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Thanks for clicking. Canadian interest rates won't be going anywhere but up for the foreseeable future. This according to the most recent forecast from Canada's big six banks. And yet banks have been wildly wrong before. All projecting very few interest rate hikes coming from the central bank back in 2022. Despite rates being wildly negative after one of the biggest money printing experiments in modern western history. that even with that massive mist and the consequences stemming they're from the real estate industry continues to treat bank projections as something authoritative as though the banks have an interest in teaching you how to pay them less money they don't. >> So what I want to do today is go over how well the banks did the last time they got interest rates so wrong. Take a look at what they have to gain if they get those predictions wrong again and then discuss some implications. as we'll see today to the perpetual bumfuzzlement of the real estate industry. The powers that be have an interest in directing consumer behavior. We will obviously continue to track the difference between what we hear in the media and the facts on the ground on this channel. Make sure you click like and subscribe if you want to get those updates, but for now let's get into the banks. Onto bank projections. As mentioned back in 2022, Canada's big six banks all maintained very, very optimistic projections as to how high the central bank would have to go in containing 4.8% and rising inflation. This relatively optimistic view of inflation and interest rates stood in stark contrast to those made by an admittedly fairly new YouTube channel nearly a year prior. As massive stimulus spending, both both by the US and by Canada will in fact drive inflation up. to so I took >> but the predictions made nearly a year later made by those with substantially more resources than I evidently when inflation was much much higher were ridiculous on their face as a 1 and a quarter policy rate would have meant a prime rate of 3.45 with 4.8% 8% inflation, meaning real rates, rates adjusted for inflation would have been massively negative, encouraging people to borrow and spend exactly the opposite of what the central bank wanted them to do, which was restrict spending. Restrictive stance of monetary policy. Restrictive territory. >> Restrictive stance. >> Restrictive mon restricted restrictive restrictive >> the stance of monetary policy as measured by real interest rates entered restrictive territory only recently in the wave the wave of both a higher policy rate and declining inflation expectations. >> I uh I just remembered something. But with that advice in hand, the banks certainly did well in 2022 with variable rate usage constituting over 50% of their books for at least the first half of the year and income from interest rising 11% from the year prior. So let's just propose a counterfactual that knowing what the central bank very much knew that interest rates were going to have to get into restrictive territory, the big six had told borrowers that floating rates were going to be going up and going up quickly. Those borrowers may have chosen fixed when bond yields were right around here. Back when a decent 5-year fixed mortgage rate was 2.74. Were households to have piled into that 2.74, there would have been multiple consequences for the banks. None of them all that great, at least for the banks. First and most obvious, the banks would have borne the shock of those higher interest rates. While Canadian households would have been locked into that 2.74% for 5 years, essentially borrowing cheaper than the Canadian government could only a few months later. Second, all of those mortgages held on the books of the banks were the banks to have wanted to sell them, which we very much know the banks do. Those 2.74% mortgages wouldn't have been worth nearly as much just a few months later. As we know that there's an inverse relationship between a bond's price and its yield. As an investor that likes to buy up mortgages, why would I want a mortgage sitting on the books of the banks that only pays out 2.74 when I could lend money to the Canadian government for 3%. Silicon Valley Bank ran into this problem as well before it failed as it had bought up far too many longdated treasuries and mortgage back securities at relatively low rates. Third, given that the spread between variable and fixed rates was so high with RBC offering 1.63% in late 2021, maybe households don't go so deep in debt to get into the housing market, having to pay 2.74 instead of 1.6. And finally, given that reduction in lending, given the drop in bond prices, maybe banks don't see profit beats by the summer of that year. So, in summary, back in early 2022, had banks have gone the other direction, had they predicted that floating rates would have to rise and rise substantially to deal with massively high inflation, the banks would have borne more of the risk of rising interest rates. It would have been more difficult to sell those fixed rate mortgages that they had on their books. Households may not have borrowed as much money and the banks may not have seen as big of profits. >> They were only trying to help. >> Now, I'm not saying that there was a big conspiracy