Bank of Canada increases overnight rate target to 1 per cent
bankofcanada.ca
bankofcanada.ca
Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and are only reacting now...
By artificially keeping rates near 0% the idea was to 'stimulate' the economy by making capital freely available, so for example, banks can more easily loan money to businesses generating long term economic growth and add new jobs. But the side effect has been that retail banks were incentivized to hand out cheap mortgages and the public was incentivized to speculate on the 'hot' property market.
If this bubble doesn't deflate smoothly this will be yet another very expensive side effect of mainstream monetarist policy.
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...
http://www.slate.com/blogs/moneybox/2014/02/24/housing_infla...
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.
Ex2: many government benefits are tied to "inflation" . If your personal basket inflates faster than their example basket then they can get away with paying you less than promised (in spirit).
But from an economist perspective relative price changes of one good to another are usually not very relevant.
The measure for real domestic deflation you want to look at is the 'GDP Deflator'.
EG you buy more electronics and gas (cheaper), and less clothing and food (more expensive), but your overall spending remains ~50% of your income, which hasn't changed.
Wages are usually the primary driver of higher CPI measured inflation.
Inflation has occurred outside of CPI basket, most notably in equity markets and real estate prices in large urban cities - and bitcoin :)
Those are assets rather than goods. They are neither produced nor consumed. That being said, yeah, it's no mystery that low rates have caused asset price inflation, not consumer price inflation.
You are consuming housing when you pay rent/mortgage. A house is built, and then its owners consume it in "housing units", or rent those "housing units" to other for consumption.
Likewise that ground beef you have in the fridge is an asset - you can sell it to your neighbor at any point before you consume it.
Equity is a claim on a company's assets. If General Electric goes bankrupt and you own GE stock, you will get paid out (after everyone else) a share of the bankruptcy proceeds. So in a way you own some of what GE produces, some of the inputs it consumes, etc.
You can look at literally any transaction as an investment into an asset (generally durable goods) or the purchase of a good for consumption (generally non-durable goods). It depends on how you want to record it on your personal balance sheet...
When you pay rent you are consuming housing. When you pay a mortgage it is a financing transaction on the asset. Your consumption cost nets out because you are both paying and receiving rent. Yes all transactions are for either an asset or a good, as Y=C+I...
And whilst land may not be particularly portable, land ownership is.
Other productive assets: metals, grain, productive plant, etc., may also have financial asset value. Also goods which aren't particularly useful such as fine art.
The problem of conecting the economists theoretic definition of general price level is quite tricky to nail down. The commenly used CPI or even Core CPI does not perform very well.
Many economist would now argue that instread of focusing on CPI price level measure we should use either total spending directly, or use a different price level measure like the 'GDP deflator'.
What I did not talk about is that many prices are foreward looking, so prices start adjusting before demand if things are expected.
[1] http://www.nytimes.com/2011/04/02/business/02charts.html?mcu...
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 spending for given incomes...
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.
The first part happened. The last two don't seem to be happening, which is puzzling. Central banks are having to consider that the old model may not hold anymore. No one's really sure what to do.
Consumer tendencies weren't really supposed to enter into it, as far as I know.
Also of note is that more economic activity is concentrated in fewer and fewer regions, so while a select few (urban) regions experience growth and whatnot, most other areas do not.
We've seen since the last recession that top 2% have grown incomes while most others are stagnant, perhaps this is part of it.
That central banks and treasuries insist on inflation above zero when we should probably be deflating and letting technology make everyone wealthier...no wonder there are property bubbles. (Note this inflation argument encompasses the effect of trade deficits in creating asset bubbles, because inflation/treasury debt breaks the trade/currency feedback loop)
For another thing, if the monetary base is expanding, it could be that all the new cash gets sucked into fixed asset wealth like land and stock value, but the number of transactions fall so that these price increases don't leak out into broader consumer prices or wages.
Finally it could be that technological change is causing deflation on the same order of magnitude as the banker's monetary inflation.
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).
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.
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.
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 employment, keep consumer prices relatively stable.
All CBs can really do is make sure banks have enough money to lend into the economy by adjusting reserve requirements and interest rates. They could massively screw up the economy by jamming interest rates up right now, or dumping all their purchased QE assets back on the market, but they can't really improve the economy strictly through monetary policy.
