# Rising bond yields could threaten real estate



## james4beach (Nov 15, 2012)

Those of you exposed to real estate (whether residential or commercial) should be aware that Canadian bonds, like US bonds, have been plummeting in the last few days and driving interest rates way up.

Canadian government bond yields directly impact fixed mortgage rates. This means that fixed mortgage rates are going up right now. But that's not the only effect. The bond market is the basis for all major borrowing, so things like construction, new homebuilding, new condo towers, REIT borrowing all rely on the bond market. They're all getting more expensive by the day.


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## MrMatt (Dec 21, 2011)

james4beach said:


> Those of you exposed to real estate (whether residential or commercial) should be aware that Canadian bonds, like US bonds, have been plummeting in the last few days and driving interest rates way up.
> 
> Canadian government bond yields directly impact fixed mortgage rates. This means that fixed mortgage rates are going up right now. But that's not the only effect. The bond market is the basis for all major borrowing, so things like construction, new homebuilding, new condo towers, REIT borrowing all rely on the bond market. They're all getting more expensive by the day.


We've had years of incredibly low interest rates, it's not healthy.

We need higher rates, the sooner the better.
But they won't come too fast, the markets will crash, they have to be careful.

Yes I'm still holding a variable rate mortgage.


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## james4beach (Nov 15, 2012)

Mortgage rates move directly with the bond market. Today, RBC raising their fixed mortgage rates
http://www.cbc.ca/news/business/royal-bank-mortgage-rates-1.3851423

RBC cited the same thing I have, the big move in 10 yr government bonds. About a 30 basis point increase in bond yields.

XBB is a useful ETF to watch, as it shows the movements in the broad bond market, and thus financing/mortgage rates.


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## doctrine (Sep 30, 2011)

Panic? RBC's new rate is 2.69%. That's still crazy low. Even XBB has stabilized. 

RBC's new rate is also a reflection of the changes in the mortgage approval requirements as costs are going up for a variety of mortgages, including low loan to value ones. Yields are a little higher, but still lower than last year even. Also, non-bank lenders have already raised their rates, which lessens pressure on RBC. This is all good news for RBC shareholders, though. Less pressure on net interet margins.


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## CPA Candidate (Dec 15, 2013)

Some context is needed. Bond yields are still below the level they were one year ago. Yes, they have moved up, but off rock bottom basically. They are still very low.

In addition, the market is getting way ahead of itself. Donald Trump delivers a few remarks and we're in for major inflation now? This is the same market that saw a global recession/end of world scenario in January and now it sees inflation and strong growth. Frankly, Trump's policies are more likely to send the US into a recession than an expansion.

Markets are always going through the latest and greatest investment fad and this inflation "trade" won't be any different and will fizzle like the rest.


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## My Own Advisor (Sep 24, 2012)

I'm not worried about rates until I see variable jump _at least 100 basis points_. Otherwise, just noise. Even then, we are still in shockingly-low rate land right now. 

Anyone with debt, carrying 2% or even 3% mortgage should be celebrating and paying it off - debt is cheap to get and to spend but it's also VERY cheap to pay back.

Rates needs to climb higher and I hope my timing is perfect without any debt to my name within 5 years.


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## Pluto (Sep 12, 2013)

Around 1981-2 interest rates were exceptionally high. Mortgages around 15%, Canada savings bonds were at 19%. Yes real estate got hurt and you can clearly see it in the average price graphs for housing. By 1983-4 rates were coming down and home prices prices bottomed and began recovery. It was scary, but it wasn't the end of the world. There is no reason to think that rates will go to a high as extreme as that time, but who knows. Where ever rates get to, real estate will be hurt, but not permanently. I'm guessing that the economy can't stand much of a rate rise; it seems to be fragile, as the central banks seem very reluctant to be aggressive.


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## Koogie (Dec 15, 2014)

My Own Advisor said:


> Anyone with debt, carrying 2% or even 3% mortgage should be celebrating and paying it off - debt is cheap to get and to spend but it's also VERY cheap to pay back.


Almost agree. But if you have a 2.5% mortgage and money in hand, better to invest it and earn better returns. Let the bank loan you that almost free money for as long as possible before you make more than minimum repayments. The Big 5/BoC are still subsidizing your mortgage. Let them.


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## james4beach (Nov 15, 2012)

If it's so easy to earn a higher rate of return than your mortgage rate: Kind of makes you wonder why the banks even lend you money when they could have skipped that step and invested it themselves for higher returns.

Banks are not known for leaving money on the table or failing to take a profit opportunity.


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## mark0f0 (Oct 1, 2016)

RE prices were already falling even before the most recent bond freak-out. Actual deposit rates aren't rising meaningfully. So the higher mortgage rates go almost entirely to the banks' bottom line, including expanded spreads on account of the higher risk.

Lending against high quality collateral such as stocks, on margin, is actually getting cheaper relative to housing credit. This bodes well for the stock market and business expansion.


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## mark0f0 (Oct 1, 2016)

Pluto said:


> Around 1981-2 interest rates were exceptionally high. Mortgages around 15%, Canada savings bonds were at 19%.


Why was this? Different terms (ie: points on the yield curve)? Some sort of mortgage subsidy or call feature in the mortgage or CSB's causing such a difference? The government paying extra on CSBs (I remember there was a limit to CSB holdings per person)?


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## gibor365 (Apr 1, 2011)

When bond yield will become attractive, investors will start buying and pumping it up


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## lonewolf :) (Sep 13, 2016)

Koogie said:


> Almost agree. But if you have a 2.5% mortgage and money in hand, better to invest it and earn better returns. Let the bank loan you that almost free money for as long as possible before you make more than minimum repayments. The Big 5/BoC are still subsidizing your mortgage. Let them.


