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
CLICK CHART TO ENLARGE
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".
See also Real 10yr Rate - Interest Rate Spread - Canadian Yield Curve
and are defined as "the nominal rate less CPI".
See also Real 10yr Rate - Interest Rate Spread - Canadian Yield Curve
The chart above shows that in February 2019, the real long (30yr) interest rate (plum plot line) dropped with the 1 beep nominal rate drop and the CPI drop from 2% to 1.4%. The Bank of Canada target is 2% inflation and its had a 2% or greater handle in 10 out of the last 12 prints but after 10 years of ZIRP and NIRP total CPI is still in a long term downtrend.
After the energetic CPI rally from July 2017 to July 2018, buyers of the TSX real estate index appear to be testing the 2017-2018 highs. In some minds, real estate inflation is till a trade-able bet.
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.
After the energetic CPI rally from July 2017 to July 2018, buyers of the TSX real estate index appear to be testing the 2017-2018 highs. In some minds, real estate inflation is till a trade-able bet.
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.
Canada Household Savings Rate
source: tradingeconomics.com
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 or will turn to a quick transformation of debt to equity via selling at a capital loss. 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, eventually.
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.
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.