That would require better fiscal and regulatory policy, such as tax code reform, increased spending on R&D and infrastructure, spend on education, etc. Even then it's not guaranteed this spending would lead to any technology-advancing breakthroughs that could raise the standard of living across the economy.
Ultimately I believe that low productivity (we've hit a ceiling on the returns to the internet, computer, and smartphone for the moment), plus a lot of the rest of the world catching up in terms of infrastructure, is to blame for the stagnation.
I just don't have enough economic knowledge to say with confidence that unemployment would have bottomed out without QE2 and QE3, and that monetary policy post QE1 has been bad/unnecessary. I have to defer to CBs judgement on this matter.
If you have studies/data to the contrary I would definitely want to read them.
https://www.federalreserve.gov/econres/feds/files/2017093pap...
A central bank has to conduct montary policy for the economy as a hole. Attempts by central banks to 'clamp down' on bubbles have generally been catastrophic.
Also the low interest rates are simply not just 'artefically low' because of central banks. The montary effect of the interest a central bank sets is determained by the difference to the natural rate.
Propery bubbles or any other bubbles by themselfs don't relay cause much problems beyond the markets in question if montary policy stays on target.
Aditionally the idea that all these things are bubbles is quite suspect in a lot of places there is real demand for property.
Contracting montary policy in order to fight a property bubble would lead to the hole economy going into a recession.
The last time the 'fighting bubble theory' was really popular was in 1929. I'm not saying that was the only reason for the Great Depression, but its one of the major reasons.
Which is why Central Banks don't make sense as independent arms of Government.
Bubbles are very very dangerous (as we all discovered in 2007/8) but they cannot be fought with interest rates alone. It takes a combination of government regulation, legal reform and government spending adjustments to bring bubbles under control before they infect the entire economy (which they will always inevitably do if left to fester).
By the way, calling people out for trying to stop the 1926-29 boom is a bit like blaming firefighters for fires getting out of control. The real mistakes were made after the bubble burst.
Just as after the great depression when everybody believed overspeculation on the stock market had been the problem. Economist have studied this for 70 years and the practically universal conclusion was that montary policy errors was the real problem.
In Australia montary policy did not fail and they did not experiance a recession, the have not had one since the early 1990s. Whatever housing prices might do.
Simularly the stock market crash of 1987 (just as big as the one in 1929) did not even cause a blip in GDP.
Montary policy might have caused a little boom between 1926-1929 but if you really believe that the reslution of that boom required the US economy to contract by 30% then you are totally misguided. The problem was a contractionary montary policy.
The same goes for 2008, montary policy was the problem. Its the same story, everybody blames bubbles and speculators but economist have increasingly rejected this view.
Your story of 1926-1929 is basically the Rothbardian story, even his the majority of his studends and others influenced by him have since rejected this story. Its an intellectually dead idea that refuses to die because it perfect for the political left to demand control over all markets. Exactly what you advocate.
An independend central bank focus on macro economic stability should only have one job, stability of nominal demand.
Outside of that we can have political debates about how much banks and markets must be controlled.
There's a direct line from Bear through AIG and Lehmans to the wider economy. Everyone was over-leveraged and GDP growth was predicated on the understanding that other people would keep on spending more. With house prices tanking that fantasy collapsed and everyone immediately started re-trenching. Cue recession. Any bubble large enough will always trigger a recession.
The government did everything it could to lessen the impact (sadly pretty much guaranteeing the next bubble will happen sooner and be larger in the process) but a recession was inevitable because people couldn't keep on spending money they din't have.
The Great Depression wouldn't have been as bad if economic stimulation had been applied earlier (although it may well turn out to have ended sooner, thanks to better targeted stimulation) but it couldn't have been avoided with better monetary policy. The boom relied on stocks continuing to climb exponentially. It was a ponzi scheme. And it burst.
Ultimately Central Bank policy is failing now because it doesn't have enough levers to restore balance to the economy. What lift we got in 2009 was from the automatic counter-cyclical kick of government spending that has largely petered out.
ps I didn't provide any story for 1926-29 boom so I have no idea what you're talking about there. You appear to be projecting.
There might have been a slight recession even if monetary policy was on point but its hard to see one sector declining so much that it shows up as a recession in macro data. In smaller less diversified economy that can happen easier.
> The government did everything it could to lessen the impact (sadly pretty much guaranteeing the next bubble will happen sooner and be larger in the process) but a recession was inevitable because people couldn't keep on spending money they din't have.
