Thursday, January 7, 2010


Let's take a peek around the internet today, shall we?

First up is the lastest stats from the Real Estate Board of Greater Vancouver (REBGV).

December stats reveal that the bubble is blowing ever higher and the average price of a detached home in the Village on the Edge of the Rainforest now sits at an astounding $952,927.00!

(click on image to enlarge)

Will we hit a million dollars? Possibly.

Canadian Banks continue to ignore the warnings from Carney and Flaherty to be 'prudent' with lending. Offers to get you in for zero down, such as this one from TD Canada Trust, continue to exist.

And realty companies, like Royal Lepage, continue to pump the market by suggesting that buying now will result in an 7.2% increase in value of your purchase this year in the Lower Mainland... "so long as the expected mid-year rise in mortgage rates isn’t a dramatic spike."

But that's the rub, isn't it?

That's the entire essence of the warnings we have been blurting out for the past year: rising interest rates will destroy you if you buy now.

And the warnings continue unabated.

The National Post chides today that "happy times for interest rates can't last forever".

So dire is that potential problem that the Post notes that a simple 1% increase in rates could dramatically affect you bottom line. "For a home buyer, rate increases mean hefty payment boosts. For example, it will cost $3,252 more per year to pay down a $500,000 mortgage balance when the interest rate rises from 3.5% to 4.5% , assuming a five-year term and a 25-year amortization."

The 25-year amortization comment is particularly important given the fact the Finance Minister is sounding warnings that the permitted amortizations could be reduced from the current 35 year maximum. Before 2006, that maximum was 25 years.

It means those with a mortgage face the double whammy of increased interest rates plus a shorter amortization period when they renew.

A simple 1% rise in rates could translate into $3,252 increase in yearly payments on that $500,000 mortgage.

When you consider that the conservative estimation on what will happen to interest rates is that we will see a minimum of a 2.5% spike in rates, it means the cost of renewing adds up quickly.

With that theme in mind, Report on Business is also warning mortgage holders to "Fasten your seatbelts".

They suggest you have roughly six to nine months to get a personal plan together for dealing with higher interest rates.

Yikes! At least they try and offer several strategies to get ready.

And it's not just in Canada that warnings are being issued.

In the United States, the FDIC has now come out with an 'Interest Rate Advisory' for institutions.

US Banks are being reminded "of supervisory expectations for sound practices to manage interest rate risk (IRR)."

The warning is very specific:

"In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates."

The only real question is how high might it go?

And THAT, of course, turns us once again to the issue of the US Dollar and US Treasury sales to foreign countries - particularly China.

With that in mind, consider this article from 'The Business Insider' which lays out a series of charts showing clearly that "China's Dumping of the US Dollar has begun". The yellow line represets the plunging level of Treasury purchases by China.

(Click on image to enlarge)

To sell sovereign debt, the purchasing of that debt is going to have to be made very attractive.

And there's only one way to do that: increase the yield. That means higher and higher rates on home mortgages.

We've been through this before... in the late 1970s.

22% mortgages, anyone?


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