“Unprecedented deflation are pushing rates down. However, investors are holding 1/3 outstanding shares of ETF | TLT short: Betting that rates will go up.”
Article and video commentary by Christine Hughes
In a totally unexpected move, the Bank of Canada cut the overnight interest rate by 25 basis points on Wednesday. This of course should make you wonder what the Bank of Canada knows that the rest of us don’t! I mean usually the Bank indicates a bias towards cutting interest rates, but this was just out of the blue. It signals that the oil shock on the economy is going to be a lot more significant than anyone expected.
The Canadian dollar dropped vs. the US dollar thanks to the surprise move. Gold and silver prices climbed on safe-haven demand. Canadian bond yields plunged. As per Bloomberg: “’It’s a big shock,’ David Doyle, a strategist at Macquarie Capital Markets, said by phone from Toronto. “They’re going to try to provide the necessary medicine here for the soft landing from slowing debt growth, from slowing investment in the oil sands, and I think they thought it needed some stimulus here.”
No one probably stands to hurt more from plunging oil prices than Alberta.
Energy companies have started cutting capital expenditure, and this means job losses, which means a slowing housing market. In fact, plunging oil prices have seen home sales in Calgary tumble 37% in the first half of January, compared to a year earlier. Prices dropped 1.5%. And active listings soared by nearly 65%.
As you can see in the chart below, while you may have thought Toronto was a hot housing market these past several years, you’d be wrong. It was Calgary.
What’s the most worrisome about this is that everyone thinks Canada’s mortgages are different than what caused the US housing market to blow up. Well, not exactly. See, mortgage standards vary by province, and things in Alberta don’t look good.
There are two types of mortgages Alberta can issue: recourse and non-recourse. In a recourse mortgage, the bank can cease your house, sell it, and you will still owe the remaining balance of your mortgage. In a non-recourse mortgage, the bank can seize your house, and you the borrower can walk away. If the asset doesn’t sell for at least what you owe, then the bank has to absorb the loss.
Below is a chart, courtesy of RBC Capital Markets, which outlines that 35% of all Alberta mortgages (by the big 6 banks) are non-recourse. They can walk away! Pay attention to Royal Bank especially:
There’s definitely a reason why the Bank of Canada is very concerned! By Christine Hughes
- If things are getting better, why do global rates keep falling?
- To much debt is causing deflation.
- US has the highest relative rates, hence where everybody wants to invest.