Careful What You Wish For



When I first met him, he was living in an uninspiring cubicle with a corridor view near the photocopier station on a middling floor of the Royal Bank building in downtown Toronto. Today Derek Holt is a vice-president over at Scotiabank, an emerging media darling in the flower of his career as a big-time economist. He also has some sobering news. Not that the masses will see it.


Yesterday we talked on this blog about the poor people at Best Buy, Future Shop and Sears now worried about their mortgages after having been laid off thanks to slagging sales. Those sales are down because incomes have swamped at the same time real estate debt’s washed over family finances. It’s called a vicious cycle. When house prices stop going up, everything looks different.

It’s worth noting the slump in house sales across the nation, the squishyness of prices and all this babble about a crash has happened when you can still get a mortgage for less than 3%. That’s about equal to the inflation rate in most cities, which means money is as close to free as it will ever get.

Not only does this make accelerating mortgage payments a bad idea, but it shows we’ve reached such a point of real estate saturation that interest rates don’t actually matter. In other words, leaving rates at the crazy-cheap levels of the past four years is unlikely to get many new people buying Montreal condos or bungs in Red Deer.

holt So back to Derek, the soft-spoken, 905ish, hairless oracle of Bay. He’s just scored more attention with a heavily revised forecast for interest rates and the Bank of Canada. The latest: no hike this year. No hike next year. The central bank’s key rate at the end of 2014 will be exactly what it is now – 1%.

This, of course, is not good news. It’s why you can’t buy a 60-inch TV at a Best Buy store in Victoria this weekend, and why all those kids who bought downtown Toronto condos last year can’t sell them without a loss. Sustained low rates mean the economy continues to teeter on the knife edge of inflation and deflation – something Ottawa thought was impossible just a year ago.

The reasons Holt cites are stark. Our weak economy cannot withstand the higher dollar a rate hike would bring. This could, “prompt sharp currency appreciation which we do not believe the economy could handle without encountering further downside risks to both growth and inflation via imported pass-through effects of a stronger Canadian dollar.” In other words, fewer jobs and higher prices.

Second, there is “sharply cooling credit growth and housing markets.” F’s virgin-sacrificing rule changes have already whacked real estate, Holt says. Hiking rates now could be fatal. Third, idle factories – which economists call “spare capacity.” Says the economist: “We see spare capacity persisting into 2015 at a minimum and therefore do not anticipate that the BoC’s malleable 1-3% inflation target band within a flexible framework will be significantly challenged.”

Finally, a special caution for all the cocksure cowboys in Calgary – an “unwelcome weakness in the crude oil-producing sector with an emphasis on heavy oil.” It’s the same message the Alberta preem had days ago when she warned of falling government revenues and the potential for retrenchment. A rate hike boosting business costs when the oil sands’ future is clouding is the last thing Alberta needs.

What does all this mean? Slow growth, more layoffs, less investment and downward pressure on house prices – almost the mirror image of what’s expected in the US. Things will limp along here, Holt suggests, for the next two years. Maybe then, 2015, something like normal will return.

This is more dire than I’d expected. It’ll be interesting in the coming weeks to see if other mainstream economists come to the same conclusion. Certainly recent events suggest all those debt chickens are screaming home to roost, as people curb their spending and stop shopping for trophy houses. Rising interest rates are a sign of growth, activity and expansion. Mired rates mean the opposite. Just ask Japan.

By the way, here’s fresh evidence. From Victoria, where everyone thinks it’s different. Like Toronto.

Compared with January of 2012, last month sales of single-family homes tanked 19.8%. Total sales fell by 20.9%. And the median price of a SFH dropped 7%. Yes, and during all this time you could get a mortgage for less than 3%.

But try getting a job.





avatarGarth Turner - The Greater Fool posted Friday, February 1st, 2013.

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