Mortgage News Articles by Jeff Laberge

Covid 19

1) Interest rates plummeted to record levels once the lockdowns began, which increased  consumer spending due to a reduction in mortgage payments, lines of credit payments,  and other debt repayment.  

2) Governments handed out obscene amounts of cash to their citizens due to the  lockdowns, and they did this by expanding the money supply (printing money).  The expansion of the money supply reduced the value of currencies in all countries that  conducted lockdowns and handed money out, which was almost every country in the  world, with approximately 16%-17% of the global population receiving cash-based relief.   When you reduce the value of a currency, each dollar purchases less than it previously did,  driving up prices and leading to inflation.  The money handed out was spent rapidly, which  drove up prices rapidly.  

3) The global supply chain broke down due to border controls and Covid 19 closures, making imports more expensive due to a lack of  supply not meeting demand.    

4) The Bank of Canada key policy rate was 0.25% for a period of about two years.  During  this time, consumer spending went wild at a time of reduced supply and inflation rose while the Bank of Canada did nothing to cool it.  The Bank of Canada, and all central banks then raised rates too late, which meant that the degree of increases that followed had to be  greater than they may have been if they raised rates sooner.  

5) Large wage and salary increases came during and after Covid 19, and the cost of services  rose as well.  

Now  

1) Rising fixed rates are mainly the result of rising oil prices caused by the Iran war.  If the  war ends, or the Strait of Hormuz becomes open for shipping, oil prices will come down because the world economy is in poor shape at the moment, so demand for oil is actually low compared with times of economic strength.  

2) Inflation is at about 3.00% in Canada, which is still somewhat within the Bank of Canada's comfort  range, and if we remove energy from the CPI data, inflation is only 2.40% in Canada, so we  are actually in a period of low inflation, with prices of non-energy related items yet to see  increases caused by higher oil prices.    It may not feel like a period of low inflation due to the high cost of living, but low inflation simply means that prices are fairly stable now after a prolonged period of high inflation.  

As mentioned earlier, we are also not seeing unusual wage and salary increases or an increased cost of services  (as we saw during Covid 19), which are the largest contributors to long term inflation  because they tend to never fall afterward, and instead we are seeing  a commodity based  increase, which is more temporary in nature.  

3) Rather than a policy rate of 0.25%, as was the case during Covid 19, the Bank of  Canada's policy rate stands at 2.25%.  A difference of 2.00% in massive when it comes to  it's ability to cool inflation.  

4) The Japan carry trade.... this one is a bit complicated.  Ever since about 1999, Japan has  had basically 0% interest rates due to stagnant deflation that had been plaguing their  economy since the 1990's.  Massive hedge funds would borrow from Japan and place the  money in western bond markets such as ours and that of the US, which had higher interest  rates, and they would profit from the spread between the rates.... easy money.  But inflation  that followed Covid19 ended Japan's period of 0% interest rates, and rates have been  steadily rising in Japan since 2022, with the yields on the bonds increasing by  approximately 280 to 300 basis points (2.80% to 3.00%) in the past 4 years.  This is a very  large and scary increase for Japan to deal with.  Due to the rising rates in Japan, the carry trade has become unprofitable, so investors have pulled their money out of the carry trade, which in turn resulted in a sell of  government bonds over the summer which cause yields to rise at the same time oil prices  also drove up the bond yields.  Not only this, but Japanese investors and corporations have  been selling billions of dollars of western government bonds to repatriate Japanese money.  

5) Government of Canada bonds are dragged along with US Treasuries, regardless of if the  factors reflect the Canadian economy due to integration of global bond markets, and  investors trading government bonds in batches (i.e.; Exchange Traded Funds) rather than  individually.  

Inflation in the US is higher than in Canada, and they also have much more national debt.  As mentioned earlier, investors are becoming nervous about the US' ability to pay back their debt, so investors are selling US treasuries and over the past two years, have been purchasing gold  instead, which unfortunately has caused our bond yields to rise with theirs (This is largely  why gold prices have risen so much this year).  US national debt per person current stands  at approximately $94k, while in Canada it is approximately $56k. 

What is my preference at this time?  I am currently in a variable rate and plan to stay in it for the foreseen future.