Crying Wolf: Whither Higher Mortgage Rates

So where are these higher interest rates anyways?

Here was Mark Carney in December 2009 (ht “Anonymous”):

The governor of the Bank of Canada warned Wednesday [Dec 18 2009]  that consumers and banks should not be lulled into a false sense of security because of low interest rates.

In a speech in Toronto, Mark Carney, said both parties have a responsibility not to take risks that could derail the recovery.

Consumers are helping Canada’s economic recovery outpace that of its G7 partners, Carney said, but that the recovery remains vulnerable to over-indulgence.

“When risks are still manageable is precisely the best time to act,” Carney told a business audience. “We must be vigilant, and all parties must fulfill their responsibilities.”

And here he is last week:

Bank of Canada Governor Mark Carney is again urging homebuyers and banks to be prudent warning that not only will interest rates rise, but over the life of any mortgage, rates could be “much higher” than they are now.

“With monetary policy continuing to be set to achieve the inflation target, our institutions should not be lulled into a false sense of security by low interest rates,” he said in the speech Wednesday to the Vancouver Board of Trade. “Similarly, households will need to be prudent in their borrowing, recognizing that over the life of a mortgage, interest rates will often be much higher.”

And don’t bank on housing prices rising much further, he added, noting that Canadian home prices as a share of income have climbed well above their historical average and that investment in residential real estate has reached what in the past have been peaks.

“The average level of housing prices nationally now stands at nearly four-and-a-half times average household disposable income,” he said. “This compares with an average ratio of three-and-a-half over the past quarter century.

I’m sure rates will rise but from what I see there is

  • a lack of private investment
  • a looming house price bubble in Canada and parts of Asia
  • chronically high unemployment
  • an environment where all levels of government seem focused on balancing budgets.

Not exactly what one would call an environment for positive real rates. At some point in the future, when unemployment drops and the economy is running on all cylinders again, interest rates will rise, but it doesn’t look like it’s today. So when Carney barks at people for taking on too much debt and worrying households about rates going up, does he not think that people read Aesop’s Fables as children?

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Li Kai Shing
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Li Kai Shing

First…..in everytink !

Devore
Member
Devore

It's hard to see how a significant rate increase will work in the near future. So what is the purpose of C's and F's debt and interest rate scare? Is it just setting the stage to deflect eventual populist blame game? I could see a .25 increase soon, just to make the point and wake some people up.

Historically, is it obvious to those looking when rates are set to rise?

space889
Guest
space889

@Devore: It could also be that BoC are screwed between a rock and a hard place. If they don't raise rates, they risk asset bubbles and money going into risky products often build with leverage chasing yield. If they raise rates then they risk popping bubbles and even more economic slow down due to higher servicing cost. So they have no good options left and probably hoping all this talk will help restore balance and make their choice down the road easier. No one wants pain and politicans especially don't want pain. However pain is now unavoidable.

space889
Guest
space889
@crabman – In response to crabman, I didn't say I don't believe there is a bubble in China. I am merely saying what is a common practice in China, at least in 2nd tier and lower cities, that can explain why you have satellite photos of empty "cities" – really just large condo developments, and yet when reporters visit 2 or 3 months later, they are filled with living there. Those people aren't hired to stage some show for foreign reporters, they are actually living there. So not all the "empty cities" are actually permanently empty cities. Please also remember, these developments are building by companies, not actual government, and often with loans which needs to be paid back. So majority of them can't simply be left empty by the construction companies just for the hell of it. You can… Read more »
Not much of a name..
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Not much of a name..

@space889:

So they have no good options left

Sure they do…restrict mortgage lending further. It's pretty simple. Why not go back to 10/25 and cap the maximum amount that can be insured through CMHC?

Yalie
Guest
Yalie

I saw this posted on Garth's blog, not I don't think it's been posted here yet.

http://www.theeconomicanalyst.com/content/whats-r

Scroll down and have a look at the graph. The title says it all: "What's really driving house prices in Canada".

We're toast.

Li Kai Shing
Guest
Li Kai Shing

I hear beachball 4 puck idea going over well with NHL Gary Buttman and GM Mike Gilligan.

Canucks fans pretty stupid…basement suite renters, drink beer..day old nachos….use boxers as hat.

Using beachball, game slower….not need pay high salaries… Shed useless overpaid Canucks (redundant).

Maybe hire Junior B players, pay minimum wage.

Business plan is cheap beer, fans get drunk.

Not notice difference ( was there any difference? )

This much like RE bubble.

Anonymouse
Guest
Anonymouse

@Li Kai Shing:

"I hear beachball 4 puck idea going over well with NHL "

You sure know how to wear out a joke.

Devore
Member
Devore

We know BoC is targeting inflation, and inflation has been running over 3% for a while, which is above their target rate. For now Carney is saying this is temporary, so no monetary response is required, but if it persists for some time he will need to do more than talk.

