Tag Archives: Interest Rates

In Case You Thought Our Bubble Was Due To Special Local Factors…

“Johan and Alejandra are the kind of Swedes the IMF has been warning about – piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.
The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans.
“I may travel, I may want to invest in a new business,” said Alejandra, who runs a cafe in the city centre.
Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.
Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.
Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago – the first time in more than four years.”

– from ‘Swedish household debt soars as poll nears’, CNBC, 24 Aug 2014

“In the capital the latest full-year figures show that the average wage is £39,920, while the average house price is about £400,000.
Prices are therefore 10 times greater than wages.
But in South Buckinghamshire, in towns like Amersham and Beaconsfield, the average home is worth 20 times as much as the annual local salary.
Outside the South East, the place where houses are least affordable is the Cotswolds, where they cost 19 times wages.
The countryside may be scenic, but that is little compensation when the average worker, putting a third of his or her salary into a mortgage, would need over 60 years to pay it off.” …
“”I shall be disappointed if I only get £550,000 for it,” says Mike Golding, as he shows me into a two-bedroom, first-floor flat he is selling. It has no garden, few proper windows, and no view to speak of.
But such prices are not excessive in Stow on the Wold, a pretty market town in the Cotswolds, where the undersupply of affordable housing is matched only by the oversupply of Barbour jackets, local organic brie and bow-windowed tea shops.
One such tea shop is run by Anna Wright and her mother.
She and her boyfriend have been looking for a house to buy, but, faced with prices like the above, they have given up looking in Stow.
“We have been priced out of the market,” she says.
“You are privileged to grow up in the Cotswolds, but there’s never an expectation of buying a house here,” she tells me.
A few doors down, 21-year-old shop worker Nicola O’Driscoll is in the same position.
She has been forced to look for a flat in Cheltenham, no less than 18 miles away.
“It’s really unfair. I feel like they don’t want youngsters to live around here. Because there’s no way they can,” she says.

– from ‘The 62 areas where houses are less affordable than London’, BBC, 18 Aug 2014

Too-cheap money has caused many speculative bubbles in housing, and perverted the relationship between income and housing prices. – vreaa

‘Extreme Speculation’ – “The problem is that the diversion of resources into investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity.”

The Vancouver RE market can only be understood as part of a global phenomenon of too-cheap money encouraging ‘extreme speculation’. -vreaa

“When the central bank pumps money into the economy and suppresses interest rates it creates incentives to speculate and invest in ways that would not otherwise be viable. At a superficial level the central bank’s strategy will often seem valid, because the increased speculating and investing prompted by the monetary stimulus will temporarily boost economic activity and could lead to lower unemployment. The problem is that the diversion of resources into projects and other investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity. In effect, the central bank’s efforts cause the economy to feast on its seed corn, temporarily creating full bellies while setting the stage for severe hunger in the future.
We witnessed a classic example of the above-described phenomenon during 2001-2009, when aggressive monetary stimulus introduced by the US Federal Reserve to mitigate the fallout from the bursting of the NASDAQ bubble and “911” led to booms in US real estate and real-estate-related industries/investments. For a few years, the massive diversion of resources into real-estate projects and debt created the outward appearance of a strong economy, but a reduction in the rate of money-pumping eventually exposed the wastage and left millions of people unemployed or under-employed. The point is that the collapse of 2007-2009 would never have happened if the Fed hadn’t subjected the economy to a flood of new money and artificially-low interest rates during 2001-2005.”
– from ‘Setting the stage for the next collapse’, Steve Saville, The Speculative Investor, 22 July 2014

“Yellen will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause. … I had thought that central bankers by now, after so much unnecessary pain, might have begun to compromise on this matter, but no such luck… The evidence against this policy after two of the handful of the most painful burst bubbles in history is impressive. But not nearly as impressive as the unwillingness of academics to back off from closely held theories in the face of mere evidence.”
– from Jeremy Grantham’s latest newsletter, GMO Q2 2014

Enter Inflation, Stage Right

The Bank of Canada came under pressure on Friday to stop fretting about low inflation after unexpectedly sharp price gains pushed the rate above the central bank’s target, making it more likely the next move in interest rates will be higher.

Statistics Canada reported the annual inflation rate hit a 27-month high of 2.3 percent in May from 2.0 percent in April. Core inflation, which excludes some volatile items like gasoline, rose to 1.7 percent, the highest since July 2012, from 1.4 percent in April.

As recently as last week, Bank of Canada Governor Stephen Poloz had said the underlying rate of inflation, which he pegged at 1.2 percent, was so low it “leaves us vulnerable to a downside shock at any time.” —

“The low-inflation ship has sailed in Canada, and I think the Bank of Canada pretty much has to change their rhetoric as of the next meeting,” said Bank of Montreal chief economist Doug Porter.

Poloz said the central bank’s policy stance was neutral, specifying that rates could just as easily fall as they could rise, using dovish language that has kept a lid on rate hike expectations and the currency.

