Monday, December 13, 2010

Another significant warning about interest rates...

Time after time I have said that when it comes to the Real Estate Bubble in our little hamlet on the Edge of the Rainforest, the issue is all about interest rates.

When they go up dramatically, the bubble will burst in spectacular fashion.

Until they do, the bubble bears will have to withstand the taunts and barbs of the bulls.

And while bears have uttered the warning for several years now, rates have been artificially suppressed by stimulus initiatives and the bulls have chortled about it every chance they get.

Bears have also had to endure the criticisms from friends and family who chide them because the collapse has not come.

For those of us who can see what is coming, the taunts are insignificant.

Unless property has been bought to be flipped, the time frame is irrelevant. Buying five years ago or buying yesterday is immaterial... interest rates will destroy you because the amount of your mortgage is so massive that the amount still owing cannot withstand the level of interest rates we are about to be saddled with.

And the fact of the matter is most have not bought their real estate to flip.

What we see coming is the day the manipulation of interest rates end - either because governments have decided to withdraw stimulus or because governments can no longer effectively manipulate them (ie. the bond market forces interest rates higher).

And judging by the warnings from those who matter, that will be sooner rather than later.

Bank of Canada Governor Mark Carney has come out with his sternest warning yet of what lies ahead.

In a speech to the Economic Club of Canada today in Toronto, Carney said efforts by various governments to stimulate the economic recovery are keeping borrowing rates low. But...

  • "the crisis is not over, but has merely entered a new phase... when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many with debt loads they can no longer afford... The Bank of Canada will set interest rates based on inflation, not on whether a large swath of Canadians have taken on too much debt. The bank may also raise interest rates even in a low-inflation environment to discourage risky borrowing."

Honestly... short of pounding you over the head with a shovel, how plainer can the looming future be made for you?

Canadians, of course, will respond with the same fairy tale denial that is almost a mantra now... "the government would never allow interest rates to go very high because it would hurt Canadians too much".

Okey-Dokey... Joe six-pack, allow me to introduce you to Stephen Harper, Prime Minister of Canada:

  • "The [current] situation is the result of individuals' choices, and the government can't control how they spend."

If you didn't catch it, that was your Prime Minister officially hanging you out to dry.

For years the refrain has been "buy now or be priced out forever."

For those who can read the writing on the wall, the refrain has become, "sell now or lose out on those capital gains forever!"

Problem is, too many Canadians are illiterate.



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