Of course, in the US they have a simple solution to this; don't like the numbers? change them!

http://www.nasdaq.com/aspx/stock-market-news-stor

whydoItry
Guest
whydoItry

I see the pictures of the empty cities from satellites. I see pictures of THE empty towers from a distance. But I have never seen pictures of these cities after they have been inhabited or what or if the interiors even have toilets, let alone stoves, fridges, etc.

WHY?

Anonymous
Guest
Anonymous

@space889:

It's not just google earth pics: http://uk.reuters.com/article/2010/07/09/idUKTOE6

"yet when reporters visit 2 or 3 months later, they are filled with living there" Links please?

2.5 weeks in China – you must have seen most of it.

Drachen
Member

@Anonymous:

Go to youtube and search "empty china cities"

The reporters are there. There STILL aren't any people. The Great Mall of China (nickname, I don't know its real name) is the biggest farce of all. Biggest mall in the world with only a few percent occupancy after years, one store owner says he sees a paying customer two or three times a week.

Dave
Member

@Devore:

I think it is a good idea to raise rates now. The inflation numbers support it, but to also send the message as you suggest. It will also give some ammo back should the economy take a turn with the pending US economic slowdown.

But to be clear, this is all just optics. We are stuck in a low interest rate environment and will be for many many years. Interest rates won't go up significantly until Western governments figure out how to solve the debt issue.

I think Central Banks are going to need more monetary tools going forward. Targeting inflation is too simplistic. They should probably target other things as well (e.g. employment, debt, asset values).

Aleks
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Aleks

Not much of a name,

Going back to 10/25 would be a good start, but if they limited CMHC insurance to primary residence only the bubble would pop instantly.

Not much of a name..
Guest
Not much of a name..

@Dave:

It will also give some ammo back should the economy take a turn

Apparently the numbers for April will show a step backwards for Canada with a contraction in the economy.

Dave
Member

If you take a step back and look at the situation, it's pretty phenomenal that "we" really don't understand economics. We basically manage the economy ad-hoc. We just ride a trend until it hits a wall.

The new trend is free money. I think that trend will probably last another decade.

I told you so
Guest
I told you so

What used to be an inflation aimed strategy has become a FX rate problem. They cant raise the interest rates because that would strengthen the CAD agains the USD. The exporting sector is struggling so if you raise the borrowing rates which would generate an increase in the FX rates it would be a double whammy kick in the balls to them. I believe these last messages from JF and MC are desperate attempts to stop people from borrowing money. I dont think we will see a new interest rate hike before the end of 2011

Dave
Member
The construction build-out in China is crazy. I wonder whether these videos of empty stores and cities really tells the whole story. Or is it just cherry picking a small segment of the market? Remember Tinseltown about 6 months after it opened? It was a ghost town as well. Had you made the assumption this was endemic of commercial real estate overcapacity at the time, you would have been dead wrong. And then, most of those buildings are owned flat-out. It's not like there is much in the way of mortgages on them. Presumably the owners can afford to wait. Or is there a hidden debt market in China? I do think China has over invested in production regardless of their real estate. Transportation and factory infrastructure has all assumed this huge exponential rate of growth. I think they are… Read more »
Dave
Member

@I told you so:

That's one reason why the Central bank needs more tools. They either need to intervene in our currency, cap asset values or hinder the growth of debt.

I think it's a safe assumption to say that we need to be ahead of economic problems and not react to them as we have in the past. It was much easier to dig our way out of a hole in the past. With the present World situation, that will be much harder in the event of a downturn.

Not much of a name..
Guest
Not much of a name..

@Dave:

If you take a step back and look at the situation, it’s pretty phenomenal that “we” really don’t understand economics. We basically manage the economy ad-hoc. We just ride a trend until it hits a wall.

Or is it more a case of the powers that be managing the economy in a manner that is best for them. Unfortunately, this is a situation that may not be good for the economy and the collective we as a whole.

Devore
Member
Devore
@Dave: I think Central Banks are going to need more monetary tools going forward. Targeting inflation is too simplistic. They should probably target other things as well (e.g. employment, debt, asset values). They all already do, even if it is not in their official mandate, their overall priority is economic growth and stability of the monetary and economic systems. This includes aspects like cost of public deficit financing, which I believe is the primary motivation for ZIRP, but I could certainly have my cause and effect reversed. How does a CB target employment anyways? If they release a bunch of liquidity into the banking system, they have no control over where it goes. That is area of legislation and government policy, which can (try to) stimulate specific areas with fiscal and regulatory incentives. (I don't necessarily believe in this myself,… Read more »
paulb
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JR
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JR

Government and government agencies are hoping against hope that air will gradually be let out of the bubble over time. They know for certain what they have created, they've seen how this ends to the South, they live in fear of the pop, as well they should.

Thurston Howell
Guest
Thurston Howell

"I think Central Banks are going to need more monetary tools going forward. Targeting inflation is too simplistic. They should probably target other things as well (e.g. employment, debt, asset values)."

Dave, I mean Rob, you are still making a fool of yourself.

Targeting just inflation is too simplistic, although on your blog you argued differently, nonetheless you are still advertising your stupidity.

Central bankers have a greater scope- even Aarpn could help you with this one.

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