Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Central banks generally talk about rate hike when the economy is booming. Canadian economy shows no sign of any solid performance except housing sector. The issue with Canadian housing sector is – it appears to be founded on quick sand of speculation. Bank of Canada is not mandated to act on speculators. It needs solid economic drivers to start thinking about a departure from the current stance.

Assuming that our central bank is to act on the housing situation – as many experts want – it may have an unknown impact on the whole country.

The bubble exists only in some pockets, In some cities and metropolitans. The unfortunate problem with these bubble gubble in the media is that the reporters live in cities. Experts from reputed universities live in cities. No matter how we deny it – our surroundings do influence us.

Looking at the problems in cities we actually fail to understand the situation in other areas of the country. Canada is still not better off than where we were – pre-recession.

Bank of Canada looks after the complete picture – not only few bits and pieces of it. Tightening credit the market will rise interest rate everywhere.

As a result of any aggressive action in terms of rate will bring the following repercussions:

  1. Canadian currency will rise. – That is a bad news for manufacturing. An economy needs manufacturing to have balance. It can not only rely on natural resources and domestic housing demand.
  2. Canadian bonds will rise and yield will fall: Canadian yields are at their lowest level already. Taking it further down will have direct impact on retirees. Another problem is that these bond buyers will target particularly Canadian bonds because of weak US situation. The demand is mainly foreign.
  3. Inflation will drop. – Inflation is the magical ingredient in an economy that is needed but an excess of it can be deadly. As of now inflation is already low. Taking it further down will constrict the economy.

These all reasons and more will force the Bank of Canada to take the grandstand for now.