Orlando realtor Heather Joubran, where zero rates don't help.
Some people have come by to say they see no reason Canadian interest rates canâ€™t stay in the dirt for years. A la Japan. Others have asked me to comment on what might happen if they did.
Here are some thoughts.
First, itâ€™s key to remember that todayâ€™s rates are not market rates. They are uninfluenced by economic supply and demand, the level of the currency, money supply or inflation. Therefore the Bank of Canada, in dropping its key rate to 0.25% and leaving it there, did a political thing.
This was not in the central bank play book, but rather a response to an emergency situation. It went hand-in-glove with spending tens of billions in tax dollars to buy mortgages from our big banks and plunging the country into the worst annual debt ever to bail out Chrysler Canada and GM and plaster â€˜Canadaâ€™s Action Planâ€™ billboards everywhere. This is the most extreme form of interventionist Keynesian economics Canada has seen. Too bad it does not seem to be working, as Monday’s numbers show.
So, what we have are emergency rates. They’ll stay in place as long as an emergency looms. When the economy sputters back, inflation increases, borrowing demands push bond yields higher or people starving on their GICs mobilize, rates will return to market levels. As Iâ€™ve said, I expect that to take mortgages back to the 7% or 8% range by 2014-5 â€“ just in time for renewals.
But what if they stayed unchanged? Wouldnâ€™t that keep this real estate party going, protecting recent indebted buyers with new equity and goosing the economy?
Well, wonâ€™t happen. There will be no sustained real estate price increases until wages and incomes rise. Second, emergency rates have brought forward demand from the future, not created new demand. Third, rates are already starting to rise in other countries, and our central bank cannot withstand a widening trend. Fourth, the Americans will raise rates to support the falling dollar. And why not? Cheap money has done absolutely nothing to reflate their crashed housing market.
I was reminded of that when I read a report from Orlando, and condo owner David Burt. He paid $167,000 for his unit three years ago, and is hoping now to sell it for $37,000. The Florida city has seen a 56% drop in condo prices over the past year, and the median apartment now sells for just over $50,000. The closest disaster area in terms of price is Las Vegas, with a 46% annual plunge. Despite near-zero interest rates, lenders are not even financing empty units sitting in near-vacant builders with bankrupt condo associations.
But, despite the above, what if rates did remain near zero here? What would that mean?
In a word, it would mean desperation. Rates would stay low if demand for goods and services withered and we entered a period of renewed recession. Or worse. Theyâ€™d stay low if business owners were facing imminent failure and laying off new legions of workers. Theyâ€™d be low if the economy slipped back into contraction with unemployment racing past 10% on its way to 15% or more. If there was deflation instead of inflation. They would stay low if the Bank of Canada had absolutely no other weapons to combat a cycle of tumbling incomes and prices. In short, emergency rates would remain so long as we had an emergency. And thereâ€™d be little reason, I would imagine, why anyone would be out buying a house.
And then Toronto might smell like Orlando and Vancouver taste like Vegas.
So, I look for the cost of money to rise. And with it, hope.
Asked, $719,000. Sold, $747,000.
Steps from the Toronto mega-corner of Yonge & Eglinton, 1,200 square feet with a front-‘lawn’ parking pad, on a 21-foot lot. The owners received almost $30,000 over asking after 6 days on the market. Many believe the real cause of the US housing crash was not dodgy lending, but foolish buyers.