Canadian Money Forum banner
41 - 60 of 75 Posts

·
Registered
Joined
·
679 Posts
No doubt! Also consider how much easier it was to save up a downpayment.

If you were really worried about the interest payments you could just save up for longer and take a smaller mortgage.

$80,000 house in 1981:
$12/hr = 25K/yr salary (approx.)

Time required to save down payment (10% savings rate):
5% down = 1.6 yrs
20% down = 6.4 yrs


$600,000 house today:
Salary adjusted for inflation = 70K/yr (approx.)

Time required to save down payment (10% savings rate):
5% down = 4.3 yrs
20% down = 17.1 yrs

These numbers might be conservative. A house that cost 80K in 1981 is easily a million dollars around here today.
That $80k house is $350-400k today and salary went from $25k to $100k. Location plays a big part. Had to live where the work was.
 

·
Registered
Joined
·
263 Posts
In 1981 I was paying 21% on my mortgage, and lots of people were losing their homes. Why do you feel this can't happen again.

ltr
Good question. I was going to reply that back then, rates were generally higher and so the relative change didn't impact people's finances so much, but then I looked at the BoC historical rates and saw that before 1955, rates were around 2% for a long time. So yeah, I guess that going to super high rates after a long period of low rates can indeed happen.

Well, now I'm scared, haha.
 

·
Registered
Joined
·
3,863 Posts
So yeah, I guess that going to super high rates after a long period of low rates can indeed happen.
Yeah, there's a whole generation that has never experienced high interest rates and they tend to feel that it can never happen. Back in the 80's, inflation started rising out of control (sound familiar) and so to counteract this, the Bank of Canada started raising rates.

My favourite memory was one where I was at work and a bunch of us were sitting around at our desks and the manager came through as he did every year with a signup list asking who wanted to buy Canada Savings bonds to be subtracted from their cheques in small amounts until the bond was paid off. When we asked the yield he said it was 19.5%. Everyone laughed, and said no thanks, since we all just knew that rates would be going higher and that 19.5% was a terrible rate.

I wouldn't mind one of those bonds today.

ltr
 

·
Registered
Joined
·
17,139 Posts
Remember Pierre Trudeau and wage and price controls ?

I don't remember if it was an effective strategy, but I remember leading workers out of our factory on the national Day of Protest and getting fired for it.

I got my job back because the other workers refused to go back to work......but it was an interesting time.


Edit.......after research, the wage and price controls were a failure. The idea was an election campaign by the Conservatives that Trudeau said was ridiculous but a year later he adopted. It was a blatant attempt to control inflation by capping wage increases. Inflation was at 11% and the wage and price controls only dropped it by 1.7%.......a dismal failure that caused a lot of financial distress to working families.
 

·
Registered
Joined
·
17,139 Posts
LTR is right and this generation will have to learn how to manage their own inflation. They do so by the spending choices they make.

We can't control all our costs, but we can control a significant number of them to make a difference.
 
  • Like
Reactions: londoncalling

·
Registered
Joined
·
17,139 Posts
$3 USD for a US gallon is pretty cheap gas. It is about the same price as Canada.

People have been spoiled by historic low interest rates, gas prices, food prices, and cheap trinkets and trash from China.

First world problems.
 

·
Registered
Joined
·
942 Posts
Bonds are getting, in my opinion, worse and worse. Cash is disappearing at the rate of inflation which is over 6%, and I think is going higher."

Siegel anticipates rising prices will stretch out over several years, with cumulative inflation reaching 20% to 25%.
 

·
Registered
Joined
·
17,139 Posts
Sounds like good news for people who have their savings stashed in GICs.
 

·
Registered
Joined
·
17,139 Posts
They gain more in interest than they spend on inflation.

If someone has $100,000 in GICs, they don't have to run out and spend it right away.

Maybe they will use the interest income to pay the monthly payment on a debt....like a 7 year car loan with a low fixed interest rate.

Maybe they will use the interest to buy a vehicle that has a discount for cash only.

Maybe they will spend it on Black Friday sales on items that are discounted by 50%.

Maybe they will never spend it. There is no disputing that getting 20% interest on your money is better than getting 2%.

People should focus on managing "their" inflation and not worry about the "overall" rate of inflation for stuff they don't buy anyways.

It doesn't matter to me how much a new designer shirt has gone up in price, because I buy my clothes at Goodwill.

I buy a lot of things at Goodwill and Salvation Army Thrift stores........dirt cheap and no taxes. The stuff often still has the retail price tags still on them.

Shop smart......you are your own best inflation fighter.
 

·
Registered
Joined
·
5,627 Posts
Shop smart......you are your own best inflation fighter.
I agree with shopping smart. It still doesn't make inflation good for people with GICs denominated in fiat.

