One of the key distinctions being made between Canada’s mortgage market today and the one of the 80’s, where housing prices dropped drastically, is the cost of borrowing money. Many bankers, realtor’s, and mortgage brokers point to the fact that in those days interest rates neared 20%, nowhere close to the low rates they are at now. So how then, could we possibly see any sort of drastic downturn in housing prices?
Well, one must look back to why interest rates have become so low in the first place. When interest rates are lowered it is typically done so to strengthen the economy, think kicking a horse in the side with spurred boots to get it to go faster. In fact, this is exactly why rates have become so low in the last fifteen years, due to the US Federal Reserve Board lowering interest rates to avoid a severe downturn in the early part of the decade. Of course, with the close link between the Canada / US economies, the Bank of Canada followed suit, although not to the same degree. The cost to borrow as a result became incredibly cheap and not necessarily for the better. Alan Greenspan was quoted as saying, “I don’t know what it is, but we’re doing some damage because this is not the way credit markets should operate.” The damage is the fallout in subprime lending in the US.
Most of the real estate and mortgage industry in Canada has continued to believe that the same will not happen in Canada. Those of you who know me know that my favorite saying is “there are two types of economists, macro and micro, micro economists are wrong about specific things, macro economists are wrong about things in general.” The truth is no one knows what will happen in the future as there are far to many factors to predict. There are two things that are certain however, it is still cheap to get credit, and no matter what housing prices do, if you get in the market and stay in the market you will never lose.
You can read more about How Credit Got So Easy And Why It’s Tightening in the US market here.
