bank of Canada. Not a huge move, but definitely a tick up. Is this just noise or the start of a more meaningful move.

US Yields have shown a similar bounce up.

How much can we make of this? To be honest yields are now impossible to forecast. It used to be fairly easy in the past.

The yields on long Governments bonds used to be based on a number of factors that could be analyzed. Inflation expectations of bond vigilantes, Government deficits, other investment options, whether we were entering a boom (higher trending yields) or a bust (lower trending yields). 

Now however, things are so messed up that no one has any clue where they will be, and the many predictions of higher rates have been 100% wrong for the last 4 years.

We have so many unique things going on that the equation no longer works. 

First we have low inflation. Even though the Central banks have dropped rates to near zero and bought bad debt and Governments have ramped up spending, the inflation genie has NOT come out of the bottle. The velocity of money (the speed at which it passes through the highly indebted economies has slowed), Debt is still being unwound in the private sector (Canada has just started) and Governments have just realized they cannot borrow and spend indefinitely. Second we have an anemic job market and therefore low wage pressure. All in all not a recipe for inflation.

Secondly we have Central Banks like the Fed and the ECB buying their own Government bonds..huh? What sort of bizarre Capitalism is that? Like a company buying it's own products when no one else wants it. They have to keep interest rates low by whatever means it takes. 

Take the US, it is paying an astounding $360 Billion interest a year alone- when rates are near zero. Imagine what would happen if they went to 5% which is the historical average.

Finally we have two pressures pushing rates down. The first is fear of 2008/9. The sudden deleverage that took place had people fearing widespread defaults of large banking and industrial institutions. This was averted by zero rates and tax-payer infusions of money and assumption of liability - to a criminal degree IMVHO. The fear is still there however. 

Furthermore the Boomers are desperate for yield. 

Each $1M of savings will yield $15,000-20,000 a year in Canada from GICs and even less in the US. That's before tax and is not enough to sustain a retiree. Hence they will jump on any chance of juicing the yield up a little by moving into longer duration bonds or accepting more risk than they should.

There are literally Millions of people looking for safe, steady yield at a time when none is to be had.

So even though rates may have popped and moved off the bottom, there are very strong forces which are likely to keep them very low, for much longer than we think. We should not expect a 'rate shock' to be a major factor in any RE correction. We will have to get there on the basis of lack of affordability, reductions in Government inducements (stupidity), demographic changes and a change of psychology. 

In the US, Greenspan told everyone to go 'variable and not fixed in their mortgages' and then raised 16 times (yes it's true!) killing those who took his advice, and the result was a sudden bursting of the RE bubble, which could not be reflated when the FEd subsequently slashed rates. 

In Japan however, it happened without rates rising, just as a reaction to a decade of foolish over-pricing. We could follow Japan, rather than the US in this.

Finally I noted some great links on Vancouver Condo- hat-tip VMD. These show the effect on demographics on our economy. The numbers are quite staggering

This graph shows us that from 2010 onwards we are a point where the number of non-workers being supported by workers is going up very rapidly and will soon be 50% higher than the 2010 number and eventually twice the number. 

How is that going to happen? The worker must either pay a lot more tax or the recipient must receive less OR we do neither and just borrow and leave it for the next generation to deal with, as the US and Europe have done.

This paper from the Bank of Canada is easy to read and is a must read.  Our Aging population means less taxes and more entitlements. $20K a year healthcare costs when we go over 80! Add in pensions and other subsidies,  then throw in the fact that Canadians have saved very little for retirement. Stir in the demographic  truth that the fastest growing group will be the over 80s and you can see we have a very hot stew in the making!


  1. The Bank of Canada article shows how screwed we would be without immigration. Our population would be dropping, with lots of seniors coming to their peak use of benefits. Of course we need the right immigrants, young and hard working, not more elderly.

  2. They didn't see it coming. What they didn't see, they couldn't prevent. And what they didn't prevent, they couldn't STOP .. IN .. TIME ................
    until everyone in the family circle got out safe, sound and stupid wealthy.

  3. We missed Scenario #1, as luck would have it.
    Scenario #1

    Where are we heading, Scenario #2 or #3?

    Scenario #2
    a Canadian Bubble Burst

    Scenario #3
    A US-style Housing Crash

  4. Excellent post, Fish. Thank you.

  5. The Oz guy who bought a retail biz from me, still has his cheese stashed safely abroad. His neighbor, a dual US/CA citizen, has moved back to the LML temporarily to escape the looming mess and to take advantage of our cheaper education for his college kids and universal healthcare. He complains bitterly of the low 1-year CD rates, @0.50% - 0.65%. These guys are no fools. Not if MC can negotiate a huge paycheck for himself and in the event the Euro fanfare does not pan out, he might even land safely on the Liberals wagon in a couple of years just in time for the next election.

  6. Price-fixing and rate-fixing bring to mind collusion, irrespective of whether they are carried out by private banks or central banks.

  7. Pertaining to our Real Estate, it didn't go unnoticed in the other part of the world that we have refined the art to a religion.

