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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

#151

Post by GatorD42 »

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…

It's not necessarily artificial to keep rates low. I would argue it's artificial to set rates anywhere, and likely market rates without intervention would be close to zero. Your theory of bank lending and asset bubbles is not consistent with mainstream monetarist theory. Banks are not that affected by the interest rate channel of monetary policy since borrowing at 0% and lending at 1% is not that different from borrow at 4% and lending at 5%. Low interest rates are supposed to spur inflation through the interest rate channel (which affects businesses by making them want to invest more, not banks) and the credit channel. Because of sticky prices and sticky wages in the short term the economy can grow faster than usual in the short term. Long term real effects should be negligible. I don't believe the conventional story is accurate either but your description is not completely correct.

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

#152

Post by sbenitoj »

omegaworks wrote: post #148
sbenitoj wrote: post #145

Earlier quoted context omitted.

You're right -- the commonwealth countries are in for a rude awakening! Especially considering government debts worldwide have increased A LOT since the 2008 financial crisis [0], they don't have the same ability to inflate their way out of the next crisis that they had after the 2008 crisis. Even though I agree with the spirit of your statement, I don't think that central banks "let this happen" -- on the contrary,…

Is there a viable alternative to fiat currency? The Gold Standard brought about an era of mineral extraction and colonial pillage, and Bitcoin doesn't seem to work all that well at having a stable value or even as a means of exchanging that value (unconfirmed transaction delay).

Great question, I suspect we'll find one in the next 100 years!

The gold standard over the past 100 years was mostly a government controlled gold standard, where paper money's tenuous link to gold was slowly eroded until it was completely eliminated (Nixon severed the final ties to gold in the US in 1971). If governments had never mettled with money, I suspect the world would already have a well-functioning monetary system (most likely gold).

I'm a big cryptocurrency fan, but as you mention Bitcoin has recently had issues with unconfirmed transaction delays. Without going into the details (don't know how familiar you are with the politics of Bitcoin), I think this will ultimately get resolved, and the transaction delay / high transaction costs / full blocks are ultimately what lead to Bitcoin forking into Bitcoin and Bitcoin Cash.

As for Bitcoin lacking a stable value, that's also an issue, but if it actually has a shot at replacing fiat currencies worldwide (and I think it does), its value will increase massively but ultimately it will plateau and have a relatively stable value (I suspect this would've happened with gold already if governments hadn't mettled with it)!

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

#153

Post by wyatte »

mgbmtl wrote: post #146
wyatte wrote: post #137

Earlier quoted context omitted.

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.

> "Canada isn't facing a housing bubble as much as they are facing a debt bubble." Are you sure? I've seen articles mentioning increasing debt in general, but that's mostly tied to mortgages, which isn't a big deal (unless rates rise quickly, which is unlikely). For example: http://www.cbc.ca/news/business/canada-credit-cards-transuni... "[credit card] delinquency rates in British Columbia and Ontario dropped by 2.1…

As I understand it, housing is out of control in Toronto and Vancouver which accounts for most of the averaged out increase in Canada's housing prices over the last 8 years. These out of control cities are experiencing the increases because of foreign purchasers pushing up the prices (they may only account for 5-10% of purchases, but that money has impacted all pricing through competition). And Canada is a great place for foreigners to have their money.

[edit: note that TO is in a short term downwards price adjustment due to the 15% foreigner tax put in recently, that will stabilize this year, but still over the last 8 years TO pricing has skyrocketted]

Even so housing across Canada has gotten more expensive. Through gentrification in these big cities, smaller cities have seen people move in causing some nominal increases too.

The result is that people all around are needing to allocate more and more money towards housing leaving them having to use credit cards and loans more. You can do a Google search on Canada household debt and there's no shortage of articles declaring record breaking household (non-mortgage) debt levels.

So yeah it's all one big problem, but it's the household debt that's going to kill them, not the mortgage debt. Foreigners will continue to invest in Canada even during a recession, because Canada will still be a good investment on a relative basis. Big cities like Vancouver and TO will hold their value as all big cities tend to even during recessions. Just look at how quickly NYC managed/recovered post 2009 compared to other US cities.

All this leads me to believe that people are in financial trouble due to household debt, though maybe it's semantics. For some when, mortgage renewals come about, does it really matter which?

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

#154

Post by sbenitoj »

GatorD42 wrote: post #151
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…

It's not necessarily artificial to keep rates low. I would argue it's artificial to set rates anywhere, and likely market rates without intervention would be close to zero. Your theory of bank lending and asset bubbles is not consistent with mainstream monetarist theory. Banks are not that affected by the interest rate channel of monetary policy since borrowing at 0% and lending at 1% is not that different from borro…

"I would argue it's artificial to set rates anywhere, and likely market rates without intervention would be close to zero."

Why would interest rates be zero without intervention? Who would lend money to someone else for free?

