Bank of Canada increases overnight rate target to 1 per cent • Hacker News Board

Re: Bank of Canada increases overnight rate target to 1 per cent

#51

Post by kitcar » Wed, Sep 06, 2017, 4:42 PM UTC

dmix wrote: post #43

The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and…

I believe the official stance of the bank of Canada is inflation is below target hence the low rates being acceptable for so long.

What I don't understand (and I hope someone can shine some light on!) is the basket of goods they use to measure inflation doesn't seem to be very impacted by low interest rates - therefore how will the low rates increase inflation? i.e. banks will only lend to me at below 5% if I'm buying fixed assets like a house - which isn't included in the inflation measure. If I want to borrow to buy groceries, gas, or the other things they measure for inflation I would be borrowing at >19.99%. Therefore all low rates does is cause the price of fixed assets to skyrocket. But those assets are tremendously difficult to convert into consumer spending - i.e. You sell your now inflated house, but rather then spending that "profit" (due to the value of your house increasing) on more groceries and gas most people just roll it into another expensive house as they gotta live somewhere. I guess ultimately there will be a trickle down where everything will get more expensive, but seems like it would be a very long process...

Re: Bank of Canada increases overnight rate target to 1 per cent

#52

Post by cthrow » Wed, Sep 06, 2017, 4:42 PM UTC

dmix wrote: post #43

The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and…

Alternative in 2008 was to let the banking system collapse, then rebuild from scratch.

Personally I believe many older/sick people would have died if central banks hadn't dropped interest rates and embarked on QE asset purchasing schemes to keep the system afloat.

Credit/lending would have all but disappeared for a while, many would have lost access to financial instruments necessary to secure housing, healthcare, insurance.

As a young person I'm not happy that we've propped up the status quo, that my rent is stupidly expensive, and that the majority of recovery has gone to the wealthy/those who owned existing equity/assets/real estate, but I can see why it was necessary.

Re: Bank of Canada increases overnight rate target to 1 per cent

#53

Post by blobbers » Wed, Sep 06, 2017, 4:44 PM UTC

Informational note: The notion of fixed rate mortgages does not exist in Canada. You can lock in for about 5 years, but otherwise your mortgage rate floats with prime.

If prime rates rise, borrowers can be on the hook for large amounts of defaults as incomes fail to keep up with higher payments.

(canadian housing market exhibits higher sensitivity to interest rates)

Re: Bank of Canada increases overnight rate target to 1 per cent

#54

Post by loeg » Wed, Sep 06, 2017, 4:54 PM UTC

kitcar wrote: post #51

dmix wrote: post #43

The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and…

I believe the official stance of the bank of Canada is inflation is below target hence the low rates being acceptable for so long. What I don't understand (and I hope someone can shine some light on!) is the basket of goods they use to measure inflation doesn't seem to be very impacted by low interest rates - therefore how will the low rates increase inflation? i.e. banks will only lend to me at below 5% if I'm buyin…

Well, you hit on it directly. Cost of housing ought to be included in inflation measures.

Re: Bank of Canada increases overnight rate target to 1 per cent

#55

Post by jpdaigle » Wed, Sep 06, 2017, 4:55 PM UTC

kitcar wrote: post #51

dmix wrote: post #43

The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and…

I believe the official stance of the bank of Canada is inflation is below target hence the low rates being acceptable for so long. What I don't understand (and I hope someone can shine some light on!) is the basket of goods they use to measure inflation doesn't seem to be very impacted by low interest rates - therefore how will the low rates increase inflation? i.e. banks will only lend to me at below 5% if I'm buyin…

Another thing I don't understand about the basket of goods approach to measuring consumer prices is how we're getting inflation figures which are so low. Since goods we buy priced in USD have gone up massively in 2-3 years due to a falling Canadian dollar (electronics, smartphones, computers, SaaS, etc.), the only way the basket stays at 2% YoY growth is if that's offset by other things falling in price.

But, anecdotally, home services, energy cost, health services, food and clothing are all more expensive now than a few years ago, the only exception I can think of off the top of my head is gasoline, which has fallen.