That is just false. If you look at the data you will see that nominal GDP was dropping like crazy in 2008 and even at the end of 2008 the central bank had not changed policy.
In fact they refused to change policy for so long that they literally ran out of (or at least went to low level that they did not want to go below) that they were forced into easing.
You can see this very clearly in the data during 2008.
When people talk about 'they did everything they could' they usually refer to stuff that started to happen well after that QE2 and QE3 for example. The big mistake was made in 2008 and early 2009, the later monetary policy action just insured that NGDP would not flatten out completely (as it did in Eurozone).
> The Great Depression wouldn't have been as bad if economic stimulation had been applied earlier (although it may well turn out to have ended sooner, thanks to better targeted stimulation) but it couldn't have been avoided with better monetary policy.
Australia practically avoid it. Sweden and Israel did way better in the early years and this was because of monetary policy. Australia keeped up NGDP growth and thus they did not suffer a recession.
> Ultimately Central Bank policy is failing now because it doesn't have enough levers to restore balance to the economy. What lift we got in 2009 was from the automatic counter-cyclical kick of government spending that has largely petered out.
A central bank is job is not to find some mythical balance. A central bank job is targeting demand and the Fed does a sort of OK job at it.
The argument that fiscal policy was the determining factor simply holds no water. Changing in government spending have absolutely no predictable impact on overall demand. The Fiscal Cliff of 2013 was the best example, everybody who believes in these fiscal theory were predicting disasters even writing a open letter signed by many economics. Their predictions proved to be absolutely wrong.
The magnitude of automatic stabilizers is simply not large enough to account for massive swings in the macro economy. If you however look at NGDP relative to trend line you will see that those swings are in fact large enough.
> ps I didn't provide any story for 1926-29 boom so I have no idea what you're talking about there. You appear to be projecting.
I implied that there was a unsustainable boom between 1926-29 and that the mistakes were made there. That is simply incorrect and basically no economist today who believes in that story as a large contributor to the Great Depression.
What do you define as 'real demand'? There are three main areas of demand for housing property:
1. People requiring shelter (i.e. people who will purchase a property to live in themselves) or
2. People purchasing property to extract rents (landlords) or
3. People purchasing property to later on-sell for a greater amount (property investors)
It's the third class of buyer that many believe is driving demand, and there's certainly a strong argument that the property investor class is bigger today because of depressed interest rates. Because of this increased demand, prices increase. But that price increase is driven only by the perceived future sale value of the property. This is why it's a bubble - The returns are predicated only on continued buy-in to the market. It's little more than a ponzi scheme.
This assertion falls apart if you don't accept the premise that current activity is being driven by investors, of course.
Also, investment however flawed is simply not the same as a ponzi scheme.
Fundamentaly however you have to realise that low interest rates are not artefical. If the natural interst rate were as high as in 2006 with the rates we observe now we would see a massive collapse of the money supply and a recession worse then the great depression. Interest rate in the hole world have been going down since 1970. A recession itself depresses real rates, because investment is simple not as profitable.
The idea that the central bank can indepentenly fix housing bubbles and create stable demand is just flawed, its simply not possible. Its the wrong tool for the thing you want to fix.
The central bank could simple start buying and selling property instead of bonds, but that just replaces stability in one market with instability in another.
I was responding specifically to your statement:
>Aditionally the idea that all these things are bubbles is quite suspect
I agree with your point that monetary policy may not the right place to solve a property bubble. I disagree only with the assertions that property bubbles might not currently exist and that bubbles can never be easily identified.
>Also, investment however flawed is simply not the same as a ponzi scheme.
It is if the return on your investment is solely dependent on the continued input of other people's investments.
>Fundamentaly however you have to realise that low interest rates are not artefical.
I am not arguing that they are. Are you confusing me with another poster?
>The idea that the central bank can indepentenly fix housing bubbles and create stable demand is just flawed, its simply not possible. Its the wrong tool for the thing you want to fix.
I agree.
If your meaning of 'bubble' is that at some unknown time in the future the price will be lower then it is now, then the concept is economically speaking useless.
> It is if the return on your investment is solely dependent on the continued input of other people's investments.
Still not the same thing. There is still a real asset that exists, it might change in price but it exists.
In a Ponzi scheme that is not the case, it falls apart if there is no further and nobody will have anything.
