From whence we came

Thirty-four years ago, when the average Millennial was playing with his toes, the prime at the banks was 14.75%. A five-year mortgage was 13.75%. Shorter loans were 14.25%.

Actually things didn’t look so bad at the time. Nine years earlier the prime has been 22.5% and fiver mortgages were 21%. But you couldn’t get one. The banks simply stopped giving out long-term loans. (This was when Canada Savings Bonds – remember them? – yielded 19.5%.)

The point is that the central bank has done some weird things over the years. Decades ago they ratcheted the cost of money to extreme levels to squish inflation. It worked. But the bankers also kicked the crap out of the economy and the housing market. In 1990 we were deeply into recession. Real estate values were dropping hard. Unemployment was on its way to 10.7%.

Today mortgages are 4% or in the low fives, the jobless rate is six and there’s no recession here, or coming. The CB rate has dropped from a high of 5% and will be 3.75% by Christmas. Inflation is nicely in the 2% range.

All this is a win after coming out of the worst global pandemic in a century. Don’t forget that four years ago unemployment hit 14%, the government’s finances were swirling teh drain, stock markets suffered the fastest bear market in history and society basically shut down. When the pandemic passed we had labour and supply shortages, leading to 8% inflation, an explosion in house prices and an affordability crisis.

People just don’t understand how measured, effective and principled the guys running our monetary policy have been. Rates went up as much and as long as required. They’re now retreating, orderly, before much damage is done. Compared to past decades, we’re bobbing on a sea of tranquility. You should be thankful, even if your daughter can’t afford a house near yours.

On Friday the US Fed boss, Jerome Powell, made it clear interest rates in that country will be coming down for the first time in half a decade. The initial drop will be in September. Two more by the end of the year. In Canada we’ve had a pair of declines with the next expected on September 4th and then again in October and December.

The meme lately has been how bad the world is. It’s not. For example, take a look at how many people are behind on their mortgage payments. “The 90+ day arrears ratio has only less than one-fifth of one percentage point (0.19%) of all outstanding mortgages behind in their payments,” says a Scotiabank report. “That remains toward record lows across several cycles. Banks have increased their provisions for mortgage loan losses, but from nothing when rates were dirt cheap toward historic average rates that remain very low as a share of outstanding mortgages.”

Yeah, glance at the chart. Defaults were a worry when mortgages were 14%. Today, a nothingburger. Of course in 1990 we didn’t have social media platforms where myopic doomers and folks with nihilist agendas could spew and mislead.

Mortgage defaults? A big nothingburger.

So the banks, as they report earnings this week, are going to be just fine. People may be carrying historic and nosebleed levels of debt, but they’re making payments – like always. The mortgage renewal cliff is now a minor speed bump as the cost of home loans drops into the 3% range in 2025 as most families renegotiate. Meanwhile the fact that four of the five Big Banks gave folks fixed payments on their variable-rate home loans means they skated through the Bank of Canada tightening cycle blissfully unaffected.

So now we come down the other side of the mountain. Bank prime peaked at 7.2%, will be less than 6% by this Christmas and should hit 4.75% by late 20025. The cost of home equity loans, lines of credit, car financings and business borrowings will all crumble. Variable-rate mortgages will be a popular and smart thing once again.

There’s no recession expected in 2025. The IMF says our GDP will expand by 2.4% next year – which means we’ll have the fastest-growing economy among G7 nations. The USA will be second (1.9%) and the UK third (1.5%). By next summer the inflation rate in Canada is anticipated to be just 2%. Wage gains are expected to be round 3.4%.

In other words, we got through a massive crisis (the pandemic). We overcame a serious spike in inflation (from 0% to 8.1% in two years). The economy toughed out a 1,900% increase in the central bank rate. The jobless rate went from 14% to 6%. The economy didn’t backslide. And now the next year promises that loans will be cheaper, the cost of living less, jobs and growth more plentiful, incomes higher and inflation lower.

So why would anyone want the Bank of Canada governor’s head on a stick? Is it legitimate to accuse the government of creating inflation that was (a) the result of a global pandemic and (b) world-wide? How can a 50% drop in interest rates by this time next year be a bad thing for businesses, job creation or your mortgage?

Some days we seem to have lost perspective, if not our way.

Life isn’t perfect, measured against perfection. When set against the past, at least be grateful.

About the picture: “As always, thanks for what you give us, and thanks especially for your sense of humour!” writes John. “Here’s a pic of our little Cocker Spaniel YoYo, ears flying in the wind, nose sniffing the wind to get his bearings – he knows the harbours, and remembers year to year where the parks and water access is, these creatures are pretty bright. When we moored in Picton, he took us to his favourite park, of course!”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/08/25/from-whence-we-came/