REAL LONG INTEREST RATE The Bank of Canada 30 year Bond Rate less CPI and the TSX Real Estate Index
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 October 2018, the real long interest rate (plum plot line) continued moving up off its recent plunge into negative lows as CPI ticked back down from 3% in July to 2.2% in September (one month lag). The Bank of Canada target is 2% inflation. After 9.7 years of ZIRP and NIRP total CPI is still in a long term downtrend. After the energetic CPI rally since July 2017, buyers of the TSX real estate index now appear to be switching their bets on a continuation of real estate inflation. During the global ZIRP-NIRP experiment, citizens could not earn a real positive return on cash assets, so they stopped saving and consumed as cash assets depreciated. The live TradingEconomics.com Canada Household Savings Rate chart below demonstrates the point. If peak real estate has come and gone, those at the margin will turn to balance sheet repair.
In June 2017 the TSX real estate spike high (green dotted plot) gave way, failing to remain above resistance begun in 1Q 2015. But in 2018 the attempt to break out was tried again and now the last 3 prints suggest that buyer momentum has turned down.
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. Real estate is a fundamentally depreciating asset and its investment value rests on its yield.
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. See MyRealtyCheck.ca for the growing wave of price reductions in BC and the lower mainland.