There has been a general fear that interest rates would suddently start to rise.
This has been fuelled by the banks who want everyone to lock in now.
One has to understand that the banks do not make money on mortgages that are prime – whether it is prime minus .50 or .70
There is also the fear that this will bring down our real estate market and the price of homes.
But short variable rates aren’t going anywhere fast for a few reasons.
- the central bank’s reason for raising rates is to control inflation. Our inflation was as 1% as of July 23rd, well below the central bank’s uppler limit of 2% ( as measured byt the consumer price index).
- The effect of higher rates are felt over time, so to raise short term interest rates gradually allows the central bank time to measure the impact of previous increase on the economy before raising and tightening further. So nothing happens all at once
- The real estate market is finally cooling off. One of the banks’ chief concerns about leaving it’s overnight rate at emergency low levls was that it would fuel a housing bubble. Now that we have a more balanced housing market that point is moot.
- While the Canadian ecnomic recovery is coming along well most of the rest of the world is not faring to well. The central bank has recently acknowledged that if they are aggressive about interest rate- hikes this could stifle our momentum.
- The U.S. fed isn’t expected to increase it short-term policy rate until 2012 at the earliest. If we keep raising rates independent of the fed our $ will keep increasing thus slowing our exports and our economy
- There is a popular belief that higher rates will hammer our real estate market . History just doesn’t bare this out. In fact historical data shows that rates and house prices rise together more often than not. Rising rates generally occur in an imprved economy & the positive economic momentume accompnying higher rates creates an effect that is gernally more positive than negative. Most of my real estate and mortgage career interest rates were more than 10% this did not crash our real estate markets at all.
- Job creation has outpaced any of the forecasts and is a key factor in our economic recovery. Job creation and affordability are far more important to our real estate market than the direction of interest rates.