That is why you can go to prison for a Ponzi scheme but not for property speculation.
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.
Property ownership in those two cities also isn't limited to being a resident of those cities either. A significant amount of properties are rented out and the landlord can live outside of the cities, so the effects of a drop in prices will be widely felt. Combined with the fact those two cities and surrounding areas represent a significant percentage of the total population.
The US housing crisis was itself limited to a group of areas in the country in varying degrees as well, for example Florida got hit way harder than most places. The group was just far larger given the country's population is 10x the size of Canada.
And Bank of Canada has started to add mortgage restrictions this year country-wide so they too see it as something that needs to be addressed nationally.
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.
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.
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.
Any source for this?
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.
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 per cent and 3.3 per cent, respectively." (by contrast to Alberta and Saskatchewan)
Car loans are ~ 2% of total debt, at least in Quebec: https://www.desjardins.com/ressources/pdf/pv170828f.pdf?resV...
[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?
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.
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.
Summary: govt created a housing bubble let's see what happens.
Even though I agree with the spirit of your statement, I don't think that central banks "let this happen" -- on the contrary, fiat currencies and central banks BY DESIGN massively exacerbate (and arguably cause) the boom and bust cycle [1].
Without central banks unilaterally determining the price of borrowing money (AKA interest rates) and propping up bankrupt institutions (e.g. see 2008 bank bailouts), the natural boom and bust cycle would have a much lower amplitude as the market would determine the price of borrowing money rather than disconnected bureaucrats sitting in the room pouring over the latest econometric reports. Price controls don't work for goods and services (see the USSR) and they certainly don't work for money either!
[0] Worldwide Government Debt - https://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS
[1] Austrian Business Cycle Theory - https://en.wikipedia.org/wiki/Austrian_business_cycle_theory
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)!
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.
Why would interest rates be zero without intervention? Who would lend money to someone else for free?
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.
In the absence of central banks it's likely the world would eventually settle on a single commodity to be used as money, and it's unlikely to be a commodity that's inflated into oblivion like fiat currencies. Additionally it's unlikely that people will somehow start loaning out money for a rate of almost 0%, why would people loan money (and therefore risk losing it) for a return of 0%? They'd be better off just holding onto it.
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.
Housing prices went nuts in Canada because Canadians felt they were being priced out and "real estate always goes up".
They are doing the right things here and targeting increased rates for investment owners over home occupiers
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).
My point is that the connotation we associate with the word artificial varies with our opinion of the legitimacy of the monopoly in question. People who are disinclined toward the federal reserve will read artificial differently from those who think it does a good job.
But, Canada posted exceptionally strong growth numbers (4.5%) at the end of August, which kind of made this very likely.
Also, the government just sold bonds that mature in 2064 (at 2.2%) and has indicated that it might issue more "ultra-long bonds" in the coming months.
All this to say, money's going to stop being cheap.
But there is a pretty wide spectrum between that and what we have now. Gold is a hedge against something like what happened to Yugoslavia, even if it's not a good hedge against the apocalypse.
Having a "prepper bunker" full of expensive supplies is not an asset, it just makes you a target. Having a small cache of things you can easily hide, secure, and trade is significantly better. If you have to bail in your city because things get too ugly you don't need a trailer truck to move.
Any normal person who needs more than a bug-out bag and a passport to survive is doing it wrong.
That said, I agree that gold is probably not that useful in a collapse.
Maybe they think inflation will stay low. My sense is that at the moment there's a lot of money sloshing around chasing not-so-great returns, so returns on everything are low - capital is subject to supply and demand like anything else.
And much better than anything < 0%.
If you hold it physically, you have to store it and secure it, which costs money.
If you deposit it in a commercial bank, it'll be less safe than German bonds.
When you talk about "money being electronic" you're basically talking about bonds. When people (or companies, foreign governments, etc.) want to hold large quantities of USD they don't really hold USD, they hold short-term US government bonds.
The only truly "real USD" is physical cash, or an account balance at the Federal Reserve (which is available only to banks).
So people don't own bonds just because of the coupon, it's also really the only convenient way to own (something mostly equivalent to) currency -- other than keeping it in a private bank, which is much more likely to fail than the government.
They could keep it in the Fed, but the Fed charges money for the privilege (and I assume so does the ECB and other equivalents)
A record where, though?