 If in debt paying interest as prices drop not good. History has shown it is not good to borrow to invest i.e., margin calls in 1929, 1987, 2008


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## lonewolf :) (Sep 13, 2016)

The baby boomers buying homes on mass pushed interest rates higher in the past. When people are confident in the future they will borrow money thinking they can pay it back helping to push up interest rates. If lenders are not confident the IOUs will be paid back they will demand higher rates.

The markets control the interest rates more then the fed does. The Fed follows the T bill rate


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## james4beach (Nov 15, 2012)

lonewolf :) said:


> The markets control the interest rates more then the fed does. The Fed follows the T bill rate


That's right, and people seem to forget this. The central banks do not control the bond market. Yes, they try to manipulate it, but ultimately the bond market decides interest rates.

The Fed could keep the overnight Fed rate at 0%, while 10 year treasury yields could soar to 8%. The central banks control the short end of the curve but have limited ability to influence the rest of the yield curve.


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## Eclectic12 (Oct 20, 2010)

mark0f0 said:


> Why was this?
> Different terms (ie: points on the yield curve)? Some sort of mortgage subsidy or call feature in the mortgage or CSB's causing such a difference?


For mortgages, it was market forces without a subsidy from what I recall. 
Then too, some signed mortgages for 18%, the lending rate peaked at over 21% and the decade ended (or the new decade began) at 14%.
http://www.theglobeandmail.com/real...rned-from-80s-interest-rates/article24398735/

For CSBs, it was the gov't messing up with their forecasting. At the time the rates for the CSBs were set in advance, with no ability to change them. After this messup, the ablility to adjust the rates down below the originally published rates was added.




mark0f0 said:


> The government paying extra on CSBs (I remember there was a limit to CSB holdings per person)?


What limit?

The only limit I can recall is how much cash I could scrounge up to buy as many over paying CSBs as I could ... as did my parents, my sister, my uncle etc.
It is a long time ago so it may be I have forgotten or was not close to the limit.


Cheers


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## james4beach (Nov 15, 2012)

Wow, do you recall the interest rate on those Canada Savings Bonds?

The highest rates within my investing lifetime were 6% or 7% GICs


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## birdman (Feb 12, 2013)

mark0f0 said:


> Why was this? Different terms (ie: points on the yield curve)? Some sort of mortgage subsidy or call feature in the mortgage or CSB's causing such a difference? The government paying extra on CSBs (I remember there was a limit to CSB holdings per person)?


I was a lender in a bank at the time and remember those years well. At the time inflation was rampant and prices and salaries were increasing very quickly. I remember receiving annual cost of living increases 10% and as well healthy merit and promotional increases. I believe the prime rate peaked at 22.75% and if you were paying say Prime +2% can you imagine what your monthly interest cost would be? Anyways, the rates were increased to curb inflation which was around 10-12%. http://inflationcalculator.ca/historical-rates-canada/ It worked and very quickly with rates and property values dropping very quickly. During the few years during the run up in inflation individuals were upgrading their homes and often making large profits providing their timing was right. They would have a clear title house and approach us for interim financing for a new purchase. It was quite common for the individuals to say they would hold off selling their existing home in 6-12 mos "when the value would be $50,000. or so higher". This worked for awhile but as rates went up the property values dropped very quickly, in some cases 25% or more. Raw land,recreational property, etc dropped like a rock. We had a subdivision we foreclosed on (this was in the Okanagan in BC) and lots which were projected to sell at $40,000. plus were eventually sold at $15,000. Tough times and lots of stories. In any event, the increase in rates worked and curbed inflation quickly. I could go on and on but thats your answer (to curb inflation)


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> Wow, do you recall the interest rate on those Canada Savings Bonds?


The rate was 19.50% for the lovely 1981 CSB S36. 

It stood out as well as energised the family to scrape up extra cash the comparison rate from the previous year was 14.41% (1980 CSB S35) as was the following year (1982 CSB S37). The year after that was 9.66% (1983 CSB S38). 

I should clarify that the rates set by the bond for the following years did drop but were not inline with what the Gov't would have preferred for the market conditions, after realising the rate had been bumped up too much. Shortly after, changes to allow more flexibility in the rates were written up in the papers.




james4beach said:


> ... The highest rates within my investing lifetime were 6% or 7% GICs


I am trying to remember how much of a jump but I can recall my parents being glad their mortgage wasn't due and having friends agonizing over whether the 18% and higher mortgages were going to last or not.


Cheers


*PS*

I seem to recall my mom thinking that one of the deciding factors was that with all other other GIC offerings, while I recall double digits ... the best rates weren't close to the CSB rate (confirming the financial commentary that the gov't had mess up the rate).


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## birdman (Feb 12, 2013)

Eclectic12 said:


> The rate was 19.50% for the lovely 1981 CSB S36.
> 
> It stood out as well as energised the family to scrape up extra cash the comparison rate from the previous year was 14.41% (1980 CSB S35) as was the following year (1982 CSB S37). The year after that was 9.66% (1983 CSB S38).
> 
> ...


In 1981 interest rates on "non chequing savings accounts" peaked at 19%. vhttp://www.bankofcanada.ca/wp-content/uploads/2010/09/selected_historical_v122493.pdf


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## Eclectic12 (Oct 20, 2010)

frase said:


> In 1981 interest rates on "non chequing savings accounts" peaked at 19%. vhttp://www.bankofcanada.ca/wp-content/uploads/2010/09/selected_historical_v122493.pdf



I must have had the wrong savings accounts then as I recall more like 9%. :rolleyes2:

The paperwork is long since gone so it may be my faulty memory.


Cheers


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