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The Toronto-Dominion Bank Message Board

  • mroleandn2000 mroleandn2000 Feb 10, 2013 9:45 AM Flag

    Bring on higher rates already....

    This cheap money, ultra-low interest rate environment is ridiculous. Rates were kept artificially low for one purpose, and one purpose only : to enable those deeply in debt to have the means to reduce their debt substantially by ensuring that the majority of debt payments went to principal rather than interest costs. The premise being to provide a soft landing in the event of an interest rate hike (which seems to keep getting put off) or a real-estate correction (even a relatively minor correction in the neighbourhood of 5-15%). Few are prepared for, or even want to think about, interest rate hikes or real estate corrections.

    Instead, what we're seeing is that the average Joe and Janet are racking up yet more debt, as the interest rate environment makes all that "stuff" affordable (from a minimum monthly payment scenario).

    Average household debt is up substantially, based solely on people feeling all warm and fuzzy about their real estate valuations. What most of these people don't realize is that you really can't count your primary residence as an asset, it's not liquid. You live in it, if you sell it you still have to live somewhere. Residence is a fixed life-cost. It costs money to buy it, it costs money to live in it, it costs money to maintain it and it costs money to sell it.

    I see homes new homes starting in the $600K range, and these aren't mansions on huge lots, but rather middle class homes in sub-division settings on 40-50' lots...cookie cutters. In order to make first mortgage, these people have to come up with approximately $150K down and then carry a $450K mortgage. Are these people nuts? Yup.

    Meanwhile, if you're cash rich and have the means to put away, say $100K, a one-year GIC will pay you, at maximum, 1.8%. If you want more of a return, you'll have to look at corporate debt or preferred shares. What we're being told is that as there's no risk in GIC's, the rates are extremely low.

    There is risk, but it's not just for fixed-rate investments. There's a lot of risk out there, but most people don't want to acknowledge it. Conventional mortgages are 25 year commitments, most people seem to think that their monthly payment, that they can afford now, will be there for the duration. So, like good little consumers who have to have the best of everything, every spare dollar is used to accumulate that "stuff", rather than paying down the debt when the cost of the debt is cheap (on a historical basis). Most of this "stuff" depreciates and will be virtually worthless in less than 5 years. Are these people nuts? Yup.

    What we're facing is that the cash-rich are supporting the debt-poor. The banks merely collect the spread.

    What are these people going to do if rates increase by only 2 percentage points over the next 2-3 years. Better yet, if house prices correct by 10-20%, most of these mortgagees won't qualify upon renewal. Their home values won't allow for a loan-devalue renewal. I somehow doubt that debt repayment is at the top of the priority list. It's all about appearances, nice house (mortgaged to the hilt), nice car (leased). Most houses are houses of cards, all it's going to take is a stiff financial breeze........

    Bring on higher rates, the sooner the better to nip this laissez-faire financial attitude in the bud.

    That's my financial-political rant for this dead board.

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