Still, yields on overnight index swaps show rate cut expectations have largely faded.

And even before Friday’s data economists were unanimous that the next rate would be a hike. —

“We are still of the view that any moves on rates are not likely until 2015, but certainly there is now a higher probability of hikes coming sooner rather than later,” said Royal Bank of Canada assistant chief economist Paul Ferley.

- Reuters, 20 Jun 2014

No, Not Karl Marx; That Other Mark, Mark Carney – “Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.”

“Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself,” Bank of England governor Mark Carney said. “A sense of self must be accompanied by a sense of the systemic.”

Carney said public trust had been damaged by the behaviour of banks both before and after the financial crisis. He cited allegations that the Libor interest rate benchmarks and prices on the foreign exchange market were tampered with.

“Unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption … has eroded social capital,” he warned. “An unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens.”

- from ‘Bank of England’s Carney says bankers should be less selfish’, David Milliken, Reuters, 27 May 2014

Related things can be said for the threats to a society of perversely low borrowing rates resulting in astronomically overvalued homes. A housing bubble devours its life-blood.
Carney was instrumental in ensuring years of mispriced money in Canada. He repeatedly threatened to tighten policy, but never walked the walk, and his words were ignored and seen as vacuous. And he never adequately leaned on those in government with direct influence on mortgage terms.
– vreaa

“I personally know of a friend who was offered the moon from the bank to buy a home in October. This month the same bank is reconsidering the mortgage. Nothing has changed for my friend’s finances.”

“Sadly, I’ve been hearing lots of stories of financing falling through. Banks have done a 360 degree turnaround. They are still lending, but on their terms. Not so attractive terms. I personally know of a friend who was offered the moon from the bank to buy a home in October. This month the same bank is reconsidering the mortgage. Nothing has changed for my friend’s finances.”
enlightened at VREAA 16 Dec 2013 3:36am

BC Realtors Predict ‘Unsexy’ Market – “Over the next year or so we expect price changes to hover around zero”; “Price increases of the last decade are long gone”

Announcer: “There hasn’t been a crash, thankfully, but Ottawa, and the Bank of Canada, are desperate to raise interest rates once the economy improves. Economists are expecting rates to start inching upwards by late 2014, meaning that the price increases of the last decade are long gone.”

Cameron Muir, BC Real Estate Association economist: “We expect the market in Vancouver is going to be unsexy over the next year or so… uh, uh, long term trend sales activity… prices… probably pretty flat, we expect prices to stay.. hover around zero… percent or two on [inaudible] side.. depending on what community or neighbourhood you’re in.”

- from Global News 19th or 20th Dec 2012 [video archived by GreenhornRET; hat-tip El Ninja]

Next year will likely see the first very clear declaration of substantial price weakness in Vancouver RE.
Yes, we’ve already seen some price drops, but the numbers are not very remarkable (1%, 4%, 7%), and have been easily hidden in reporting. They certainly haven’t yet pervaded group consciousness.
Realtor association predictions tend to (1) extrapolate recent activity and (2) err on the side of optimism. These calls for a flat market are precisely that, and we are close to certain that they will be proven wrong.
It is noteworthy that even Global sees enough evidence to state plainly “the price increases of the last decade are long gone”.


I’d submit that the use of the word ‘unsexy’ is likely an unconscious attempt at delivering a sobering idea in a playful fashion, in the hope that it makes it somehow more palatable.

As an aside, consider these reports from the perspective of our recently discussed (mythical) ‘Discretionary Seller’. If you had already decided that you’d like to sell, and either had your property on the market, or had taken it off awaiting a strong spring, how would you feel about these predictions? What would you tend to want to now do? Those who reply: “Put another log on the fire and wait for a strong market (in 2014? 2015?)”, back of the class.

- vreaa

Ignoring The Effects Of A Topping Bubble – “Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity.”

“The market for home sales is chilling further after months of decline – and it’s putting Finance Minister Jim Flaherty on the hot seat. New data show sales deteriorating in November, and the association that represents Canadian realtors says sales will fall, not rise, this year and next. Mr. Flaherty, who sought to cool the market this summer by tightening mortgage insurance rules, says his actions are only one part of the story and that Canadians are voluntarily curbing their appetites for mortgage debt.” …
“Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity,” CREA chief economist Gregory Klump stated in a press release.

– from ‘Realtors blame Flaherty as slump deepens’, Globe and Mail, 17 Dec 2012 [hat-tip allen]

A speculative mania eventually implodes under its own weight. It doesn’t need rising interest rates or a failing economy to bring about its demise. In fact, its deflation is more likely to bring on an economic slump than to be caused by it. In Vancouver, the market started slowing before the mortgage changes came into effect.
The erroneous argument put forward by the economist above has already been ‘collected’ in our ‘Erroneous Theories For Falling Prices’ category.
– vreaa