What lies ahead

The weekend showed how fast stuff happens. Syria’s dictator and Putin’s buddy was sent packing. Outcomes unknown. Donald Trump told NBC he’ll pardon imprisoned J6 rioters, punish his political enemies and end birth citizenship. Plus hit Canada with tariffs. Outcomes unknown.

In this country governments in Ottawa and the biggest provinces have turned on the stimulus taps – because everybody’s concerned what 2025 may deliver. And that was before the weekend news.

Over the next few weeks politicians will be unleashing more than $16 billion in cash and equivalents, plus a massive easing of mortgage financing rules. It’s designed to counter the growing threat of recession, unemployment and voter anger, underpin a more fragile real estate market and prepare for a threat from the US that wasn’t on  Canadian radar a year ago.

In this volatile mix sits the Bank of Canada and its key interest rate decision on Wednesday. Looks like the bankers are about to prove they’re also concerned. The policy rate will drop another half-point, down to 3.25%, the fifth reduction – dramatically ahead of other central banks around the planet.

Personal loan and mortgage costs, LOCs, business borrowings, home equity loans and VRMs will all get cheaper. So will renewing a mortgage in 2025 – part of that period when 70% of all Canadian home loans come up for refinancing. And, of course, when a federal election takes place.

This drop in the price of credit is a biggie. Maybe the last for a while. It’s designed to make carrying – and getting into – debt more palatable. (Like we don’t have enough already.)

This rate drop comes at the same time as those generational mortgage changes we’ve been yakking about.

• Thirty-year mortgage amortizations available to first-time buyers of any real estate.
• At the same time all buyers of new housing (first timers or repeaters) will be eligible for 30-year loans.
• The price cap for CMHC insurance soars to $1.5 million, meaning cheaper loan rates for buyers of more expensive homes using leverage of up to 20x.
• The cap change also brings a 60% drop in minimum downpayments (and a corresponding increase in mortgage debt).
• The stress test for renewers has been eliminated, so homeowners facing big interest rate increases don’t have to prove they can actually pay them.
• The amortization changes alone, says Scotiabank Economics, are equal to a 1% drop in mortgage rates in terms of market stimulation.
• Plus the crazy-generous tax-dodging, house-feeding HFSA and the enhanced taxless downpayment-ciphering from RRSPs are with us.

But wait. Look at all the cash equivalents about to fly around from Ottawa, Victoria and Queen’s Park.

The GST/HST cut to take effect next week will reduce prices and is the equivalent of putting $3.5 billion into the hands of consumers. Then there are the $250 cheques to be mailed out to nineteen million people in a few months – giving consumers earning less than $150,000 a year another $4.5 billion.

Not to be outcome, Doug Ford is sending Ontarians $200 each, for a total of $3 billion, next month. BC’s NDP government is taking the cake with $1,000 cheques set for distribution – at a cost of almost $2 billion. And the latest federal carbon rebate worth $2.5 billion are about to be distributed to small businesses.

Yes. Sixteen billion out the door by governments that don’t have to money and must borrow it. More real estate incentives at a time when average families cannot afford average houses. Another big interest rate cut by a central bank that doesn’t need to.

So, like, what’s up?

“If US President-elect Trump imposes a 25% tariff on all exports from Canada shortly after inauguration day on January 20th then the effects will be disinflationary through the damage caused to the Canadian economy,” says economist Derek Holt.

If Canada retaliates, inflation comes back. Higher rates, too. A GDP hit.

Holt (and others) argue the CB should wait until late January before making this decision, to see what Trump does, and in light of the cash governments are about to throw at people. That would be prudent.

But, nah, this is Canada. If we give people cheap money, they’ll just party up and forget about the bill. That worked so well during Covid.

Click to enlarge. Source: Global

About the picture: “I have been a longtime reader of your blog,” writes Dave in Victoria. “I thought you might enjoy this story and photo of Polly, our reactive Saskatchewan rescue.  She really sells the sad clown look!”

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Source: https://www.greaterfool.ca/2024/12/09/what-lies-ahead/