Bank "clearing" means that ultimately a bank is keeping its money either with other banks or with the central bank. They're records, but not necessarily interest-bearing, and keeping it with other banks is not risk-free.
https://www.ecb.europa.eu/explainers/tell-me/html/what-is-th...
(I realize we're talking about German banks, and FDIC is a US institution)
If you try to leave your money with the Swiss Central Bank they will charge you 0.75%. Buying bonds is definitely preferable to that. https://www.snb.ch/en/ifor/finmkt/operat/id/finmkt_nz
The answer to your question "why would any entity buy bonds..." is: to sell them moments later at a profit.
Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.
The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.
…looks like the market expects 1.57% inflation over the next 10 years, so these bonds are expected to beat inflation handily.
Okay, but at the same time yields on US government debt just reached their lowest point since last November. Due to various factors (North Korea, natural disasters, etc) the Federal Reserve is now talking about raising interest rates slower than they had originally planned, which was already pretty slow. The era of cheap money has to end eventually obviously, but it doesn’t seem like things are going to change all that fast.
http://www.bankofcanada.ca/core-functions/monetary-policy/ke...
Think of it like setting the temp on a thermostat. You are attempting to achieve a temperature through the use of a device to put energy into a system, but there are other factors that contribute to the actual temperature achieved.
[1] http://www.bankofcanada.ca/2015/10/overnight-repo-overnight-...
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)
...
"You can lock in for about 5 years"
what?
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.
A lot of people in the Bay Area got their 30y mortgages locked in at a fantastic (low) 3.x% in the last ~5y, and would be hesitant to give that up, even if they wanted to upgrade. Combined with with property taxes that are locked to inflation, means that a homeowner has an incentive not to sell, and buyers compete for limited inventory.
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...
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 get a floating-rate, your rate moves when the Bank of Canada moves the rate. This is desirable if you think the BoC is going to lower interest rates.
Self-plug - I made a tool to look at how sensitive your monthly mortgage payment is to movements in interest rate: https://pycal.github.io/real-time-ammortization/
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 mortgage (depending on lots of different factors, of course).
Which makes me think it's not really any special favoritism in the US...
Places as far as Vaughan and Milton are expensive. We're talking decent detached houses (slightly above starter home) for over 1 million.
Rents are feeling it as well. I think the numbers just came out yesterday or today and an average 1 bed is about $1950. I've seen one bedrooms rent in this neighbourhood for upwards of $4000 a month -- again for the trendier buildings. And this is by no means the upper limit.
I remember approximately 2 years ago, when the average attached houses in the downtown were ~600k (usually 2 or 3 bed, kitchen, living, dining, basement, yard, garage). They hardly exist for anything less than 950k
Back then the average 1 bed rented for 1200 - 1500 a month. That's a long lost dream now.
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.
[1] http://www12.statcan.gc.ca/census-recensement/2016/dp-pd/pro...
Interest rates going up will only make this worse.
Hold on tight!!
So that means a -8.7% change from July to August alone.
Numbers for recent months - Detached houses in "416" area code: August: $1,191,052 July: $1,304,288 June: $1,386,524 May: $1,503,868 April: $1,578,542
http://www.trebhome.com/market_news/release_market_updates/n...
We are asking about examples of actual prices of homes going down. They are not the same thing.
The price of homes can actual stay flat or even go up while the average sold price goes down.
"From the market's peak in April this year, the average price for detached homes in the GTA has fallen 19.6 per cent to $968,494 in August from $1,205,262 in April, bringing the average detached home price back below $1,000,000 in the region."
From 1.2mil to 1mil in five months
Think about that.
[1] http://creastats.crea.ca/treb/images/treb_chart05_xhi-res.pn...
An apt caption for the uncertainty in Toronto introduced by Wynne's last desperate attempts to change people's minds on her.
Overnight rate directly affects the prime rate, the rate at which commercial banks loan to their least risky customers. In the US, prime rate hovers 3% above overnight rate (federal funds rate). You can see that relationship here: https://fred.stlouisfed.org/graph/fredgraph.png?g=eY9Y
In basic economic theory, when interest rates go up, the economy slows down. Higher interest rates encourage saving/purchasing safe assets, and make lending/investing in risky assets or new business ventures more expensive. Banks generally make less loans that fuel direct economic activity when interest rates are higher.
Context/So What:
Canada's economy showed strong signs of growth and low unemployment, so the central bank decided to bump up the interest rate a bit while the data supported the decision to "cool off" the economy.
