2005: A year for confident borrowing

December 31, 2004
A shiny new year always seems to bring a sense of optimism and promise. This is human nature at it finest- when we can somehow ignore staggering credit card bills, crappy Canadian weather, salt stains up to your knees and the latest Avril Lavigne album.

For investors,

and anyone worried about building and preserving capital , 2005 looks like it is going to be above average, and following on some of the dominant themes of last year. Count on the stock market improving steadily- as it did in 2004- thanks to cheap money, little inflation, steady economic growth and a whole lot fewer corporate scandals. For all of you who have been v-e-r-y-bad over the past four years, and shunned your RRSP contributions, this is the year to catch up.

Another big story

will be residential real estate in 2005, as it struggles to maintain the boom status it`s enjoyed now for the past six years. Right across the country, house prices have hit record levels, mortgages have bloated in size, renters have swarmed to become owners, and real estate has turned into the asset of choice for millions of families. Never before have we had so much riding on a single investment, with houses now equalling almost 75% of the nation`s entire household wealth.

This means any downturn in real estate values

will have a profound effect, and many experts have warned that a sudden rise in interest rates would have a double- whammy effect, with real house prices falling at the same time mortgage payments jumped. So, is 2005 a year in which we need to worry about rates?

Just four months ago,

the answer was a distinct and vocal “yes” from the economists I hang with. The call was for the prima rate, then 4%, to rise close to 6% by the end of 2005.That would effectively double the cost of below- prime, variable rate mortgages, and doubtlessly scare off a lot potential new real estate investors.

But the reality in the first few days of this year

is that interest rates, and the cost of a mortgage, will remain exactly where they are until at least the middle of the summer. This is because the Bank of Canada is concerned about the impact of our high dollar on exports, which could slow economic growth and impact employment. Any rate hikes now would simply make that situation worse, which is why the bank decided on December 7th, to take no action when is came to review the cost of money.

My bet is that bank will be in pussycat mode for all of this year.

There may be an increase or two by the beginning of 2006, but it will amount to no more than a half a point, which means the prime rate will still be in the 4% range next Christmas. Long and short term mortgages costs will be barely unchanged from today, and the impact on the real estate market will be minimal.

For borrowers,

and anyone with a home loan, this means that you have another year ahead in which it makes absolutely no sense to have anything other than a variable rate mortgage. All the lenders will give you VRM money at 4% or less these days, while traditional fixed, five-year mortgages stick in the 6.5% range. So those wimps who decide they want to lock in and avoid any potential rate hikes in months to come are paying a huge insurance policy.

What a waste of money that is,

when the same cash could be shovelled against the mortgage principal itself, or dumped into an RRSP to get a big dose of tax relief, and create an investment portfolio. So, too bad that approximately half of all homeowners in this country now have borrowed the wrong way- talked into costly, unnecessary, inappropriate mortgages by Big Banks reps who probably know better. Too bad that Canada`s financial regulators are chasing down mutual fund managers who shave a little extra off on trades, while millions of borrowers are talked into making billions in extra, needless, payments. So, in 2005, be a smart borrower. Go short. Go variable. Be confident. I`ll tell you when it`s time to duck.

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