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Canada Raises Its Benchmark Lending Rate

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The Bank of Canada increased its benchmark lending rate for the first time since 2007, reflecting growing inflation concerns from Canada’s booming real estate market and strong economic growth.

The increase of one quarter of a percentage point brings the central bank’s overnight rate to 0.5 percent. It is the first increase by a Group of 7 industrialized country since the market collapse of 2008. Australia, which also has an economy based on commodity exports, has posted a series of rate increases in the last several months.

In a statement, the bank cited the “robust 6.1 percent” growth of Canada’s economy during the first quarter, which was mostly driven by residential real estate and consumer spending.

But the bank suggested that the economic turmoil in Europe makes further increases unlikely in the near term.

“Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” it said, adding that the effects of Europe’s problems on Canada had been limited to a modest fall in commodity prices and some tightening of financial conditions.

Anticipation that the Bank of Canada would increase rates has helped drive price increases in Canada’s residential real estate market over the last few months as buyers hurried to take advantage of low mortgage rates. Unlike banks in the United States, Canada’s banking system emerged largely unscathed from the credit crisis of 2008 so mortgages were readily obtainable in Canada.

But the run on the real estate market has led to concerns that prices were reaching unsustainable, and unaffordable, levels in some cities, particularly Vancouver and Toronto.

In response, the federal government tightened some lending rules, but the move had little apparent impact. Given that interest rates in Canada still remained low by historic standards after Tuesday’s increase, it was unclear if the Bank of Canada’s move would significantly slow the market.

Excellent has the horse already bolted again? Canada in the middle of a huge housing boom just as a potential global debt crisis is about to explode. Still I'm sure rates of 0.5% will help crush the ballooning housing market.

However won't people panic more and assume if they don't buy now before rates go higher they'll miss out forcing up prices even higher?

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I would argue that Canada is not in the middle of a housing boom but very near the end of a housing boom in certain markets, and passed the end of the housing boom in most markets.

The key point of note in the article is the 6.1% growth is in real estate and consumer spending and, given that according to the OECD Canadians have the highest household debt to asset ratio of any G20 nation, that is unsustainable.

My view is that the average Canadian is not that worldly-wise with regards to the global situation and has believed all the hype around 'we're not the US and our banks are safe'.

I think there will be a housing 'correction' here as the inventories in some areas of the country are huge. The house we bought here has doubled in 'value' over the last 5 years, but I don't think it will last. Canada has many boomers looking to offload their 'Macmansions in the boonies' to some unsuspecting punter.

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Well, I can say here in Ontario that the market is booming, however the implementation of the HST (like VAT) on 1 July on new houses will kill the market imo. In fact its well documented that people are buying now to avoid the HST, so the boom is kind of false in any case. Also, most of the people that I know haven't fixed their mortgages rates and are therefore exposed to the rates rising. In any case the rate rise has been expected for a few months now.

I also agree that Canadians in general are highly indebted. Wages are low and prices of goods and services are high here. I know that Canada is painted as some kind of Nirvana on this website, and while I love living here, I can definitely tell you that it isn't!

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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