OK, so commercial loan interest rates will rise 0.25%. Not a huge deal for majority of the economy.
More importantly, the central bank is slowly gaining back the overnight rate as a tool for monetary policy. Many central banks are unwilling to drop the overnight rate below 0%, effectively taxing banks for the reserves they are usually mandated to hold with the central bank.*
If the Bank of Canada can continue to bump the overnight rate up to traditional 4-5% level, it can then cut the rate again to spur economic activity in the case of a downturn. The closer the overnight rate is to 0%, the less effective the rate is as a monetary policy tool.
Personally I believe it will be a long time before we see 4-5% overnight rates again, but overall this is a reaction to good economic news. It happened before investors expected, so the markets are buzzing about it a bit, even though the small bump will probably not have a large impact on Canada's economy.
*BoC actually has no reserve requirements: http://www.bankofcanada.ca/1997/04/working-paper-1997-8/
So, this should mean mortgage loan rates, savings account interest rates, and inflation are all now on an upward trend. Right?
And thus housing prices should begin to curb, since the cost of loans making buying houses more expensive and less appealing, thus lowering demand.
(I've already noticed increasing savings account rates and mortgage rates, so it definitely seems like this is an upward trend, though I haven't seen much curbing of housing prices yet)
Not inflation. Inflation isn't going up much anywhere. It's a conundrum for central bankers. The old model may no longer work.
Normally, when unemployment goes low enough, wages and then prices go up. That hasn't really happened. Instead, house prices (in Canada) and consumer debt are rising.
It is (and has been for a while) the goal of the Bank of Canada to keep inflation between 1% and 3%: http://www.bankofcanada.ca/core-functions/monetary-policy/in...
And it is not doing too bad: https://tradingeconomics.com/canada/inflation-cpi
This article expands that argument at length: http://business.financialpost.com/news/economy/the-phillips-...
> The move, which will likely be a surprise for some, came less than a week after the latest Statistics Canada numbers showed the economy expanded by an impressive 4.5 per cent in the second quarter.
> "Recent economic data have been stronger than expected, supporting the bank's view that growth in Canada is becoming more broadly-based and self-sustaining," the bank said.
> The rate increase means governor Stephen Poloz has now reversed the two cuts he introduced in 2015 to help the economy deal with the plunge in oil prices. The bank said Wednesday the increasingly robust economy shows it no longer needs as much stimulus.
> Others predicted the bank would refrain from moving the rate out of concern such a move would drive up an already strengthening Canadian dollar and pose a risk to exporters.
> In its statement, the bank also said headline and core inflation have seen slight increases since July, largely as expected. It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies.
Food is such a small part of my discretionary spend (I buy grains in bulk, specifically quinoa, and greens from the farmer's mart).
Looking back at my spend, the majority of it is in technology that is undergoing massive deflation, or my pet hobby of collecting rare books (neither of which is accounted for in the basket).
I am probably an edge case, but the point remains -- the basket that is set seems outdated. I can't imagine that people are spending as much on food as you think. ex: "USDA data shows that in 2010 Americans spent 9.4 percent of their disposable income on food"
To explain a little further: A variable rate mortgage can have fixed payments - every day your mortgage accrues a bit of interest, then when you make the payment it pays off that interest and the remainder pays off the principal. If the interest rate increases that just means that the interest that accrues every day is a bit higher and less of your payment goes against the principal, so it takes longer to pay it off.
If the interest rate hits the point (the trigger rate) where your monthly payments no longer cover the interest, then your bank will call and want to increase your payments. In this case, a rate hike will translate to higher payments.
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 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.
Reference? See my answer to RobertoG for more details.
Neither there is a connection of saving account returns and discount rate. In contrast connection of the discount rate and CC rate is explicit http://hudsonsbaycredit.capitalone.ca/docs/Hudson_Bay_Cardho... very first page.
My point is that the market determines savings rates, and when interest rates are higher, banks can afford to give higher savings rates.
So even though banks aren't really lending out savings in the way people assume, they still need to keep their saving account returns competitive and somewhat related to money they're making on loans. The main difference between the incorrect model and how banks actually work has to do with the willingness of the banking industry as a whole to lend out money and the availability of credit - that genuinely is pretty much untethered from saving rates.
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.
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.
Erm, thanks... but I'm using Chrome on a Google Pixel?