{"id":2355,"date":"2016-06-14T08:55:11","date_gmt":"2016-06-14T15:55:11","guid":{"rendered":"http:\/\/www.roryc.ca\/blog\/?p=2355"},"modified":"2016-06-14T08:34:31","modified_gmt":"2016-06-14T15:34:31","slug":"raising-interest-rates-too-quickly-could-bring-canadian-housing-to-its-knees","status":"publish","type":"post","link":"https:\/\/www.roryc.ca\/blog\/2016\/06\/raising-interest-rates-too-quickly-could-bring-canadian-housing-to-its-knees\/","title":{"rendered":"Raising Interest Rates Too Quickly Could &#8220;Bring Canadian Housing to Its Knees&#8221;"},"content":{"rendered":"<p style=\"text-align: justify;\">A leading economist with one of Canada\u2019s biggest banks has flagged what he says would topple the Canadian housing market, while dishing out advice for how the Bank of Canada can steer clear of a crushing outcome.<\/p>\n<p style=\"text-align: justify;\">\u201cThe ultimate risk to Canada\u2019s housing market is not higher rates, but fast rising rates,\u201d warns Benjamin Tal, CIBC\u2019s deputy chief economist, in a recent note.<\/p>\n<p style=\"text-align: justify;\">\u201cImpotent\u201d is how Tal describes all major central banks excluding China\u2019s. Previous policy decisions on slashing interest rates have left these institutions with limited options, he argues.<\/p>\n<p style=\"text-align: justify;\">\u201cInterest rates are now about as low as they can go (in these markets) and the marginal effectiveness of taking them lower is diminishing,\u201d says Tal.<\/p>\n<p style=\"text-align: justify;\">Last year, the Bank of Canada cut the key interest rate twice leaving it at a historically low 0.5%. (For more on how the key interest rate influences mortgage rates read a detailed explanation here.)<\/p>\n<p style=\"text-align: justify;\">\u201cUltra-low interest rates mask a lot of bad things that will not be fully visible until rates rise,\u201d says the CIBC economist. \u201cWe might have reached a point in which the cost of low rates exceeds their benefit,\u201d notes Tal.<\/p>\n<p style=\"text-align: justify;\">Low interest rates encourage borrowing. While they can boost housing markets by making mortgages \u2014 and subsequently homeownership \u2014 more affordable, with ramped up lending activity comes increased household debt, which hit record heights towards the end of 2015.<\/p>\n<p style=\"text-align: justify;\">Earlier this year, Lawrence Schembri, the Bank of Canada\u2019s deputy governor, warned this rising household debt makes the economy and financial system vulnerable to interest-rate shocks. In April, the Bank of Canada said two thirds of outstanding credit households owe came from residential mortgage debt.<\/p>\n<p style=\"text-align: justify;\">\u201cIn Canada, the central bank continues to warn about the risk of debt accumulation and overvalued real estate markets, but at the same time, at this stage of the game, it is more comfortable cutting rates than raising them,\u201d says Tal.<\/p>\n<p style=\"text-align: justify;\">Raising interest rates, however, is something Tal recommends, and the sooner the better to avoid a shock later on.<\/p>\n<p style=\"text-align: justify;\">\u201cThe longer rates stay abnormally low, the greater risk we develop an economy addicted to low rates, in which a modest but swift increase in rates can be recessionary,\u201d he explains.<\/p>\n<p style=\"text-align: justify;\">\u201cStarting early and moving very slowly over the coming two-three years will buy insurance against the risk of being forced to raise rates quickly (eg. Greenspan in 2004)\u2014a scenario that would bring Canadian housing to its knees,\u201d Tal says.<\/p>\n<p style=\"text-align: justify;\">Alan Greenspan, the US federal reserve\u2019s chairman between 1987 and 2006, initiated 14 consecutive benchmark overnight lending rate hikes from June 2004 to January 2006, when he stepped down. The flurry of hikes followed several years of rock-bottom interest rates stateside.<\/p>\n<p style=\"text-align: justify;\">Many blame Greenspan for the US housing bubble.<\/p>\n<p style=\"text-align: justify;\">\u201cLuckily, there is still time,\u201d says Tal. \u201cThe earlier the bank starts hiking, the slower it can go.\u201d<\/p>\n<p><a href=\"http:\/\/news.buzzbuzzhome.com\/2016\/06\/raising-interest-rates-canadian-housing.html\" target=\"_blank\">Raising Interest Rates Too Quickly Could &#8220;Bring Canadian Housing to Its Knees&#8221;<\/a> by Josh Sherman | Buzz Buzz Home<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A leading economist with one of Canada\u2019s biggest banks has flagged what he says would topple the Canadian housing market, while dishing out advice for how the Bank of Canada &hellip; [<a href=\"https:\/\/www.roryc.ca\/blog\/2016\/06\/raising-interest-rates-too-quickly-could-bring-canadian-housing-to-its-knees\/\">read more<\/a>]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"class_list":["post-2355","post","type-post","status-publish","format-standard","hentry","category-mortgage"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Raising Interest Rates Too Quickly Could &quot;Bring Canadian Housing to Its Knees&quot; 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