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Bank of Canada increases overnight rate target to 1 per cent

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

#131

Post by randomdata »

NathanCH wrote: post #127
dblohm7 wrote: post #99

Earlier quoted context omitted.

> Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and are only reacting now... In Canada this is because the real estate bubbles were confined to Vancouver and Toronto. Raising interest rates to cool down real estate in those two cities would have been bad for the rest of the country.

That's a bit misleading, by no means was/is the bubble limited to these cities. More like B.C and Ontario.

That may be an exaggeration as well. As a resident of Southern Ontario, but not Toronto, the CREA data shows that home prices in my area were stagnant, to slight decline, for most of the last decade. It has only been in the last year that any meaningful price appreciation has been observed. And I attribute the recent price appreciation to an improving economy and near record low unemployment (currently 2.9%).

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

#132

Post by avip »

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…

I don't know about Canada, but using a wildly unjustified extrapolation from my country - many a public sector wage, and worse - retirement plans, are following an official cost of living index. Calculating a "realistic" index would have a devastating impact on the long-term fiscal balance of the state.

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

#133

Post by srhngpr »

pycal wrote: post #77
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)

In Canada, banks offer fixed and floating rate mortgages; the mortgage rate is always prime + some %. If you get a fixed-rate mortgage, you're locked in to your rate for 5 years regardless of how the Bank of Canada changes the prime rate. This has been the product of choice for Canadians for the last several years because it protects you against rising interest rates, and rates have had nowhere to go but up. If you g…

Love the tool to help visualize; however, you need to allow mortgage period to be up to 30 years. CHMC insured mortgages (if you put anything less than 20% down payment have a maximum of 25 years); however, many banks offer up to 30 years. As an example, see the TD Bank mortgage calculator: https://tools.td.com/mortgage-payment-calculator/

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

#134

Post by goodcanadian »

emodendroket wrote: post #124
goodcanadian wrote: post #109

Earlier quoted context omitted.

Technically, yes, you are on the hook for a balloon payment. In practice, however, you would get a new mortgage for the remainder owing. You can, of course, be screwed in the event of rising interest rates or collapsing property values. Unlike the US, there are hefty fees for early payoff of the mortgage, so if you were in the position to pay it off, you would probably want to wait until the end of the current mortga…

OK, got it. Frankly, it seems like a system that makes owning a home less attractive, but I suppose US policy has been driven by the idea that home ownership should be encouraged.

Other differences: Canada does not have a mortgage interest tax deduction nor does it have low/no down payment mortgage options. Generally, the more conservative approach to banking makes things more sane and is part of the reason that Canada rode out the global financial crisis relatively unscathed.

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

#135

Post by [deleted] »

emodendroket wrote: post #124
goodcanadian wrote: post #109

Earlier quoted context omitted.

Technically, yes, you are on the hook for a balloon payment. In practice, however, you would get a new mortgage for the remainder owing. You can, of course, be screwed in the event of rising interest rates or collapsing property values. Unlike the US, there are hefty fees for early payoff of the mortgage, so if you were in the position to pay it off, you would probably want to wait until the end of the current mortga…

OK, got it. Frankly, it seems like a system that makes owning a home less attractive, but I suppose US policy has been driven by the idea that home ownership should be encouraged.

[deleted]

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

#136

Post by hughes »

alkonaut wrote: post #100
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…

Mortgages are still normally time based so the monthly expense of paying it off over say 30 years limits the umbers somewhat. In Sweden we moved from interest only mortgages to 100 years as the norm. Still too long. Doesn't work well with near zero interest rates.

"Fixed rate" mortgages in Canada still need to renew every five years, even on a 30 year amortization.

As a result, people who bought homes in 2012/2013 will be affected by rising rates as well as a new affordability test. They'll need to prove they could qualify for the loan at 2-3% higher rates in anticipation of the rate environment at their next renewal.

As a result, people who qualified & budgeted for loans at 2.5% in 2013 will suddenly have to be qualified for 6% loan interest within the next few months.

In terms of financial impact, this could represent an additional $1300 monthly expense people will have to budget for on a ~$450,000 loan.

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

#137

Post by wyatte »

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…

Well "only reacting now" might be a stretch. A few years back they elimintated 40 year mortgages putting them back to 25 years and adjusted the loan requirements.

Canada isn't facing a housing bubble as much as they are facing a debt bubble. Most of the recent household debt that has been record breaking year after year has been with credit cards, autos and lines of credit.

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

#138

Post by emodendroket »

goodcanadian wrote: post #134
emodendroket wrote: post #124

Earlier quoted context omitted.

OK, got it. Frankly, it seems like a system that makes owning a home less attractive, but I suppose US policy has been driven by the idea that home ownership should be encouraged.

Other differences: Canada does not have a mortgage interest tax deduction nor does it have low/no down payment mortgage options. Generally, the more conservative approach to banking makes things more sane and is part of the reason that Canada rode out the global financial crisis relatively unscathed.

Well, it also makes people less likely to own homes, and I'm not really convinced you couldn't have a relatively cautious system that still had long, federally backed mortgage terms or tax deductions or even relatively low down payment options. The big crash was preceded by lots of outright fraud.

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

#139

Post by crescentfresh »

randomdata wrote: post #131
NathanCH wrote: post #127

Earlier quoted context omitted.

That's a bit misleading, by no means was/is the bubble limited to these cities. More like B.C and Ontario.

That may be an exaggeration as well. As a resident of Southern Ontario, but not Toronto, the CREA data shows that home prices in my area were stagnant, to slight decline, for most of the last decade. It has only been in the last year that any meaningful price appreciation has been observed. And I attribute the recent price appreciation to an improving economy and near record low unemployment (currently 2.9%).

Also as a resident of Southern Ontario, but not Toronto, I concur.

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

#140

Post by BenoitEssiambre »

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…

The main inflation channel works through investment in new projects and labor. The higher asset prices cause more assets to be built. In the case of housing, more house builders get more and higher wages which they then spend which makes other prices rise.
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