    He finds the Canadian system, where the buyer’s agent gets paid only if the deal goes through, makes more commission the more his or her client pays, and gets paid by the party that he or she is negotiating against, to be rife with conflicts of interest. “What strikes me about the Canadian system is that it facilitates collusion because it creates a situation where it is always in both agents’ interest to get a sale at any price,” he says.
    - unquote.

  8. new 423
    price change 122
    sold 110

  9. Central Banks can stop buying their own treasury bonds, thanks to the advent of a $1 trillion platinum coin.


  10. Total is
    5548 detached
    7351 attached

  11. HAM expected to flood Vancouver's RE market this spring

    There has been a mad scramble to get cash out to elude the corruption clampdown by current government.

    1. should read .... "to elude the clampdown on rampant corruption by the current government."

  12. homeless_landlordsJanuary 25, 2013 at 6:04 PM

    Need help here! How to get hold of "a deed of adverse possession on vacant homes on the west sides?

  13. new 387
    price change 132
    sold 120

    Total detached 5610
    attached 7384

  14. Buyers who bought last year, are fuming that developers are giving up to 5% off to lure more buyer.

  15. It seems that GVRD's house prices are tied to PRC's GDP.
    photo 2/2 >(enlarge)

    1. The chart is from Bloomberg's Ilan Kolet & Greg Quinn

  16. new 453
    price reduced 161
    sold 150

    detached 5657
    attached 7444

  17. The inventory number could be controlled or rationed. Though some listings no longer are on MLS, they still appear on the agents' websites.

    1. RealityCheck @VCI seems to confirm this too. See posts #59 & #60 "Oh, and that house was NOT listed on MLS."

  18. At least fixed mortgage rates are going lower. I know someone get 2.5% fixed for 3yr, when you think 2.99% is as low as you can get. This is just a FYI; you can make your own interpretation to what it does to the market.

  19. Jan. 30, 2013
    By Greg Robb, MarketWatch
    "The Federal Reserve on Wednesday maintained its aggressive bond-buying policy given the downside risks to the economic outlook."
    What's the point, when record number of Americans are renouncing the citizenship to avoid paying taxes since the Wall Street-GS Naked Swindle in post-war history.

    The less affluent Americans are crossing the border in to the 49th parallel north.

    With F following the footsteps of the Fed (Bernanke), rich citizens are taking the cue from smartA$$ politicians.

  20. Fantastic post however , I was wondering if you could write
    a litte more on this topic? I'd be very grateful if you could elaborate a little bit further. Many thanks!

    my homepage - Strec

  21. I don't know if it's just me or if perhaps everybody else experiencing problems with your site.
    It seems like some of the written text on your content are running off the screen.
    Can somebody else please provide feedback and let me know
    if this is happening to them too? This might be a problem with my browser because I've had this happen previously. Kudos

    Here is my web page: strec

  22. I really like your blog.. very nice colors & theme. Did you design this website yourself or did you
    hire someone to do it for you? Plz reply as I'm looking to construct my own blog and would like to find out where u got this from. kudos

    Have a look at my blog post;

  23. Hi! Someone in my Myspace group shared this site with us so
    I came to look it over. I'm definitely loving the information. I'm bookmarking and will be tweeting this to
    my followers! Fantastic blog and outstanding design
    and style.

    Here is my page - instructions

  24. I'm new to building internet sites and I was wanting to know if having your blog title relevant to your articles and other content really that crucial? I see your title, "Blogger: Vancouver RE and then some " does seem to be spot on with what your website is about but yet, I prefer to keep my title less content descriptive and based more around site branding. Would you think this is a good idea or bad idea? Any assistance would be greatly appreciated.

    Review my website :: oprema

  25. If you are going for best contents like I do, simply visit this website everyday because it gives feature contents,

    Here is my site - healthy diet plan
    my website: healthy diet plans for women

  26. Hey. I noticed your website title, "Blogger: Vancouver RE and then some" does not really reflect
    the content of your site. When writing your blog title, do
    you believe it's most beneficial to write it for Website positioning or for your readers? This is one thing I've
    been battling with mainly because I want great rankings but at the same
    time I want the best quality for my site visitors.

    my blog post - info
    My web page > site

  27. Have you ever thought about including a little bit
    more than just your articles? I mean, what you say is valuable and
    everything. However think of if you added some great pictures or video clips to
    give your posts more, "pop"! Your content is excellent
    but with images and videos, this site could definitely be one of the very best in its niche.
    Very good blog!

    Here is my website ... recovery

  28. Bеcаuse the admin of this site is worκing, no unсertainty ѵery rаρidly it ωill be famouѕ, ԁue
    to itѕ featuгe contеnts.

    Αlso visit my website :: hcg weight loss diet

  29. Just desire to say your article is as amazing. The clarity in your post is just
    spectacular and i can assume you're an expert on this subject. Fine with your permission allow me to grab your feed to keep updated with forthcoming post. Thanks a million and please carry on the gratifying work.

    Look at my homepage: