Bank of Canada: Have we entered a new era of structurally higher interest rates?

[RichardGibbons]

12 hours ago, Viking said:

I heard this on a podcast a while back (not sure which one). I did a quick search online and found the following article: 

 

“For a typical wood-frame condo development in Vancouver, the fees represent 29.25 per cent of the unit’s final purchase price.”

 

- https://biv.com/article/2023/07/government-fees-inflate-risk-uncertainty-bc-builders#:~:text=Municipal fees account for the,is attributed to regional fees.

 

“Government fees imposed on a project can range from those that cover infrastructure-related needs (DCCs and development cost levies), community contributions that will offset density (CACs), a federal goods and service tax (GST), building and development permits, property transfer taxes and the speculation and vacancy tax. 

 

“ In Vancouver, there is also the additional empty homes tax and a public art fee, according to a February 2023 Urban Development Institute, Pacific Region report. 

 

“The total cost of government fees represents 32.72 per cent of rent that the end-user pays in a typical wood-frame, purpose-built rental development in Vancouver. 
 

“Municipal fees account for the majority of this total at 44.27 per cent; federal and provincial fees account for 28.39 and 24.15 per cent, respectively. The remaining 3.18 per cent is attributed to regional fees. For a typical wood-frame condo development in Vancouver, the fees represent 29.25 per cent of the unit’s final purchase price.”

 

Wow, thanks Viking!

[John Hjorth]

At The Brookfield Listed Affiates Investor Day running right now, there was in the presentation of BBU a presentation of Sagen [www.sagen.ca ] by it CEO. [BBU is a part owner of Sagen].  That presentation was especially and also with focus on the expectations for the near future for Sagen about morgage default insurance in the Canadian residential real estate market, so to me certainly relevant to this topic, and I found it interesting.

 

I suppose a video of the session will be made available on the Brookfild website tomorrow.

[Viking]

This graph illustrates beautifully the difference in the impact of rising interest rates on home owners with a mortgage in Canada and the US. Canadian mortgage holders are being impacted much more quickly than those in the US. And that makes perfect sense given borrowers here have interest rates that are variable or fixed for only 1 year, 2 year, 3year, 4 year or 5 year (mortgages can be amortized for up to 30 years). 
 

Current mortgage rates in Canada are now about 6.2% for a 5 year and higher (for shorter terms). So every year about 20% of borrowers in Canada are now resetting to 6.2% or higher from their old rate which is probably around 3% = double the interest cost.
 

Hard to see how this does not have an impact on consumer spending / the broader economy over time. The key is how long interest rates stay elevated. On that front, inflation surprised everyone and ticked higher again a couple of days ago.
 

 

Source: https://x.com/asif_h_abdullah?s=21

 

Edited September 22, 2023 by Viking

[John Hjorth]

Mentioned here in all modesty : Perhaps North America actually could learn something from us Danes about a good solution to this by studying the The Danish Mortgage Model.

 

[Download Link] and attached.

 

As likely all interested in studying this phenomen with rises in interest rates, and the effects of it, may know it's quite bad in Sweden, too, at the moment. When I try to explain to Swedish investors why we don't have a real estate havoc by now here in Denmark, and links to this paper, most of them simply can't grasp the concept of interest rates locked in for 30 years on a mortgage.

Finans Danmark - den-klassiske-realkreditmodel_uk_2021_final - 20230922.pdf

[John Hjorth]

On 9/21/2023 at 8:24 PM, John Hjorth said:

At The Brookfield Listed Affiates Investor Day running right now, there was in the presentation of BBU a presentation of Sagen [www.sagen.ca ] by it CEO. [BBU is a part owner of Sagen].  That presentation was especially and also with focus on the expectations for the near future for Sagen about morgage default insurance in the Canadian residential real estate market, so to me certainly relevant to this topic, and I found it interesting.

 

I suppose a video of the session will be made available on the Brookfild website tomorrow.

 

YouTube - BBU 2023 Investor Day session replay. The Sagen presentation by Sagen CEO Stuart Levings starts at around the 20:10 mark.

 

Personally, I perceive the expressions of expectations about what the future will bring by Mr. Levings to be in overall line with what - as in to a high degree similar to - what @Viking has expressed in this topic, while I'm very well aware that the expressions of boths gents are about the future with all what that brings with it, with regard to reservations etc.

[scorpioncapital]

Why do the government bureaucrats have to do all these supply and demand laws and actions? I mean, it sounds to me that by not allowing the free market to operate, there is not an incentive to bring supply and demand in balance. A lack of desire to invest and capital flight. If the government wants to raise taxes to 80% and build all the housing stock itself, why not? Well, that doesn't work so well either. There are lots of slum-type apartment complexes in former Soviet countries - they are falling apart, was constructed poorly, and while it houses lots of people it isn't exactly a good quality of life.