Edit: This StatCan paper (http://www.statcan.gc.ca/pub/62-553-x/62-553-x2015001-eng.pd...) explains CPI in detail and it seems like the basket is thorough and well-thought-out. Appendix B outlines all the components and their weights, and both homeowner costs, rents, and mortgage interest costs do factor into the shelter calculation.

Re: Bank of Canada increases overnight rate target to 1 per cent

#56

Post by asdf33323 » Wed, Sep 06, 2017, 4:57 PM UTC

refurb wrote: post #46

This will be very interesting to watch. The Toronto real estate market has already started to correct. Prices are down 20-30% seconds nice earlier this summer. A ton of people eager to buy "before prices go even higher" are getting creamed. Interest rates going up will only make this worse. Hold on tight!!

Prices aren't down 20-30% - you're referring to average sales price. Big difference. It's been attributed to the sales mix (people opting for condos/townhomes)

Re: Bank of Canada increases overnight rate target to 1 per cent

#57

Post by jpdaigle » Wed, Sep 06, 2017, 4:58 PM UTC

loeg wrote: post #54

kitcar wrote: post #51

Earlier quoted context omitted.

I believe the official stance of the bank of Canada is inflation is below target hence the low rates being acceptable for so long. What I don't understand (and I hope someone can shine some light on!) is the basket of goods they use to measure inflation doesn't seem to be very impacted by low interest rates - therefore how will the low rates increase inflation? i.e. banks will only lend to me at below 5% if I'm buyin…

Well, you hit on it directly. Cost of housing ought to be included in inflation measures.

Yes - assume you're buying 1/200th of an "average home" every month as part of a monthly basket of consumption. It's an assumption I use when comparing cost of living between cities.

Re: Bank of Canada increases overnight rate target to 1 per cent

#58

Post by asdf33323 » Wed, Sep 06, 2017, 4:58 PM UTC

blobbers wrote: post #53

Informational note: The notion of fixed rate mortgages does not exist in Canada. You can lock in for about 5 years, but otherwise your mortgage rate floats with prime. If prime rates rise, borrowers can be on the hook for large amounts of defaults as incomes fail to keep up with higher payments. (canadian housing market exhibits higher sensitivity to interest rates)

"The notion of fixed rate mortgages does not exist in Canada."

...

"You can lock in for about 5 years"

what?

Re: Bank of Canada increases overnight rate target to 1 per cent

#59

Post by cpncrunch » Wed, Sep 06, 2017, 4:59 PM UTC

RobertoG wrote: post #48

cpncrunch wrote: post #36

Earlier quoted context omitted.

>saving accounts won't be affected and still have near zero return rate While the big banks have near zero savings interest rates, most of the credit unions and low-fee banks (like Tangerine) have higher rates. I've used Outlook Financial for years, as they tend to have the highest rates (1.7% for regular savings, at the moment). I don't understand why you say "saving accounts won't be affected", as savings rates are…

"the difference between the two gives the bank their profit" I don't think this is true. Banks don't lean the money from the deposits. About, why banks shouldn't increase saving accounts interest, the answer is, of course, profit. They would avoid that so much as possible.

>Banks don't lean the money from the deposits.

Credit unions do, and banks have to compete with them. Also, CIBC's chief economist says "Recent history suggests an increase to the overnight rate will translate into a corresponding increase in interest earned from savings accounts", so I think I'll take the word of CIBC's chief economist over an anonymous HN user :)

>About, why banks shouldn't increase saving accounts interest, the answer is, of course, profit.

Credit unions will increase rates, and if banks don't they'll lose profit. That's business 101, and it's why all gas stations have virtually the same price.

Re: Bank of Canada increases overnight rate target to 1 per cent

#60

Post by cpncrunch » Wed, Sep 06, 2017, 5:00 PM UTC

betaby wrote: post #47

cpncrunch wrote: post #36

Earlier quoted context omitted.

>saving accounts won't be affected and still have near zero return rate While the big banks have near zero savings interest rates, most of the credit unions and low-fee banks (like Tangerine) have higher rates. I've used Outlook Financial for years, as they tend to have the highest rates (1.7% for regular savings, at the moment). I don't understand why you say "saving accounts won't be affected", as savings rates are…

> I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit). They don't, that's why. In contrast variable mortgages and credit card rates are explicitly tied to the prime rate.

>They don't, that's why

Reference? See my answer to RobertoG for more details.