An Insiders Perspective Of The Market.
A Rate Not Seen Since The Global Recession."
It's official, the Bank of Canada raised its overnight lending rate to 1.25% - this is the highest its been since the global recession and the 3rd hike since July. The 5 year fixed rate product which derives its pricing from the bond market has already baked in this rate hike and the Fixed Rate Mortgage product has been reflective of this hike for nearly 2 weeks. The Bank of Canada's .25% rate increase announced this morning will send the Prime lending rate from 3.20% to 3.45%.
Who will this impact?
Those who have variable rate mortgages will see an increase to their interest rate by .25%. Depending on the size of their mortgage this may mean a mortgage payment increase of a $100 or more per month. Those who have lines of credit will also feel the impact of this rate hike.
What does this mean?
In simple terms it means that the cost of borrowing is becoming more expensive. Granted from a historical perspective interest rates are still extremely low. However, this time we may be much more sensitive to interest rate hikes than ever before. When the global recession of 2008 was wreaking havoc on economies around the world majority of central banks took action by lowering interest rates drastically. The logic being if people spent less on paying interest then they may have some disposable funds to purchase consumer goods and boost the economy. Good in theory, I suppose- but not without its risks.
For nearly a decade many major economies - Canada included of course, has been enjoying the benefits of rock bottom interest rates. Those lower rates allowed borrowers to take on more debt for less per month than ever before. And of course this led to a staggering rise in home prices and credit card debt. Low rates had become common and some market participants never knew a time in which rates were more "normalized".
Most market observers will agree that the credit cycle has begun to turn and we are now entering a time of more "normalized" rates and contracting credit- less credit available, means borrowing will become more difficult than before. Naturally this should lead to further softening of Real Estate prices- there's no way to accurately predict how the market and prices will ultimately react as there is too many variables- but all signs point to a slow down.
Good News Today May Not Be Good News Tomorrow.
There are plenty of headwinds to suggest that we are not ready to get back to normalized interest rates. Part of why the Bank of Canada has had the confidence to start hiking rates was due to the surprising economic data that has been coming out over the last year.
1. Jobless rate at the lowest in more than four decades.
2. Annualized GDP not seen in years.
3. Inflation on target to policy.
Amongst other things...
Although this is great news for Canada and its economy this is not reflective of what may be around the corner.
1. NAFTA - United States renegotiates or pulls out altogether.
2. The new minimum wage law that will be phased in to a maximum of $15 per hour by 2019 is, according to conservative estimates this is going to eliminate 60,000 jobs - some estimates paint that number much higher. This does not account for the rising prices of goods making everyday items more expensive.
3. The mortgage stress test coupled with softened real estate prices will make it much more difficult for people to qualify for mortgages at banks and traditional sources. People rely on their home equity to pay off high interest credit card debt and balance their monthly budgets. Without access to this form of credit many people will find that they will be short in their monthly budgets and see their personal debts rise to levels never seen before. This may result in a rise of bankruptcies and possible foreclosures/power of sales- accelerating the softening of Real Estate.
4. People will begin to spend less on goods and this could trigger a recession.
There are signs to suggest that we've entered the end of a boom cycle. Some cycles can lost longer than others but the cycles will always remain. The possible downturn that is around the corner may not last as long as historical downturns due to the likelihood of government and central bank intervention.
Should this play out accordingly expect to see a return of stimulus and low interest rates.
*The above is based on opinion of facts on the ground. By no means is it to be considered a prediction of things to come but its worth consideration.*
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An Insiders Perspective of The Market.
For many paying attention, today's announcement comes as no surprise. This was a fairly telegraphed announcement from O.F.S.I as they proposed revisions to their lender guidelines back in July. However given the market shift this