REAL LONG INTEREST RATE The Bank of Canada 30 year Bond Rate less CPI and the TSX Real Estate Index. Household Savings Rate Chart Below. See also the Real 10yr Rate the Interest Rate Spread and the Canadian Yield Curve
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 June 2019, the real long (30yr) interest rate (plum plot line) plunged another 49 bps with the 9 beep nominal drop and with CPI surging back above the Bank of Canada target of 2% inflation coming in at 2.4%.
After 10.3 years of ZIRP and NIRP total CPI is still in a long term downtrend with lower highs since FEB 2003 at 4.7%, MAY 2011 at 3.7% and JUL 2018 at 3%.
The TSX real estate cash index has broken out to the upside above the 2017-2018 highs but momentum is dropping.
We should note on the chart, 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. Real estate is a fundamentally depreciating asset and its investment value rests on its yield.
During the global ZIRP-NIRP experiment, citizens have not be able to earn enough real positive returns on cash assets, so consumption of cash assets has replaced savings. The live TradingEconomics.com Canada Household Savings Rate chart below demonstrates the point.
Canada Household Savings Rate
My January 25, 2019 post on Peak Consumption shows the relationships among the rates of Canadian household savings at the lows, consumer spending at the highs and retail sales momentum plunging as consumers become tapped out.
If peak real estate has come and gone, those at the margin will turn to a lengthy balance sheet repair discipline by diverting discretionary consumption spending to debt reduction or will turn to a quick transformation of debt to equity via asset liquidation. In either case it will take time as Canadians turn away from consumption back to saving which in the long term will lead back to investment possibilities.
The 20 year transformation of Canadians from producers to consumers is illustrated in my FDI FDO chart. The cost of the last decade of real estate wilding will be heavy for the weak hands that are now being exposed.