Thursday, August 24, 2017

Calculated Thought: The impact of higher US interest rates

March 29, 2017 by Sean Annable, contributing writer

Anyone who follows this column may notice I talk a lot about interest rates. When understanding the impact of interest rates, its easiest to think of them as the cost of money.

Money has been cheap for a long time. Low mortgage rates have undoubtedly added to our housing woes. They make it easier to manage fat mortgages; up goes demand and prices follow. In the bubbly areas, especially Toronto, supply has shrivelled up. Whether it’s fear of not wanting to pay sky-high prices for a new home if they sell, fear they’ll miss out on more gains, or both, no one wants to sell, and it’s pushing prices higher.

The Bank of Canada hasn’t budged, and has kept the overnight rate at 0.5 percent. As pointed out before, this rate influences the prime rate charged by commercial banks. Alas, around 75 percent of Canadians have fixed-rate mortgages, and those rates have little to do with central bank policy or prime rates, and everything to do with bond markets.

Calculated Thought is a column dealing with student finances that is featured in every issue of Nexus.

The problem is, the bond market knows no borders. It’s international, and it dictates how banks borrow and lend their money. Even the orange dude couldn’t keep the bond market from jumping the fence into the US.

Positive job numbers, higher growth, and higher confidence due to the promise of less regulations, as well as more favourable tax policy on corporations, have led to the US central bank to steadily raise their overnight rate. Up go bond rates and ditto for fixed mortgage rates; not just in the US, but Canada too, eventually.

Worse, the gap between US and Canadian interest rates messes with our dollar. Investors go to the markets with the highest return, and higher US rates offer that. Down goes our dollar, and hindered is our central bank’s ability to keep the overnight rate steady, pressured by a growing greenback and a lurching loonie.

This all won’t happen overnight, but upward pressure on interest rates doesn’t bode well for our debt-riddled nation, especially those who mortgaged $1-million shacks in Vancouver.

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