Inflation is good for people who hold assets not fiat. Fiat is devalued by inflation. Value of assets are inflated in terms of fiat

You don't want to "stash cash" anywhere if you expect inflation. Regardless how smart you shop imo
 

·
Registered
Joined
·
12,313 Posts
Bonds are getting, in my opinion, worse and worse. Cash is disappearing at the rate of inflation which is over 6%, and I think is going higher."

Siegel anticipates rising prices will stretch out over several years, with cumulative inflation reaching 20% to 25%.
I don't think central bankers will act that quickly. YOY inflation is still skewed by excessively "low" equivalent months in 2020 with uncertainty about how much current inflation is transitory. Looked at on a 2 year cycle back to 2019, average YOY per year over the two years is still well under 3%. No need to have a heart palpitation until late Spring. But I do expect there to be a move by central bankers by the end of 1Q22 to temper potential and arrest momentum.

One generally does not hold bonds or GICs for return ON investment. They hold for volatility reduction, cash reserve, etc. For seniors in retirement in withdrawal mode, most would hold it as a reserve bridge in event of equity market meltdowns. Much of my 15% fixed income component is cash reserve in HISAs @ 1.15-1.25% for that plus flexibility in expenditures. Quite happy with that situation.
 

·
Registered
Joined
·
5,627 Posts
One generally does not hold bonds or GICs for return ON investment. They hold for volatility reduction, cash reserve, etc. For seniors in retirement in withdrawal mode, most would hold it as a reserve bridge in event of equity market meltdowns.
Hedge against equities makes sense. Still trying to wrap my head around inflation being good for GICs
 

·
Registered
Joined
·
12,313 Posts
Still trying to wrap my head around inflation being good for GICs
Sags is my Ignore list so I don't see his posts and don't know the context but clearly inflation is terrible for GIC returns. 3% inflation and 2% GICs is terrible. So is 5% inflation and 3% GICs.

The context might be speculation that high inflation will result in central banks having to raise short term interest rates so much to beat inflation back to 2% that the bond yield curve will then result in 4% GIC interest rates. Entirely possible but by then the compounded hemorrhage on old GICs has already put the funds in a significant loss position in real terms. A better situation would be 1% inflation and 1.75% GIC rates on a long term basis.
 

·
Registered
Joined
·
4,296 Posts
Yeah, when read post about the relationship between inflation and GICs I kind of shook my head. Every time I see the most recent announcement on inflation I go "ouch" and think of my GICs. As AR indicated, I don't own them to make money, I own them so I always have some. I agree, however, these days I feel like I will always have less and less...but at least it is something.
 

·
Registered
Joined
·
17,139 Posts
What if you had a fixed rate auto loan for 84 months at 2% interest and used GIC interest to make the payments ?

Would you rather get 2% interest on your GIC or 10% interest ?

Same can be applied to mortgages or any long term debt with fixed interest rates.
 

·
Registered
Joined
·
5,627 Posts
Would you rather get 2% interest on your GIC or 10% interest ?
I'm trying to calculate how I would ever not want 10% but it's hurting my head

Debt is good in an inflationary environment because its value is debased. So ideally you take out debt for an asset that gets inflated like a house

Sounds like you are cancelling the rates out with fixed rates but I don't follow the logic. GIC income is taxed so I would not consider it equal
 

·
Registered
Joined
·
4,296 Posts
What if you had a fixed rate auto loan for 84 months at 2% interest and used GIC interest to make the payments ?

Would you rather get 2% interest on your GIC or 10% interest ?

Same can be applied to mortgages or any long term debt with fixed interest rates.
Using straight math, owning GICs while you have a mortgage is colossally stupid anyway. All you are doing is giving your money to the bank with the GIC purchase and they are loaning it right back to you with the mortgage offering. In between you are paying them an interest rate spread to basically move your money out of one pocket into the other. That will almost never be profitable. Car loans are the same just wrapped in a different package. If you decide you want to have both GICs and a loan then you need to be willing to pay the cost of that set up.

The only benefit of having GICs during a higher inflation period is that the interest rates you renew them at go up, but of course when all the math is done, usually you will find that the increase in rates does not keep up with the devaluation of the money itself, from the inflation.

There will always be a cost to owning GICs during inflationary times but that cost must be justified by the guarantees they provide. Its the return on them that suffers greatly during inflation but the guarantee remains.
 

·
Registered
Joined
·
5,627 Posts
In between you are paying them an interest rate spread to basically move your money out of one pocket into the other. That will almost never be profitable. Car loans are the same just wrapped in a different package.
Income tax on the GIC income plus the spread

I don't know of any GIC that come out ahead
 
41 - 60 of 75 Posts
Top