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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

#191

Post by e_d_e_v »

_5ysi wrote: post #189
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…

> By artificially keeping rates near 0%... I agree with your sentiment and artificially is a powerful word for conveying that. But strictly speaking the rate the central bank sets for lending new money is artificial, or fiat, no matter what we decide it should be (So long as it is > 0).

You could set the rate for lending new money algorithmically based on a set of other observed statistics of the credit markets. Then it would not be artificial or fiat. The algorithm might be artificial but the rate itself would not. This is not (to my understanding) how it usually works.

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

#192

Post by papercrane »

goodcanadian wrote: post #105
peeters wrote: post #62

Earlier quoted context omitted.

What you're describing is a fixed rate mortgage with a 5 year term. We may not allow 40 year terms, but that doesn't mean we don't allow fixed rate mortgages. After the term is up you can renegotiate a new fixed rate term if you want, or move your mortgage. That said, fixed rate mortgages almost always cost you more in the long run, though a 5 year term is probably going to screw you less than a 25+ year term.

Oh my. We are arguing over semantics. In the US, a fixed rate mortgage typically has a term equal to its amortization schedule. I.E. your interest is fixed for 30 years. In Canada, there are things called "fixed rate mortgages" where the interest is fixed for the term of the mortgage, but I have never seen a term longer than 5 years (most are shorter). The mortgage is typically amortized over a period of no longer th…

> but I have never seen a term longer than 5 years (most are shorter).

Five is pretty standard, but you can get longer if you want. RBC has seven year rates on their website, and if you ask you can get the full term of your mortgage. The rate is ridiculous though, for example, in April 2013 the RBC posted rate for a 25-year term was 8.75%. Obviously negotiable, but still a high starting point.

When I was financing our first home our mortgage broker said he only ever had one person get a 25-year term.

Source for the 25-year rate: http://business.financialpost.com/personal-finance/mortgages...

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

#193

Post by sbenitoj »

mempko wrote: post #183
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,…

Government debt is never the problem considering government has monopoly to create new money. The problem is private debt. In fact if you look at why private debt increases it's usually correlated to a DECREASE of government debt. For example, the Clinton surplus forced private sector into massive debt. If you haven't noticed, the common wealth countries have been going through a huge austerity program. This austerit…

"Government debt is never the problem considering government has monopoly to create new money."

Not for long they don't! Cryptocurrencies have finally found a way to get around such unethical control of the world's monetary systems.

And government controlling the monetary systems does not make government debt irrelevant -- even if they can always print more money, they can't always avoid hyperinflation. And regardless, printing money is stealing from savers, so it's not exactly some noble activity.

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

#194

Post by ac29 »

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…

>If I want to borrow to buy groceries, gas, or the other things they measure for inflation I would be borrowing at >19.99%.

In the US, credit cards are often a fixed + prime rate, so changing national bank interest does affect credit card rates.

As as aside, ~20% is an insanely high rate for credit card purchases (again, in the US).

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

#195

Post by msie »

wyatte wrote: post #153
mgbmtl wrote: post #146

Earlier quoted context omitted.

> "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 plac…

they may only account for 5-10% of purchases, but that money has impacted all pricing through competition

I don't believe that. Somehow the other 90-95% don't have a greater impact? If the roles were reversed you wouldn't even consider that possibility.

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

#196

Post by wyatte »

msie wrote: post #195
wyatte wrote: post #153

Earlier quoted context omitted.

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 plac…

they may only account for 5-10% of purchases, but that money has impacted all pricing through competition I don't believe that. Somehow the other 90-95% don't have a greater impact? If the roles were reversed you wouldn't even consider that possibility.

Well I'm not going to bother arguing the merits of supply demand curves altering pricing models. We can just agree to disagree.

I don't understand your comment on roles being reversed. I didn't realize I had a role in this and I don't know what possibility you're referring to or how it might relate. Maybe you can elaborate.

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

#197

Post by alkonaut »

hughes wrote: post #136
alkonaut wrote: post #100

Earlier quoted context omitted.

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…

> will suddenly have to be qualified for 6% loan interest within the next few months.

What if they are not? If the loan isn't granted, then the lender will have to go elsewhere, and worse case they will have to sell the property, possibly at a loss. That would seem like it just exposes the bank to more risk? Situation here is that you simply keep paying and the bank doesn't care whether you pay 110% of your income because you are unemployed, or 10% of your income because you got promoted - so long as you are paying.

Stress tests/qualification can therefore be against a "high interest rate" which is typically 7-8%.

What's interesting is that even a 4% interest rate at this point would probably lead to a recession because people are so highly in debt that they would cut saving/spending immediately. That recession would likely see interest rates plummet again. So the "new equilibrium" is a scary low.

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

#198

Post by apexalpha »

tostitos1979 wrote: post #67
akgerber wrote: post #10

Relatedly, the Toronto housing market that kept shooting up even as the US hit its 2008 housing crisis now have hit their top: https://www.bloomberg.com/news/articles/2017-09-06/toronto-h...

Toronto's property market is insane. I am still seeing condos (e.g. Gibson near North York center) being priced at 600K+ for 1+1 and larger units well over 1 million dollars. Not sure who can afford this. Places as far as Vaughan and Milton are expensive. We're talking decent detached houses (slightly above starter home) for over 1 million.

>Not sure who can afford this.

It's just investors selling them to other investors until they, as a collective hive-mind, realise this and then investors will stop buying houses and the price will go down.

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

#199

Post by sunir »

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 theory is simple. Circulating money means the economy is active and producing.

More money circulating means more of the economy is active.

More money in the economy increases inflation because more supply lowers value.

Inflation is good because it is not deflation, but it is not good because it devalues monetary assets over time. Low inflation is best.

The problem is simple. The additional money from cheap loans is not circulating. It is being sunk into mortgages and other debt.

The truth is that the policy is working in the sense that the alternate would have been deflation. Deflation kills retail because it is hard to stay in business if you buy low, sell lower.

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

#200

Post by cthrow »

pishpash wrote: post #122
cthrow wrote: post #92

Earlier quoted context omitted.

While it's easy to blame CB's for the past 8 years of stagnation in developed economies, I don't think it's their fault. It's also very hard to say what exactly is the right amount of repurchasing through QE (1.3T in QE1 vs. 4.5T total). CB's just kept repurchasing until unemployment bottomed out, and now that we've hit the bottom, they will start to shrink their balance sheets. That's their mandate - maximize employ…

Unemployment would have bottomed out regardless. QE did not speed it up or slow it down, and all of it went into boosting asset prices and malinvestment instead, that much is plain to see. In pegging rates to zero and compressing credit spreads, the central bank had essentially been telling everyone that there was no return in investing in the real economy and that there was not much difference between a good and a b…

Good timing actually - a paper came out today from the Federal Reserve Board. Supports the finding that QE1 and QE3 significantly lowered lending standards and increased risk taking among banks:

https://www.federalreserve.gov/econres/feds/files/2017093pap...

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