# Interest Rates and Housing Bubble....



## argos1 (Nov 21, 2010)

Why does everyone say interest rates will rise?

Why cant interest rates stay the same as they have been last 2 years forever?

Call me naive.


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## Jon_Snow (May 20, 2009)

Okay. You are naive.

When rates get back to historical norms, so many people are gonna be screwed. I'll be looking for some deals in about 4 or 5 years....


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## argos1 (Nov 21, 2010)

thanks....but that is not my question.

My question is why can't bank of canada keep interest rates low.


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## HaroldCrump (Jun 10, 2009)

argos1 said:


> My question is why can't bank of canada keep interest rates low.


Official answer: because inflation is rising, or is threatening to rise, above the target 2% rate.
Unofficial answer: because that would be like feeding a drug addiction with more drugs.
Do you realize how many problems our super hot real estate market is causing?
Artificially low interest rates accounts as the primary cause for the real estate "boom".
Lax lending policy accounts as the second cause.
Earlier this year, the govt. started to reel in some of the lax policies such as minimum down payment for second properties, stricter mortgage qualification criteria, etc.
They need to seriously tighten interest rates.


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## argos1 (Nov 21, 2010)

but raising interest rates would but hundreds of thousands of people with 5 or 10 percent down into bankruptcy.

Why would bank of canada want people forced into bankruptcy.

How can this be benefical to our economy to raise rates?


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## Jon_Snow (May 20, 2009)

Rising rates are going to hurt alot of people who have over extended themselves financially. But the rates must rise... if only to end the orgy of excessive borrowing. I'm with Garth Turner on this one... its gonna be MESSY.


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## slacker (Mar 8, 2010)

I don't 100% understand either, but I have read that low interest rate (easy credit) leads to bubbles.


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## kcowan (Jul 1, 2010)

Extra low rates artifically encourage people to buy stuff that they can't afford. They discourage saving and investing in the future. Neither of these outcomes is good for the long term health of a society


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## Sustainable PF (Nov 5, 2010)

canadianfinanceblog.com posted an informative guest article on this topic:

http://canadianfinanceblog.com/2010/04/22/low-interest-rates-the-good-the-bad-and-the-ugly.htm


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## Cal (Jun 17, 2009)

+1 for kcowan and Harold.


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## Berubeland (Sep 6, 2009)

http://af.reuters.com/article/energyOilNews/idAFN2310540620101123

And as inflation rises... 

We are all time lows for the interest rate. Rates will go up. 

People are stupid and an awful lot of them will get caught in the carnage. 

The same people who will scoff at rent to own furniture will gladly buy an overly large house using the same principles. 

It's more than about affordability it's also about sustainability. 

Doesn't everyone here remember when every single department store had a lay away department? Now these same stores have a person by the front door getting you to sign up for a 29.99% store card. 

Too many people are working to make payments. It's out of control. Mark Carney has said that rates are going up. 

When rates go up less people will be able to afford to buy, or will buy less. House prices will go down. They are already going down. 

From May of this year the market was up 16% year over year. A few months later down 1% year over year and inventory is building up, houses are taking longer to sell even in posh areas.


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## JAV (Mar 14, 2010)

argos1 said:


> but raising interest rates would but hundreds of thousands of people with 5 or 10 percent down into bankruptcy.
> 
> Why would bank of canada want people forced into bankruptcy.
> 
> How can this be benefical to our economy to raise rates?


From the wiki entry on Bank of Canada...

_The Bank of Canada's responsibilities focus on the goals of low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt._

Inflation is the enemy, unless you're Ben Bernanke as he's trying to create some to avoid deflation. Frankly, the world is a mess and somehow we've avoided it or it's delayed. Not sure which.

As has been mentioned, RE prices are falling in the Toronto area. Two weeks ago I went to an open house where they were "holding back offers", expecting some sort of bidding war to erupt. Today the agent emailed me that the price dropped $30k (5%). We're in the market to buy, we have 20% down but I'm thinking we should hold off for now and enjoy renting for a while longer.

If RE prices continue to fall, I would doubt the BoC will be rushing to raise rates.


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## argos1 (Nov 21, 2010)

The USA is offering 20-30 year fixed mortgages at the low 4% rate.

How far are we behind them?

if they can offer it, we can.

Why do you all say it must got up 4 - 5 perecent?


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## HaroldCrump (Jun 10, 2009)

argos1 said:


> The USA is offering 20-30 year fixed mortgages at the low 4% rate.
> 
> How far are we behind them?
> 
> if they can offer it, we can.


Buddy, you don't wanna be in the situation those guys are in.
Can you even begin to imagine what economic mess makes the govt. offer 30 year fixed rates @ 4%?


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## the-royal-mail (Dec 11, 2009)

Well of course rates are going up...eventually. There's nowhere else for them to go! lol

But they're not going up soon. The economy is way too fragile for that. Maybe later.

But yes, the housing situation in the US is dire. It's a good demonstration of what happens when people put every blasted penny into housing. Has anyone seen the movie 'Fun with Dick and Jane' with Jim Carrey? I think it came out in 2005 in relation to what happened in 2000-2001. I think it was a shot at Enron, Worldcom and that whole mess. It's funny how the exact same principles of the movie apply again following the 2008 disaster.

This is another reason I like renting. I can give two months notice and be outta here without having to worry if I'll recoup my home equity, whether someone will buy it WHEN I need to sell it and without having to shell out $10s of thousands in fees to middlemen. Sure, my rent goes up every year but the increase pales in comparison to the increases in property taxes and other already-high fees.