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

#155

Post by Mikeb85 »

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…

Don't forget that property prices were also inflated by foreign buyers looking for a safe place to put their money outside their governments' reach, and that this practice was encouraged by the outgoing government (probably the current one as well).

Also, another issue is that you can cause a housing market crash and financial crisis by abruptly increasing the rate when household debt is at a high.

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

#156

Post by ThrustVectoring »

faeriol wrote: post #149
8ytecoder wrote: post #95

Earlier quoted context omitted.

As an example - if I get to reduce my mortgage payment by $500 - because interest rate is extremely low - I could technically spend that money on upgrading my car or travel or groceries or eating out - and so pushing up the price. At least that's how I understand it. I assumed that housing prices were included but apparently not (at least in the US)[1] [1] http://www.nytimes.com/2011/04/02/business/02charts.html?mcu.…

Keywords here being IF and COULD... I'm under the impression most people are ready to spend a certain portion of their income on their living arrangement and low interest rates just encourage them to buy ~bigger~ more expensive property, rather than actually turning the "savings" into other types of spending. I'd be interested to find actual data and research about the relationship between interest rates and mortgage…

Low interest rates directly drive up housing prices of equivalent houses. If you drive down monthly mortgage payments while keeping rents constant, buying residential property and renting it out becomes more economically attractive, which then drives up the house price at which buying an investment property is sufficiently profitable.

In other words, the fixed factor is the spot rent market - how much you can get renting out a house in a certain location. When you lower interest rates, the monthly payment remains relatively constant, which drives up the principle to compensate.

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

#157

Post by GatorD42 »

sbenitoj wrote: post #154
GatorD42 wrote: post #151

Earlier quoted context omitted.

It's not necessarily artificial to keep rates low. I would argue it's artificial to set rates anywhere, and likely market rates without intervention would be close to zero. Your theory of bank lending and asset bubbles is not consistent with mainstream monetarist theory. Banks are not that affected by the interest rate channel of monetary policy since borrowing at 0% and lending at 1% is not that different from borro…

"I would argue it's artificial to set rates anywhere, and likely market rates without intervention would be close to zero." Why would interest rates be zero without intervention? Who would lend money to someone else for free?

The rate the central bank sets is effectively a floor below which banks will not lend. The effective Federal Funds Rate in the U.S. is around 1.16% The one year Treasury rate is around 1.24%. People and banks are lending money to the government for one year for essentially .08%, and this is not entirely risk free. Rates went negative after the financial crisis, and German bond rates are below Treasuries. If banks could find funding at 0.1% they would make money lending at 0.2% (depending on and adjusting for risk). So central bank rates are probably keeping interest rates higher than they would be. All of this is controversial and no one knows for certain how central banks, interest rates, and inflation interact, it's a complex dynamic system and popular descriptions are simplifications that are probably wrong.

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

#158

Post by sdm »

ericd wrote: post #81
scarhill wrote: post #32

Earlier quoted context omitted.

Canada's consumer price index hasn't exceeded 4% since 1990 and has averaged 1.74% since then. So investors who are buying those bonds could reasonably see things differently than you do.

I don't get how that could possibly be true, given that the CAD has depreciated something like 30% in the past few years vs USD?

The USD isn't some gold standard of truth. Like any currency it also appreciates and depreciates over time. You can't just look at the exchange rate between two currencies and make any meaningfully claims. Definitely, you can't make any claims about Canadian inflation by just looking at the exchange rate. When we went up to 1.10 it didn't cause deflation and when we went down to the low .70s we didn't see inflation.

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

#159

Post by jamez1 »

GatorD42 wrote: post #157
sbenitoj wrote: post #154

Earlier quoted context omitted.

"I would argue it's artificial to set rates anywhere, and likely market rates without intervention would be close to zero." Why would interest rates be zero without intervention? Who would lend money to someone else for free?

The rate the central bank sets is effectively a floor below which banks will not lend. The effective Federal Funds Rate in the U.S. is around 1.16% The one year Treasury rate is around 1.24%. People and banks are lending money to the government for one year for essentially .08%, and this is not entirely risk free. Rates went negative after the financial crisis, and German bond rates are below Treasuries. If banks cou…

Their open market operations affect short term bond yields which in turn affect long term bond yields. They clearly intervene and it's hard to imagine interest rates being as low as they have been without the intervention.

When they buy bonds, it pushes the yields lower, if things were where they were naturally the fed/ecb etc wouldn't have the sheer number of bonds they do on their balance sheet.

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

#160

Post by emodendroket »

goodcanadian wrote: post #147
emodendroket wrote: post #138

Earlier quoted context omitted.

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.

I got curious, so I did a google search. It appears that the home ownership rate is very similar between Canada and the US. At the moment, it is higher in Canada as the US is still recovering from the effects of the mortgage crisis. That said, I don't disagree with you. The US has made a policy of promoting home ownership, more so than other countries. That has potentially come with adverse side effects. On the other…

I wouldn't have guessed the rates would be similar. That's interesting.
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