Out of the Woods?
Posted by Gail | Filed under Economics 101
What does CDIC know that we don’t?
CDIC – the Canada Deposit Insurance Corporation – is the government agency that guarantees your bank deposits for up to $100,000 just in case your bank goes bust. ‘Course that guarantee comes with a price tag, which the banks pay in the form of premiums. Now CDIC is floating the idea that it will raise deposit insurance premiums – doubling them – to ensure it has the resources it would need if a major failure occurred.
Part of the problem comes from the fact that Canadians may be parking more at their local bank for a couple of reasons:
- They were scared out of the markets and sought what they thought of as higher ground… bank deposits of all types, and
- They may also be saving more as they finally wake up to the fact that you can’t spend every red cent you make.
Whatever the reason, the end result is that the amount CDIC has to cover has jumped. The Globe and Mail reported a CDIC spokesperson as saying that while deposits typically grow by about 6%, last year they jumped by 15%.
I wouldn’t be in the least bit surprised to see CMHC (Canada Mortgage & Housing Corporation), the organization that insures mortgages, follow suit. With interest rates at record lows and lenders offering clients more than enough rope to hang themselves, when interest rates start to rise – and rise they will – it’ll be interesting to see how homeowners cope with higher mortgage payments. If they can’t, it’ll be CMHC that’s left holding the bag, covering mortgages that go under.
If you borrowed $350,000 at 2.75%, and interest rates increase by even 1%, you’ll see a jump in your mortgage payment, unless you extend the amortization when you renew. So your $1600 a month payment would jump to almost $1800. And if you had to renew at 5.49%, which is today’s posted rate for a five-year term, you’d have to find just over $2,100 a month to keep your home. Would you be able to come up with $500 a month more?
Canadians haven’t come anywhere close to feeling the pain of our American cousins. The New York Times Magazine reported last weekend that millions of Americans have watched as their homes have gone under water financially. They call it having “an upside down mortgage”: one where you owe more than the house is actually worth. And even Americans who CAN afford their payments are choosing to stop making those payments rather than throwing good money after bad. So the crisis down south ain’t over yet.
Further north we have been insolated from the same kind of meltdown because of our national banking system that demands higher reserves, and because of a central bank policy determined to hold interest rates down. But for how long? And then what?
If our economy had rebalanced during the last recession – yes there would have been more pain, but at least it would be over – I might be a little more optimistic. But it didn’t. And while you’ve heard me rant on and on about the fact that “the fundamentals” can’t change, we still have people saying that they have. And we have governments prepared to pour millions into a broken economy, rather than accept the fact that markets – all markets – have ups and downs, and you have to learn to take the bad with the good.
Like protective parents who can’t stand to see their children suffer in any way, these governments have put their own financial health at risk to try and keep us happy and spending so we can buoy up the economy. But it isn’t working.
The bail-out of domestic car companies have left them holding inventory nobody wants to buy, while foreign dealers continue to rake in the money from consumers who think things are all fine on the northern front. The suppression in the natural rise of interest rates – in the global economy inflation is ratcheting up with a vengeance — has kept real estate markets hot and given home-owners the false impression that real estate values can’t go down. “Hey, we came through a recession and our house is worth even more, aren’t we smart.” Hey you only have to look down south to see that real estate is just one more asset class susceptible to market cycles.
George Athanassakos who is a professor of finance at the Richard Ivey School of Business at the University of Western Ontario, says in his column that he can’t sleep. He says that when the recession hit, about 60% of Canadian households were in a net debt position. Since then the problem has actually gotten worse as we continue to take on mortgages we won’t be able to afford when interest rates start to rise. Apparently the recession did nothing to knock some common sense into our heads. Oy!
I’ve always believed you should plan like a pessimist so you can live like an optimist. If you owe money, it’s time to stop spending on anything that isn’t an essential, pay down your debt, and build up your emergency fund. Since it’s impossible to predict what it will take to push Canada over the edge, you better be shoring up your financial defenses if you want to be able to ride out the storm that’s coming.
Here are three upcoming locations for book signings:
Saturday, Jan 23 @ 1 pm – Chapters, Oshawa Centre, 419 King Street West
Wednesday, Jan 27 @ 7 pm – Indigo, Manulife Centre, 55 Bloor Street West
Saturday, Feb 6 @ 1 pm – Chapters, Square One, 189 Rathburn Road West
This will likely be the final three, so come one, come all and let’s par-tay!