REAL LONG INTEREST RATE The Bank of Canada 30 year Bond Rate less CPI and the TSX Real Estate Index
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Real Rates of return fall with the rise in CPI or the drop in nominal yields and are defined as "the nominal rate less CPI".
The chart above shows that in August 2018, the real long interest rate (plum plot line) plunged into new negative lows as CPI (one month lag) ticked up to 3%. The Bank of Canada target is 2% inflation. After 9.5 years of ZIRP and NIRP total CPI is still in a long term downtrend, but in the last 12 months of steady CPI upticks, the TSX real estate index buyers appear to be betting on continued CPI inflation and its consequent negative effects on interest rate yields. If citizens cannot earn a positive return on cash assets, they will not save, they will consume as cash assets depreciate. Here is the live TradingEconomics.com Canada Household Savings Rate chart to demonstrate the point:
source: tradingeconomics.com
The transformation of Canadians from producers to consumers is illustrated in my FDI FDO chart.
We should also note that the real long rate troughs are happening closer together since the TSX real estate breakout in 1Q 2015, so cash buyers should be on risk management alert.
We should also note that the real long rate troughs are happening closer together since the TSX real estate breakout in 1Q 2015, so cash buyers should be on risk management alert.
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Total CPI is now 3%. In the previous 44 prints, CPI had remained below 2.4%, but not now.
The June 2017 TSX real estate spike high (green dotted plot) gave way, failing to remain above resistance begun in 1Q 2015; now an attempt to break out again is on. FOMO lives. |
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Commodity deflation reflects withering global GDP. One should keep an eye on the USD/CAD pair because since February 2018 the USD has been trending stronger and as it does Canadian consumers will need to find or borrow more loons, to maintain lifestyle as import prices increase.
The slow down in real estate sales as well as perhaps a more secular turn in trend may leave the July 2017 TSX Real Estate Index data spike high and dry as investors rethink their 2018 portfolio mix.
Mark your calendars, 2016-17 has been hot for real estate bulls and they have been able to make 2017 memorable despite sales resistance under the growing mountain of debt.
