Where are we now?

by JDH on October 21, 2023

On October 7, I predicted that interest rates have peaked, as expressed by the Canadian 5-Year Bond Yield.

Here’s the updated chart, that shows that yes, interest rates appear to have peaked:

But, I can show you the same chart, and draw an up channel showing that the drop on Friday is merely a minor correction in the longer term uptrend:

Your guess is as good as mine; I continue to believe interest rates have peaked until I see evidence to the contrary.

Other than the charts, why do I think interest rates have peaked?

Because I believe we are in a recession or close to it.

The Canadian economy only has one industry: real estate.  Most houses, condos, cottages and rental properties are purchased with a mortgage, so mortgage rates underpin the Canadian economy, the Canadian 5-year bond rate directly influences mortgage rates, and rates are much higher than two years ago.

That’s very bad for Canadian real estate, so I believe a significant correction is coming.

As every economist knows, prices are set at the marginIf you own a one-bedroom condo in a big tower in Toronto, and a one-bedroom unit sells for $1 million, your unit is now worth approximately $1 million.  If you bought it five years ago for $500,000, you feel much wealthier because your condo is worth $1 million.

But what if another owner in the building, who was renting out their condo, has a variable rate mortgage, and their mortgage payment has gone from $3,000 per month to $6,000 per month, and they can’t increase the rent by $3,000?  They may decide to sell the unit, perhaps in a hurry, perhaps for $900,000, so now your unit is worth $900,000.

Your wealth just dropped by 10%.

Who cares, you say, I’m not selling, I’m good.

That may be true for you, but for everyone else in the building, when they go to renew their mortgage, the value supporting the mortgage has dropped, so they may not be able to refinance to pay off their credit cards like they could have done two years ago, because the equity isn’t there.

That’s the problem.

So more people decide to “cash in” and sell, and prices fall further.

We are at the start of that process now.

It won’t be pretty, because crashes happen faster than booms.

Fasten your seatbelts.

And if you want the investment spin on this, if I’m correct that interest rates have peaked, by bonds.

Stay tuned, more next week, we’ll see if I’m right.