Today I talk about some interesting developments in the mortgage market, economic truths across the world of course, the U.S. election.

Cheap Interest & Your Home

U.S. 30 year mortgage rates are incredibly low, around 3.01%. Yes, for the next 30 years in the U.S. you can lock in your mortgage rate at 3.01%. That is insane considering that inflation is expected to return to 2%. Let’s say that a homeowner were to borrow at 3% against their house and invest that money. Earning a return above 3% shouldn’t be that difficult over the long term and as a result this is very stimulative to creating economic activity.

Canada is starting to see an increase to their 5 year mortgage rate slightly by 0.05%. One lender in Canada has an incredibly low promotion that when you put less than 20% down and pay for mortgage default insurance you can pay as little as 1.35% for a variable rate or 1.60% for a fixed rate. These are only for high ratio mortgages that have market values of less than $1 million but they’ll pay between 2.80% and 4% to insure that mortgage. These are historically extremely low interest rates and are incredibly accommodative for the Canadian housing market. For most refinances or purchases putting more than 20% down you can expect around 2.04% +/- 0.20%.

Another positive for the housing market is the large influx of immigration that the Trudeau government just announced. More than half of Canada’s immigration ends up in Ontario and 80% become homeowners within 3 years. Many are educated and have financial resources to buy homes.

In the short term this helps to stabilize the rental market with providing demand and in the medium term it supports home prices.

Where’s the Jobs?

US unemployment rate dropped below 7% which I wasn’t expecting to get below the 7% mark until 2021. This is positive news.

Canada’s participation in the labour market is pretty close to pre-pandemic levels while our unemployment rate remains around 8.9%. As a point of reference, Australia is sub 7%.

This further supports my preference for the US consumer and enterprises over the Canadian counterparts from an investment perspective.

Election & The Stock Market

The United States presidential election, in my opinion, doesn’t matter to the market over the long term as there will be minor nuances about each party but none will derail companies completely. Some factors that have been more impactful short term is the discussion about regulating social media platforms and also about raising corporate taxes. Don’t forget that companies will still strive to improve earnings all the time and will adjust to their environment. This is true regardless of pandemic or taxes, they are always trying to improve shareholder value by trying to increase revenue and reduce expenses. If you’ve ever had your rates raised on you, think insurance company, or been laid off then you know what I mean.

Anomaly

Canada new vehicle sales were very strong which was a bit surprising to me. It could be the average age of cars out there, the lack of other big ticket spending on travel or a higher level of savings however my initial thought is that with less people needing to drive to work that they would see the importance of a new vehicle with less enthusiasm not more. Perhaps many cars with the lack of driving are experiencing more mechanical problems and people are choosing to replace them rather than fix them. This is a positive for the economy but out of character in my opinion. Perhaps it points to the consumer’s addiction to debt and the willingness to buy now and pay later.

It Costs How Much?

Let’s talk inflation for a moment. Germany, a big exporter, has had negative inflation since July and seems poised to stay this way. This is negative economically but positive in that the governments in Europe are likely to continue to increase their fiscal stimulus for the economies. The US has weak inflation but not like Germany. Core U.S. inflation year over year was 1.7% in September. While this is weak it is not the worrisome deflation or worse stagflation. The US Federal Reserve has pledged to keep interest rates low until inflation returns to slightly above 2%. Canada’s central bank has indicated the same pledge of low interest rates for as long as it takes to return the economy to a healthy level of employment and inflation.

COVID-19 & Hospitals

There are always risks – let’s talk about the virus. What we know is that measures to cope with the virus are for containment. Yes it is true that the US just had 100,000 cases in one day and Ontario is near 1,000 cases per day but it is important to look at the hospitalization rate and the ICU capacity utilization. The hospitalization rate is not rising at the same speed as the confirmed cases. This is different when compared to the beginning in March and April when we saw cases rise and hospitalizations were increasing a lot as well.

As we learn to cope with the virus I believe they will target specific containment efforts mostly and avoid mass shutdowns as much as possible. Antivirals are coming to market and that helps us cope with the virus. While I believe that we will be faced with this virus for years to come, I believe that we will learn to live with it, much like I did my brother growing up.

No, I’m Not Giving You My Money

In my 4 pillars of wealth where I talk about Make, Keep, Grow and Protect money I would be missing a part if all I talked about was the growth of money.

What does money mean to you? Is money the amount of money that you have in your bank and investment accounts? Is money the gross amount of your income and taxes are a drag? Does the value of money mean the current value of your estate and you don’t want to lose the value when you transfer it to the next generation?

Sometimes finding ways to protect your money can be confusing and seem like it is a waste. Let’s think of a 50 year old who’s debt is getting lower and they have assets to offset the liabilities.

The flipside is that they are in their peak earning years and are banking the most amount of money that they ever have. Their kids are likely finished or finishing up school, they are finally enjoying the extra income and are saving the most that they ever have. 

They may not need to protect themselves for their whole life or as long as 25 years but protection to protect their family for the next 10 or 15 years can make a massive difference should something happen. At this age, a critical illness or disability becomes more probable. Protecting these critical earning years can be vitally important to the financial well being of themselves and their families.

Think about keeping costs lower through shorter terms of life, disability and critical illness insurance and only get enough coverage that would right side the ship.

Ask us about ways to protect your wealth and we can also bring in the conversation of using tax efficient strategies to shift assets when the time comes.

Until next time,

Trevor Dale, CFA

Disclaimer