The system isn't built for the success of the little guy.


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## davidpylyp (Jul 22, 2010)

*6% 30 year fixed*



HaroldCrump said:


> Buddy, you don't wanna be in the situation those guys are in.
> Can you even begin to imagine what economic mess makes the govt. offer 30 year fixed rates @ 4%?


Yeah Imagine the distress that could cause. 

The Canadian government loaned and guaranteed Millions to thousands of home owners in a small subdivision call Downsview! Located at the extreme end of Toronto and barely part of the city proper. 

I remember talking to a few people who had a couple of years left on their mortgage and they said they were grateful to Canada and CMHC other wise they never could have bought in the 60's with the young families they had. 

Let's put a cap on the sky is falling rhetoric unless you are in the Newspaper or book selling business. 


Lets recap According to CAMP ( Canadian Assoc of Mortgage Professionals) 

1/3 of Canadians Have no mortgage 
of those that have a mortgage 

50% of the value or less of their home is encumbered at an average rate of 2%. 

Mortgage rate defaults in Canada are less than 1.5% - 2.0% as they have been for decades. IN teh United States they are at 10% of portfolio. 

Lets add a dose of reality; 

So I have been in my house that I bought for say 225K Now worth 500K 
I have a lifestyle mortgage (HELOC) on my property to fund my cottage boat cars university tuition wedding kids divorce fund. and it cost me 800 dollars per month to service at 2.1% variable But my wife and I are still working. 


Why why why are you saying that everyone is screwed? 

I sell houses and people are buying at 20% or more down to save the CMHC premiums and paying down their mortgage. Their payments are at 33% of their gross income. 

Whats the correct answer? Large Metropolitan areas are draws for immigration both within Canada and for other countries; We have fabulous employment with a 90 % employed, Universities Hospitals Research, Banks, Insurance, Financial and Yes we are moving to a knowledge based economy. 



Is the sky falling? Will prices drop? 

Do you have a house? convinced it will drop 30 - 40% Then lets sell it.


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## hughm (Nov 1, 2010)

interest rates are one of the fundamental economic controls available to a soverign nation.

Interets rates and inflation for instance have an inverse relationship. If you raise interets rates you reduce inflation by dampening borrowing demand and encouraging savings. This takes money out of the economy and thus reduces inflation. If on the other hand you reduce interest rates, suddenly savings are less attractive and borrowing is cheaper and this stimulates spending and increases inflation.

a modest amount of inflation is positive and it goes hand in hand with growth. Too much inflation or too little is bad. Too high and your economy becomes overheated, leads to excessive wage inflation and spending and a lack of competitiveness. Too little or no inflation has a negative effect on economic growth.

interest rates are typically lowered to stimulate economic growth and once there is any momentum in the ecomony they need to rise to prevent inflation getting too high.


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## GeniusBoy27 (Jun 11, 2010)

Well, the interest rates will generally rise to historical norms. Are they going to overinflate, or go back up quickly? Probably not.

Canada does not live in a bubble, and the global economy is floundering, but the right manoeuver is to increase prime rates up. However, long-term rates may not go up very quickly, because the fixed rates are more dependent on the bond market, and the bond market is in poor shape presently. 

What I'd like to see is the return of the bank rate to BoC + 1% instead of the BoC + 2%. I would like to see an alternative bank/credit union push the rates down and taking business away from the big 5, but those days may be gone for good?


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## the-royal-mail (Dec 11, 2009)

GeniusBoy27 said:


> ... I would like to see an alternative bank/credit union push the rates down and taking business away from the big 5, but those days may be gone for good?


Huh? Times are very good! Banks have been lowering their fees and offering better bargains on things like TFSAs, high interest savings account and more. I have no doubt that this is in response to all the credit unions we've been seeing (someone posted in another thread about all the ones in Manitoba) and the discount online brokerages sucking money away from big banks as little web-savvy investors like us learn. Knowledge is power, the web gives the little people an enormous knowledge base to research with only a few clicks. Forums like this are good too and competition is a very good thing. I am grateful for the presence of these smaller companies that compete for our money. 

What you would like to see exists today! You have only to shop for it!


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## GeniusBoy27 (Jun 11, 2010)

Ah, I lived in the United States, where there was real competition... I so wish the banks had more real competition across the board from international corporations (but I digress wistfully.)


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## Addy (Mar 12, 2010)

GeniusBoy27 said:


> Ah, I lived in the United States, where there was real competition... I so wish the banks had more real competition across the board from international corporations (but I digress wistfully.)


Yeah, and look what happened in the US. I'm rather happy with the way things are here atm thank you very much. I'd like interest rates to rise, but only after we've bought our next home!


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## hughm (Nov 1, 2010)

Addy said:


> I'd like interest rates to rise, but only after we've bought our next home!


I too am waiting to buy a house, in about 12 months time. From a purely selfish prespective I would like to see rates rise now. That will have a negative affect on house prices, by dampening demand and thus slowing/stopping further price inflation or by precipitating a price reduction if a lot of houses were bought on cheap credit at the top of the market.

I don't like to see anybody lose out and be forced to sell their home, but in terms of getting value for money for my own family, I sure don't want to buy at the top of a housing price cycle in Ontario having just sold near the bottom of one in Ireland!


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## GeniusBoy27 (Jun 11, 2010)

What ... you don't like the ARM? I think if you had sense, and could work out the math, you'd know what type of risk to take and what risk not to.


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