Juggling Dynamite

The Bank of Canada hiked base rates a whole percentage point yesterday–its most significant one-time increase since 1998–now at 2.5% from .25% four months ago in March. Futures are pricing in a 84% chance that the US Fed will follow suit with its own 1% increase at its next policy meeting on July 27.

These are huge increases in a short time frame. The Canadian prime lending rate now jumps to 4.7%, and most home equity lines of credit (HELOCs) to 5.2%, while conventional variable rate mortgages are in the 3.85 to 4.2% range. Federal rules require borrowers to prove they can make their mortgage payments at an interest rate at least two percentage points above their offered mortgage rate. With a five-year fixed rate mortgage near 5%, borrowers would have to prove they can make mortgage payments with a notional interest rate near 7%–a rate level not seen since the year 2000. Meanwhile, the average Canadian home price was $164,000 in 2000 compared with $816,720 in February 2022.

As the pool of able buyers shrinks, home prices have already declined by double-digit percentages in some areas. While impossible for most to fathom, a 40% drop would only bring home prices back to where they were in 2020. And given the extreme magnitude of Canada’s late great housing bubble, a 40% decline would be a reasonably modest outcome.

Suffice to say, this mean-reversion cycle, while necessary, is set to be painful for many.

Chinese imports are not rising to the rescue of global demand this downturn as they did in 2008-2020. #tappedout.  China Beige Book does on-the-ground analysis, which is updated in this segment.

Shehzad Qazi, managing director of China Beige Book (CBB) International explains how CBB has been able to gauge China’s economic performance without relying on official figures. Shehzad gives an overview of key metrics of China’s Q2 economic data and provides his assessment of the health of the Chinese housing market and the tech sector. Here is a direct video link.

Meanwhile, the Chinese property bubble continues to deflate with increasingly volatile contagion impacts on lenders, commodities, debt and property prices internationally. Heads up Canada, see Chinese property buyers across 22 cities refuse to pay mortgages:

Buyers of 35 projects across 22 cities have decided to stop paying mortgages as of July 12 due to project delays and a drop in real estate prices, Citigroup Inc. analysts led by Griffin Chan wrote in a research report distributed on Wednesday.

The payment refusals underscore how the storm engulfing China’s property sector is now affecting the country’s middle class, posing a threat to social stability. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults.

Now is “a critical time for social stability,” said Chan, adding that “the forgoing of down payments may bring social instability.”

A drop in home values hasn’t helped. Average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years, according to Citigroup’s research.  The contagion is spreading to banks.

This segment explains the slowing economic impact of an aging population. Immigration is helpful, to be sure, but realistically, several hundred thousand per year of newcomers cannot offset the growth depressing weight exerted by aging millions in the existing population.

Demographics have a huge role to play in the U.S. economy. This video will explain how U.S. Demographics impact growth, inflation, interest rates, and asset prices in the US & global economies. Here is a direct video link.