Say goodbye to free money

The Bank of Canada has announced that it will not raise interest rates to address concerns of a Canadian housing bubble.  Unfortunately for those counting on a .25% base rate, that doesn’t mean rates will stay low indefinitely, just that they won’t be raised immediately to cool the housing market.  The BOC points out that too many other sectors of the economy would be impacted by raising rates to cool the market and there are more direct ways to affect only residential real estate.

Finance Minister Jim Flaherty has also mused about such measures, including raising the minimum down payment requirement above five per cent, or reducing the maximum length a house can be amortized from the current 35 years.

Reuters points out the interest choice of David Wolf to make this announcement, his opinion on the matter seems to have shifted dramatically:

Wolf, a former chief economist in Canada for Banc of America Securities-Merrill Lynch, was appointed as adviser at the central bank in April 2009.

When he was still in the private sector, in September 2008, Wolf had warned that the Canadian housing market was headed for a U.S.-style meltdown due to household finances that were in worse shape than in the United States or United Kingdom.

At that time he said his bank feared “it may simply be a matter of time” before home prices start plunging.

At some point in the near future stimulus measures will recede and rates will start to inch back up to historically normal levels.  How are you preparing for higher rates?  If you hold a mortgage are you locking in or are you counting on the low rates of today continuing for a lot longer?  If you’ve got cash, where are you sticking it?  Do you hold equities in markets that will be negatively affected by higher rates?

Are you profit taking, loss cutting or bet making?  It’s time to get ready for the end of free money.

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@Hrm @logic – it would be better to put the $1500/month towards princpal, but if housing prices come down significantly, I'd like to have the option of having a large downpayment for another house.

[…] VREAA know that we owe many of the anecdotes archived here to posters at VCI. In a recent article, ‘Say Goodbye To Free Money’, the pope asked a series of questions aim to assess how people were preparing for future tighter […]


@DP: How are you preparing for higher rates?

We have a 30yr amortization period on our mortgage (which is $500K), but do monthly payments as if it was a 25yr. We also have a savings account we call our “higher interest rates in 2014″ fund. We save about $1500/month into that.

Hmm, rather than put $1500 month into a savings account wouldn't it be better to put it against the principle? Aren't you allowed to put down an additional %15 of the value of your home evey year. Even if you find you couldn't afford the payments in 2014 you could renegotiate for a longer term then.

Just a thought…


And check out their even more deluded–and wrong!–forecasts for 2008.


@Dave: The vast majority of economists weren't expecting a recession in the first place, let alone the most sustained, and deepest, economic downturn since the depression. Economists' forecasts are always biased to the upside. If you don't believe, have a look at the link below.

There's a reason people who trade against sentiment make big money–when everybody agrees on something, then they're probably wrong. That's why I'll know the time to buy real estate in Vancouver is when my cab driver tells me that he'd never, ever, invest in real estate.

The Zalm

@Dave: Correct me if I'm wrong, but didn't most economists not expect the first dip as well? The big money in aggregate certainly was betting against it. The forecasting from 'most economists' is worth less than a coin-flip. I believe it was only the minority opinion that ever made money off the US housing market crash.



Most economists do not expect a double dip. The big money in aggregate is betting against a double dip. Laugh away, but your opinion is a minority one.


@Dave: On rare occasions you have a valid point. This is not one of those times. What little credibility you had just went out the window. What else can we do but laugh?



Disgusting indeed.

I also heard an interview with a volunteer for the Olympics.

What did he volunteer for?

Well, he stands for a few hours at some venue's entrance and makes sure people are not wearing the 'wrong' t-shirts, like, Pepsi logo. The guests cannot wear the Pepsi shirt.

I don't know if this specific volunteer was of the type of 'city employee forced to volunteer during taxpayer payed work hours"…


My little one just puked in her bed tonight, roughly one liter of 'value', and it smells better than this 'sponsorship'.




rp, my thoughts exactly…


#37 @logic: What kind of Nazi shit is this?


Delusional Dave
Unemployment has stabilized and everything is good again hooray. I guess we can all watch RE start heading toward the stars. I think I know a song for Dave
Dreamer nothin but a dreamer. Supertramp



Anyone for a Pepsi and DQ picnic during the Olympics? I'm buying.


albertas falling apart

suncor laysoff 1,000 more


@Dave: Dave, you're deluded if you believe even 1/4 of what you wrote. The historically unprecedented (and coordinated) global burst of spending and liquidity saved us from a very deep recession. It has done very little, however, to extirpate the sources of economic decline and has done even less to provide a solid foundation for economic growth moving forward. Anybody who doesn't see this is either not looking hard enough or has his eyes closed shut.


There has only been one double dip recession in the past century. Most recessions are single dip. Most of the economic stimulus money has yet to be spent. Confidence is back. Oil prices are down from the start of the recession. Unemployment has stabilized. The central banks are on top of bank liquidity issues. The Fed killed deflation and has many tools to ensure that will be the case going forward. I think we are going to be fine.


that was my post above.


Thank P.

“it came out in 1985… album “Brothers in Arms”

And that year I was 16-17 and hitchhiking through out Europe and I think every trucker had that Dire Straits CD 🙂



"Chances of double dip recession?"

Quite high I think. Note the early 80's recession was double dip.

"What is the worst case scenario for unemployment?"

Similar to the 80's I think, double digit for a half dozen years. Save for all the boomers leaving the work force it would be worse.

"How long this debt deleveraging will last? (it could last quite a few years in my opinion)"

A couple of decades I think, i.e. until the last boomer house is sold. I.E I don't see a housing market turnaround as soon as 6 years after the bust like in the 80's.

Now go play that video. 🙂



One must wonder what conditions must occur for the BOC to call a bubble. From what I see, that will happen only after it pops.

The BoC should either refuse to comment at all on asset bubbles (on the grounds that asset prices are not part of its mandate) or be honest about them. Its present footsie playing on the housing bubble which anyone with any sense knows we have now is insulting.



If this blog were to have a theme song

It would surely have to be "Money for Nothing" by Dire Straits. Even contains rude remarks tailor made for Bob Rennie.


Note also the timing – it came out in 1985, which was the real bottom of the last great Vancouver bust.

The video was also the very first computer animated rock video TTBOMK, and the first computer animation to see wide media distribution.

And the CD of the album "Brothers in Arms" was the first CD which everyone seemed to have bought, i.e. it marked the end of dominance of the vinyl album.

And finally, it was the first song to caustically comment on the rise of MTV, which marked the end of the golden age of rock IMHO.



very educative explanation of deflationary force of assets bubbles.thanks

Could you provide little bit of your insights for the future in the short term. (or anyone else)

Chances of double dip recession? What is the worst case scenario for unemployment? How long this debt deleveraging will last? (it could last quite a few years in my opinion)

and do you see any lights at the end of the tunnel? 🙂 (I don't)



"Probably should have opted for the variable rate and locked in when rates started going up and benefit from a year or two of low variable rate."

Not really, the banks set the fixed rate on projected future rates. If you'd waited the fixed rates would likely have gone up and taken your couple of years of benefits away.


Dp, just a query – wouldn't you be better off hitting that extra 1500 a month off the mortgage principal?

I assume you've thought of this, but am wondering why not?


great job DP – trust you are one of very few