Juggling Dynamite

Lots of disturbing news this morning, fortunately, there are also positive developments.

As endless video content and computing devour more and more power, renewable sources and battery storage to balance demand are an obvious evolution.

Interestingly, people often cite payback periods in rejecting investment in power production and storage, while freely spending on aesthetic items like upgraded countertops and landscaping that have no hope of ever lowering operating costs.

For a long time, rising home prices made non-productive capital-allocation decisions seem justified. Now that home prices and revenue are falling in many areas, interest in reducing expenses and waste is back on the agenda.

Home battery storage systems are becoming an essential key to a successful energy transition. Australia has understood this and has acted promptly to embrace the technology. Spain’s recent blackout suggests European countries have a lot of catching up to do. So can we do it? Here is a direct video link.

Happy Friday from the snowy north. Another interesting week!

The US Fed lowered its policy rate target 25 basis points (now 3.50 to 3.75%), and announced it would buy $40 billion of TBills monthly as part of a reserve and liquidity management tool. Intoxicated stock markets have continued to party, further easing financial conditions for publicly traded companies.

The trouble is that most of the private sector is struggling, and so far, Fed efforts have not translated into ease for households and businesses that borrow through the banking system.

The Fed has cut overnight rates by 1.75 percentage points over 15 months amid above-target inflation and deteriorating labour market conditions. Fed Chair Powell indicated that they may not have to lower the policy rate further, but employment conditions will be the test. The threat of further inflationary pressures from future fiscal stimulants is a wild card in the mix. See, Fed Cuts Rates Again, Signals It May Be Done for Now.

The fed funds rate influences short-term borrowing costs at a lag, including credit card and auto loan rates. But longer-term interest rates, which matter most for mortgages and business investment, have trended up since October.

The 10-year Treasury yield, which dropped to 4.01% ahead of the Fed’s cut in September, opened at 4.18% this morning — driving borrowing costs higher, not lower.

After lowering 2.75 percentage points from 5% in June 2024 to 2.25% on October 29, 2025, the Bank of Canada (BoC) held steady with no rate cut this month.

Between a rock and a hard place, inflation has been rising more slowly, but still grossly inflated shelter and service costs make it hard for the BoC to justify further cuts at this time.

Interest rates have moved higher in Canada, with the 5-year Treasury yield rising from 2.62% on October 20 to 3.013% this morning, and the Canada 10-year yield at 3.44%, up from 3.04% on October 28. Fixed mortgage rates are moving up.

The idea of firmer-for-longer policy rates also prompted the Canadian dollar to rebound against the US dollar, now up 2.5% since November 6.

Gains in Treasury yields and the loonie are tightening financial conditions at a time when employment is deteriorating, exports are weak, oil surpluses are mounting, and home prices have been falling nationally; in America, too: see Home prices go negative for the first time in over 2 years — and may stay that way for a while.

Historically, the most stubborn economic downturns have been led by contractions in the housing market.

The burden of too-high debt and inflated costs is a real and crushing legacy of ultra-easy fiscal and monetary policies through 2022. Now, the tab has come due, and quick, pain-free fixes do not exist.

About 36% (14.8m) of Canada’s (41m) population lives in three metro areas (StatsCan data): Toronto, Vancouver and Montreal.

Unfortunately, these three cities have the dubious distinction of experiencing the most significant home price inflation in North America over the past two decades, far ahead of other major American cities (shown below, courtesy of Visual Capitalist), and multiples of household income growth over the same period.

Two months short of the 4th anniversary of the February 2022 real estate bubble peak in Canada, belief in mean reversion is spreading. Perennially bullish brokerages are now predicting home price declines will continue in some of the most overvalued areas. See, Royal LePage projects Toronto-area home prices will drop 4.5 per cent by end of 2026.

Builders and housing-related retailers are also warning along for the ride, see Home Depot Shares Fall as Retailer Gives Guarded Fiscal 2026 Forecast.

High shelter costs drain cash flow away from other spending, saving and investment. The higher the price of a home, the more buyers are likely to borrow to acquire it, and the longer the cash drain from other needs and goals.

The cost of borrowing is rarely mentioned in home-buying discussions beyond the monthly payment. But the cost of borrowing over 15-, 20-, 30-, and 50-year amortization periods increases home costs by 50, 75, 121, and 226%, respectively, depending on the term (the cost of borrowing $600k is shown in the table below, courtesy of DCP).In other words, a $600k home loan ends up costing $926k over 15 years, $1.052m over 20 years, $1.329m over 30 years and $1.962m over 50 years. Principal paid, and borrowing costs are in addition to transaction costs, taxes, upkeep, and maintenance over the holding period.

On a full-cost accounting basis, home ownership often yields a flat or negative return. It is consumption spending, and inflated prices end up costing a fortune.

Affordable homes can be lovely to own, and if they are paid off and not continually refinanced, they can serve as a store of value. But they’re more of a land bank than an investment.

All of these factors should be considered when reviewing the efficacy and efficiency of financial planning and housing-related monetary and fiscal policies.