 

"3.) Rents in Vancouver are controlled by the government. Same for older housing stock in Toronto. So in the same building two of the exact same units can rent for $1,500/month and $3,000/month. So no renters can afford to move today - your rent is going to double if you do. The rental market is effectively frozen. "

 

Isn't this an arbitrage situation? Switch all the 1500/month rents to 3000/month and the investor/landlord doubles their money?

[bizaro86]

4 hours ago, scorpioncapital said:

Why do the government bureaucrats have to do all these supply and demand laws and actions? I mean, it sounds to me that by not allowing the free market to operate, there is not an incentive to bring supply and demand in balance. A lack of desire to invest and capital flight. If the government wants to raise taxes to 80% and build all the housing stock itself, why not? Well, that doesn't work so well either. There are lots of slum-type apartment complexes in former Soviet countries - they are falling apart, was constructed poorly, and while it houses lots of people it isn't exactly a good quality of life.

 

"3.) Rents in Vancouver are controlled by the government. Same for older housing stock in Toronto. So in the same building two of the exact same units can rent for $1,500/month and $3,000/month. So no renters can afford to move today - your rent is going to double if you do. The rental market is effectively frozen. "

 

Isn't this an arbitrage situation? Switch all the 1500/month rents to 3000/month and the investor/landlord doubles their money?

 

They have rent control. You can't raise the rent more than ~2% per year unless the tenant moves out. But since the tenant would have to pay double elsewhere they aren't likely to move.

[John Hjorth]

I did spend most of the day alone at home yesterday looking at the major six Canadian banks :

 

RY - Royal Bank of Canada,

TD - Toronto Dominion Bank,

BNS - Bank of Nova Scotia,

BMO - Bank of Montreal,

CM - Canadian Imperial Bank of Commerce, &

NA - National Bank of Canada.

 

Absolutely awesome experience, fantastic creatures, impressive last ten years development and ROE for them all, some better than others. A banking oligopoly. All built to last for the future.

 

I like the picture of price / risk I see here, also based on what I have read in this topic.

Edited September 24, 2023 by John Hjorth

[John Hjorth]

At least partly related to the discussion going on in this topic:

 

Bloomberg - CityLab Housing [September 28^th 2023] : These Island Homes Were an Affordable Dream – Until Residents Started to Age.

 

I've never heard about the place Toronto Islands before. To me, strange to read about such a place in existence for so many years so near the center of such a city as big as Toronto.

 

The line of thinking among the elderly in this subsociety is to me flawed in a serious degree. You have no right to regret your own decisions on this matter earlier in life to move in. That was namely inverted delayed gratification, because the saved housing expenses by living there hasen't been set aside and saved in an investment scheme, but has been consumed on a running basis while housing costs has been low while living in this community.

 

When you remove your fingers from the piece in Chess the table captures the piece.

 

[SharperDingaan]

4 hours ago, John Hjorth said:

Bloomberg - CityLab Housing [September 28^th 2023] : These Island Homes Were an Affordable Dream – Until Residents Started to Age.

 

 

The reality is that all Utopia's are time limited; as the price to live in Utopia is accelerating irrelevance as time moves on, whether you're a Mennonite, a Mormon, or a Toronto Islander. Not mentioned in the article is that the Islands flood as/when Lake Ontario rises too high, and if you have a heart attack in winter ... you need to live long enough until a helicopter can arrive to airlift you to hospital (no ferry). https://en.wikipedia.org/wiki/Mennonites

 

Its a great concept; but to maintain a healthy environment it really needs a much higher urban density, with open healthcare/groceries/road access, condominium style maintenance arrangements, all the houses designed for concurrent multi-generational living, and a location close to a source of employment. The 'old town' of a historic European/Medieval city, with the facades of old buildings kept, & the interiors gutted & modernised; great for an Old Montreal or Quebec City .... not so much for a Toronto Islands!

 

Similar versions exist in Canadian former 'company towns' where the company has moved on, but left the infrastructure. The former 'ghost town' becomes a retirement community; the main income is pensions/tourism, and the more dense the population becomes, the more efficiently health care can be delivered. Housing/property tax is dirt cheap, commutes non existent, built-in health care and restaurant/tourism industry need for workers, and the outdoors literally next door. It often spawns a local green power & urban farming industry as well (vertical growing in warehouses). Not for everyone, but a very cost effective alternative for those wiling to think 'differently'.

 

The downside is that without the scale, it can be very 'small townish' and NIMBY in the extreme. Many would tell you that the best thing between the Toronto Islands and Toronto itself .... is the lake!  

 

SD

 

 

 

 

 

Edited September 30, 2023 by SharperDingaan