Cheap capital being dumped into the housing market

There’s more media sensation over the Investor’s Group offering a 3-year prime-minus 1.01% variable rate mortgage (which gives a snazzy 1.99% headline).

The rest of their rates are fairly mediocre, so this is clearly pure marketing instead of them trying to invade the mortgage market. The three-year government bond yield is 1.17% and they will pocket the (albeit) smaller spread. After three years, they’ll try to convert those mortgages into a high-cost fixed rate mortgage or some other product.

But it leads to the question of – let’s say you had access to capital for three years at 2% (assuming those short term rates don’t rise!). The number of safe investment harbours to earn a larger spread is definitely diminished.

So where do typical retail people put low-cost capital? The answer seems to be pretty clear – housing. For that matter, institutions are pouring it into almost everything other than cash – anything with a yield, including equities and bonds, have been bidded up substantially. Financial assets are quite expensive.

Another source of cheap credit is Interactive Brokers, assuming you can post the appropriate equity security to back the margin loan. Canadian dollars right now are 2.5% for up to $100,000, 2.0% for up to a million, and 1.5% after that.

The one thing about accumulating debt is that you’ve got to pay it back. Leveraging when the stock market is at all-time highs and yield spreads between AAA debt and junk bonds are at a minimum is not the world’s best formula to get rich.

As you might tell by the tone of this post, the pickings are slim out there. Almost anything worth speculating on (i.e. with cheap prices) has considerable baggage.