Consider The Source

I have long held the belief that you should always consider the source whenever taking advice from anyone. God knows there are way too many internet bloggers giving out their opinions these days. Anyways……. Beyond considering the source of someone, we should also consider the source of some things.

Today was an absolutely gorgeous day here on the Sunshine Coast of West Florida, so I played a little bit of hookey and left the office early. I sat in my back yard, and while I was relaxing, I accidently opened Tik Tok. You can tell I am involved in finance somehow, as my Tik Tok algorithm basically gives me every mortgage agent and broker that posts videos.

I was a little taken aback when every video I saw today was basically giving the middle finger to the BOC and Tiff for the no rate cut announcement today. A lot of the video’s were going on and on about how the BOC needs to cut, the BOC needs to help Canadians, etc. etc. You get the point. It was pretty one sided. Now, I will take the odd swing at Uncle Tiff when I feel it is warranted, however, in this case it isn’t really warranted. Jump on in.

Almost everyone I talk to in mortgages, real estate, finance etc. is walking around blaming these ” high” interest rates on Uncle Tiff. The guy has some pretty broad shoulders, and takes more abuse than a Toronto Maple Leafs fan come the 2nd round of the playoffs. However, if we stood back and examined a few things – like ACTUAL facts, I think you will agree, that maybe we are placing blame in the wrong spot. Everyone is blaming high interest rates, when in fact, they should be blaming low interest rates.

High interest rates are simply the side effect, not the root cause of our problems. Blaming high interest rates for the problems is like blaming the hangover for the reason you feel like crap. The problem isn’t the hangover, the problem was the copious amount of booze you drank the night before. High interest rates are getting the blame, but it was really ZIRP ( zero interest rate policy ) that caused the problems. For my example, I am going to use strictly houses here – not bitcoin, not stocks, not 1994 O pee Chee baseball cards – just housing. People do not buy a house price – they buy a payment. I have fought and fought with everyone about this, but it is true. People do not say to their mortgage broker ” I would like to purchase a house for $812,563.00 please “. No, they simply come in, tell you about their income, debts, etc, and based on things like TDS we pre approve them for a purchase price based on those factors. If interest rates are low, the payment is a lot lower, and the qualifying rate is a lot lower, meaning said client can afford a much larger house price. The inverse ( as we are all finding out ) is also true. Low interest rates – or cheap money if you will drove up the demand side of the equation, and allowed people to bid prices up to a point that were, well, just fucking stupid.

As every fricking realtor on Tik Tok, Facebook, Insta and every other crappy social platform says ” You date the rate and marry the house”. Yeah, yeah, shut the hell up. The downside to ” dating the rate” is that when interest rates rise, you now find yourself married to a very expensive house, and your mistress of a rate is now blackmailing you. We are now at this stage. Since money was sooooo cheap for soooo long, it allowed the asset price to appreciate to a point where any increase in rate was going to cause pain. Unfortunately the rate went a lot higher, a lot faster than the ” experts” thought. Contrary to what every person with a vested interest in a commission will tell you, rates dropping will not fix the problem. Lets say Uncle Tiff all of a sudden decides to drop the overnight rate? Okay, well, every realtor is going to simply bid prices back up, Tiff is going to raise rates again, and round and round we go. The only fix for this, is for the price of homes to fall. Well, that or the Canadian government devaluing the currency in line with the Venezuelan Bolivar. While my faith in the Canadian government is about as high as my faith in winning the lottery, I don’t think they will devalue the currency that bad. Low rates will not solve the problem we are in.

Now, many people will doubt what I say – totally cool with me. There always needs to be a person on every side of the trade. Someone has to be convinced to buy housing in Canada – or else there is no market. However, to those people, I ask: Every other time in the history of the world, where assets were bid above the ability to pay, what happened? Ah, yes, the price of said asset dropped back in line. Every. Single. Time. So, unless you truly believe that the overlords in the Canadian government have found a solution to the problem that no other person in the history of the world has found, then the only way to correct is for prices to drop. On my wall I keep a framed print of Tulipomania ( the art piece was featured in the movie Wall Street – Money Never Sleeps ). For those of you not familiar with Tulipomania, the link is here:

https://en.wikipedia.org/wiki/Tulip_mania

Canadian housing was very similar to the Dutch Tulip Crisis 400 years ago. In the time since, every bubble has always ended with the same result. No matter the asset, no matter the time period, no matter the region – the end result is always the same. I am not suggesting that Canadian housing is dropping 95%, so please don’t misunderstand, I am simply saying that dropping rates will not solve the problem.

Expensive interest rates are not the problem. Tiff Macklem is not the problem. Cheap money being too cheap for too long caused this problem. People living far above their means on cheaply borrowed funds caused this problem. An economy that consisted only of trading real estate to each other for years caused this problem. The effects we are now dealing with are the hangover from the party. Tiff dropping rates now to ” solve” the issue would be the same as giving someone with a hangover a shot of tequila.

I think if we as Canadians did some soul searching, and really took a look at our budgets, our finances, how we lived, what we bought, and how we acted, we would realize the source of the problem is not the BOC, nor Uncle Tiff, but rather the person that looks at us in the mirror every morning.