The recent drop in interest rates by the Bank of Canada is a signal of desperation that promotes a, debt is great, mindset.
With individuals and economies managing mass amounts of debt there are few alternatives than to drop interest rates. This latest drop by .25% will have little impact on the Canadian economy unless investors take on more smart debt. A floundering Canadian economy is impacted by a global ripple effect, as well as its own home-made government policies.
Lowering interest rates means that savers have been penalized and foreign investors will shy away, damaging future economic growth, and contracting real GDP in the short term, not to mention the weakening impact on the loonie. Cash is not king. Debt is.
Those who’ve lived through depressions and recessions may be averse to debt, but debt handled correctly, can be a smart move towards wealth building. Taking your credit card to the limit isn’t the answer, but for individuals and small businesses that aren’t already overburdened, real estate is a great way to build wealth and ride out the low interest rate debacle, while boosting the economy.
Record home sales in June 2015 show that investors are moving their money into wealth building assets, however real estate prices in Toronto and Vancouver keep edging higher, creating an issue with affordability.
Affordability is measured by the ratio of prices to after-tax individual income. And for investors entering the rental market game, cap rates (ratio of prices to rents) are beginning to make less sense. Prices in big cities like Toronto and Vancouver are already over inflated, though there are still golden nuggets to be had. Smaller cities outside of main urban centres have a lot to offer, and Hamilton, an hour outside of Toronto, is booming.
The point is, with interest rates this low you’ve got to do something with your money outside of leaving it in the bank. Not too far in the distant future we may be looking at negative interest rates, a true sign of desperation, when keeping your money in your mattress may actually make more sense.
What are you doing with your money?
Feature Image: Good Debt Photographer GotCredit.com via freeforcommercialuse.org
TREB Chart from TorontoRealEstateBoard.com