Negative Interest Rates and their effect on Canadian homes
There has been a lot of talk and some controversy about the recent news that Canada’s central bank is open to the possibility of negative interest rates. Financial industry professionals have been panicking and making many different statements about this possibility. If you don’t know what negative interest rates exactly mean, don’t worry, as we will be explaining that. What interests us the most is the effect negative interest rates can have on the local housing market.
Interest Rates Explained
You might know of interest as what you pay on what you owe. When a central bank holds money it pays up an interest. For example, if you put in your savings at a bank, the bank will pay you an interest every year (or month in some cases). Central banks use interest rate to affect the market. For example, if there is too much inflation it means that people are spending too much money. In such a scenario a central bank will raise interest rates. This incentivizes saving; since saving money becomes more profitable. When there isn’t enough inflation and the market is stagnating, central banks lower interest rates. This makes saving less profitable and encourages spending.
The Weird World of Negative Interest Rates
If you do not understand negative interest rates then don’t worry, as even the best scholars in the world aren’t sure about the implications of it. First, let us explain what it means to have a negative interest rates; saving now reduces your money. If, for example, the interest rate is -1% and you put a 100 dollars in your savings account, you will have 99 dollars the next year.
This might seem radical and strange, because it is. Till some time ago no major country had ever toyed with the idea of a negative interest rate but stagnating world markets have changed this scenario. Japan already has negative interest rates in effect, though they only went into effect a little time ago and the repercussions aren’t clear yet. The aim of negative interest rates is to encourage the economy by discouraging saving.
What it might mean for the housing market
Before we say anything we have to be clear; these are things we think might happen. Since negative interest rates are a new phenomenon and we don’t have a lot of research about its effects we cannot say for sure what the effects will be. We can, however, make educated guesses. One thing which we assume might happen is 0 mortgage rates.
Since banks are being encouraged to hand out money and saving money will cost them, they will try to give out as many loans as possible. They might even provide loans which become smaller every year (like it has already happened in Denmark) but it is unlikely. The prices of homes might go up. Whenever it becomes easy to get a mortgage housing prices go up, provided that they were not in a downward spiral already. Basically the government is telling you that this is the right time to take out a loan and spend some money and is telling the banks to give out as much money as they can.
Only time will tell if we actually go negative with the interest rates and how it really ends up affecting the housing market.