Shipping Containers and…Your Mortgage?

From an early time humans have always looked for simple answers to complex problems. We’ve found the answers in a number of curious, and often strange ways. Reading tea leaves, checking the phase of the moon, and of course compiling sheets and sheets of data over time. Some methods work better than others and I often find that it’s the most interesting backstory that seems to win the day.

More on that in a bit.

The Bank of Canada made their policy interest rate announcement earlier this week. Most of the experts were calling for another rate increase of 0.75%. The country heaved a sigh of relief when it was only 0.50% of an increase.

That’s the 6th rake hike for 2022 and brings the rate up to 3.75% from the low of 0.25% at the start of the year. The Bank of Canada has one more rate announcement on December 7th and as they continue their quantitative tightening, another rate increase is very likely.

The question will be, how high will that increase be?

It all depends on how effective the most recent rate increase will be in bringing inflation back down to the target rate of 2%. CPI Inflation has declined from 8.1% to 6.9% and is one of the lowest rates in the G7 and still a long way from the 2% target rate.

My friend Dan Johanis at Pekoe Mortgages put this in perspective by comparing it to docking a boat. You want to slow down gradually and ease in to a nice gentle stop at the dock. Throttling back too soon and you end up too far from the dock. Don’t throttle back and your boat ends up splintering the dock and your passengers likely get wet.

Which is the perfect segue into my shipping container theory.

During the pandemic, we had all hunkered down and had stopped spending money on travel and entertainment. That money was then spent on “stuff”; new decks, new furniture and lots of new appliances. Most of that “stuff” is manufactured offshore and is shipped to us in, you guessed it, shipping containers. Shipping containers were big news last year. Shipping containers blocking the Suez canal, ships full of them piling up in harbours outside of major ports, and in some cases, ships waiting as long to unload shipping containers as it took them to make the trip from China. The cost of those shipping containers hit a peak of $10,377 (not including the shipping cost) when the long term pre-pandemic price was averaging $1,420 according to the Drewry World Container Index.

The fact that someone actually tracks this information and makes a ton of money doing it is impressive and if you’re like me, you never thought such a thing existed. I digress.

Factories in China were struggling to meet demand.

Shipping containers were in short supply.

Ships full of containers were stuck in harbours waiting to unload.

The trains delivering these containers were not operating at capacity.

All because of a lack of people available to run all of these bits of the supply chain. A lot of sick people, a lot of people leaving labour intensive and poor paying jobs, and a lot of government money sloshing around trying to keep everyone solvent and not worrying about their next meal.

No judgement on any of this, because as it turns out most of us were reacting in rational ways to many irrational and, not connected at the time, events.

Fast forward to today. Container rates are down to $3,145 which is still 121% of the pre-pandemic rate of $1,420. Wait time in most major ports is back down under a week and the trains are back at capacity. The shelves will be overflowing with stock in time for Christmas!

This means we should see prices starting to drop back down.

But how does this impact your mortgage, and Paul - get to the point!

We all acknowledge that inflation this year has been sharp and brutal. Inflation is usually driven by wage increases (money supply). The simplistic solution is to drive interest rates up so that things become more expensive to finance and own.

My shipping container theory is that the inflation we’ve experienced has been supply chain driven rather than wage driven. Everything including houses were in short supply last year. We’ve experienced the impact from a lack of supply in the housing market and that impact has been magnified by the increased cost of financing your home.

My point here is that we are using traditional tools to deal with inflation, and it’s not the inflation our parents experienced in the late 80’s.

In my opinion, I think this will be a relatively short period of higher interest rates. Likely another small increase in December and then steady through most of 2023 while prices slowly come down and demand levels off. Most governments have turned off the money tap and the bonuses that employers were paying to get people to work are disappearing. That leaves incomes not far off pre-pandemic levels and not a ton of excess cash looking to be spent. Some of the European governments are already slowing the rate increases because they are worried about pushing demand down too far.

Is the boat going to miss the dock, or hit the dock? Not the most scientific answer, yet the rationale works for me.

If you have a variable rate mortgage now, consider locking in for a year or 2 at a fixed rate. That’ll help deal with any rate anxiety you have and when rates start to trend down again you can at that point return to a variable rate mortgage. As always, when you need expert advice talk to our mortgage specialists and brokers. They will listen and propose a mortgage package that makes sense for your needs.

Shipping containers or tea leaves? What methods are you using to help answer life's questions and make sense of the chaos in the world?

Thank you for reading and enjoy the weekend.

Paul

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