amongst these six banks to dupe the public into thinking that the biggest money printing experiment in recent memory wouldn't lead to massive inflation, something they very much admitted after the fact. But the incentive structure was certainly present in 2022 to do so. But so what? That was the past. Let's all forget 2022. >> Done. But let's forget 2022 and move on to 2026. Is there a similar incentive structure on the part of the banks to tell people that rates aren't going down anytime soon when they very well could be? So let's suppose that borrowers pile into fixed rates rather than take variable, which is becoming less and less the case according to recent data. But let's say that they do. What would happen to bank profits to bank balance sheets if interest rates both fixed and floating all of a sudden started plunging say due to a major economic contraction? First, if borrowers fixed and needed to break their mortgage, they'd see great big massive penalties like what happened to a TD customer back in 2020. That customer had a prepandemic 5-year fixed rate of 3.71%, broke her mortgage, and TD charged her a $30,000 penalty. >> They're our closest friends. >> We know them. And that's because says TD with pandemic fixed rates going so low, it couldn't loan out that 591,000 that was still owed at that same 3.71% as rates were much much lower at the time. And the banks argue that they lose anticipated revenue from their client if they end the mortgage prematurely. So say you're in the mortgage with TD, you're on a 5-year fixed at 4%, rates drop to three, you want to break that mortgage. Well, TD can't make nearly as much money lending your money out at 3%. So, they're going to charge you a great big penalty for the privilege. So, if rates drop, all of those people that are currently borrowing at a 5-year fixed rate, they're going to pay great big penalties if they have to break their mortgage. Say because they want to take advantage of lower rates, job loss, and they have to sell their house, etc., etc. Alternatively, if those same people had taken a variable and they have to break their mortgage, their penalty would be 3 months interest. Second, as we very much know on this channel, since a bond's price and its yield are inverted, all of those fixed rate, higher rate mortgages sitting on the books of the banks, they'd all be worth more when those mortgages get sold on the open market. And third, and finally, of course, even if those borrowers opted to stay in their five-year fixed relatively higher rate mortgage, the banks are still doing very well as they're still getting that 4 4 1.5% 5-year fixed rate, which is much much more than their current funding cost, which wouldn't necessarily be the case with a variable rate mortgage, which moves up and down on the whims of the central bank governor. Now again, this is not at all to say that the banks are engaged in a massive conspiracy to dupe the public, but it is again to say that the interest of the banks do not always, if ever, align with that of the public. Does anyone genuinely think that the banks are unhappy that they have to charge a $30,000 penalty on a mortgage because they can't lend out the funds that they created out of thin air to someone else at a similar interest rate? No, they get the difference in interest rates right away. That's free money. >> I'm sure they feel awful. >> So, with all of that knowledge in hand, charts like these are not worth the social media page on which they are posted. So, as we've talked about in other videos, when you're deciding whether or not to go variable or fix, especially in uncertain times, don't listen to what the Bank of Canada tells you. As according to a big study from Harvard, governments lie. >> Did you know about this? >> Don't listen to what the banks tell you. They have a financial interest in your behavior. They're not going to provide you with advice that takes food off of their table. >> Did you know about this? >> Listen first, foremost, and only to your budget. If you're a first-time home buyer with minimum down payment, then I strongly advise fixing. Even Moleski, author of the study that mortgage brokers everywhere quote, but no one reads, advises against a variable rate mortgage for first-time home buyers. On the other hand, if you're comfortable, if you have a lot of equity in your home, if you're willing to watch the bond market, if you're willing to watch the money supply and the inflation rate, >> I am not. >> We know. But if borrowers are comfortable and willing to watch the money supply, the inflation rate, the market, and the economy, all of those things that would have told them what was going to happen back in 2022, then it might be worth floating for a little bit and taking advantage of the stimulus that the Bank of Canada is very much, all things being equal, going to have to inject into the economy. I just don't see how we fight a trade war with the United States with a two and a quarter policy rate, especially if we lose KUSMA. With that said, we will obviously continue to track how all of this does play out. Bank interest rates compared to the economy, bank narratives compared to the data on this channel. Make sure you click, like, and subscribe if you want to get those updates. But for now, thanks so much for watching.