I do not think it is very clever to compare the history while gauging where the interest rates are headed. I heard this argument (that interest rates will go up significantly) from big bank representatives again and again to lure me into long term fixed mortgage rates (and their complex fixed mortgage contracts).
One of the reasons why interest rates may not go up very soon and why comparing history may be irrelevant: Today's north american (and European) economy is upside down compared to what it was 10-20 years ago. Today, our economy is relying mostly on service sector, instead of lucerative manufacturing sector. With manufacturing slimming down, there are many more related businesses going down. People are simply not motivated enough to invest in businesses, since the returns have dwindled down significantly (in remaining competitive businesses). Under such a scenario, government may not have any choice but to keep the interest rates down to encourage people to take some risks and motivate their enterpreneurships. This economy situation is not going to change very soon and hence the low interest rates and hence the housing sector (although as I said before, we may see some cooling down in housing sector).
The other fact that supports above argument that the housing market may not over cool is that the house is made of two components: building (material + labor) and land. The building component increases faster than inflation (the minimum wages are increasing faster than inflation). The land component may go down because of softer demand. Let us assume that for $300000 home both the components are 50/50. In order to go down the total home price by 15%, you need the land prices to go down by 30%!! Is it likely?? Probably not. Mind you, this is assuming the unlikely situation that the building component remains steady (normally it will go up modestly).
To your other comment, I am not saying that we will not be in recovery in next 2-3 years. We WILL be in recovery (and have probably started), but this jobless recovery will be long and painful. It may not be good enough for hiking the interest rates at the levels you are indicating.
I do not have crystal ball; but I am sure above arguments and conclusion are not out of reality.
Ol Skool wrote:
A 2-3% increase to 5-6% will still be substantially under the long run trend for fixed rates the last 60 years which is around 8%. For you to say that won't happen you are saying implicitly that 2-3 years from now we will still not be in a recovery. We aren't the U.S. so we are not the global reserve currency. We can't print money willy nilly because the rest of the world will soak it up. At some point, the bond market will reflect the true cost associated with borrowing based on the debt levels out there. Countries will once again compete for money because too many countries have too much debt to pay off and not enough coming in as taxes to facilitate it. The bond market can only be artificially suppressed for only so long and that is what long term rates are based on, not what the prime rate is. Savers and credit nations will once again be rewarded with a high return on their money as it should be.
Moreover, we aren't Japan. They have been able to keep their rates at zero for the last 15-20 years because they are a homogenenous society with a high savings rate (20% in 1989 when there housing market crashed. Close to zero now). Therefore, their baby boomers put all their savings into the Japanese bond market so Japan's debt is all internal. In Canada we have no savings and our society is more heterogenous so there is less group behaviour. Therefore, rates will go up because we will have to compete for cash like everybody else. And soon Japan will as well because their savings are close to zero.
Do not and I repeat do not let these low mortgage rates give you a false sense of security. Do you take advantage of them now? YES! But not if it means taking on more debt than you would have otherwise. Use it to be more aggresive in reducing your debt levels.
So the moral of the story. The Canadian Government does not set long term fixed rates. The market does, so our Government in the end has no control.
littlestar wrote:
I would agree with Ol Skool if the interest rates rise; but 2-3% interest rise is very unlikely in next 3 years. Yes, I know the banks predicted this much interest rate rise couple of months ago, but the situation has changed dramatically since then and I do not see many more interst rate hikes.
Proof? In month of June 2010 the best available 5 year fixed mortgage rate rose to about 4.3%. Now you can get that rate for about 3.7%. Actually, I am talking to a mortgage broker and he is willing to offer me 3 year fixed mortgage rate of 2.7%!! I could not believe it, but yes, that's what they are offering! I am sure that this lending institution is not in business to lose money. I thik the CHANCES are that the rates will stick to relatively low levels for next 3 years, atleast. It should be noted that North America and Europe are still recovering from one of the worst downturns in economy.
The government is quite conscious that if the interest rates go up, the housing market will take a nose dive (in agreement with Ol Skool). Govt would not want to see the housing market going down (which takes whole economy down with it), and hence may remain very conservative in hiking the rates.
I am of the opinion that the interest rates will not rise to uncomfortable levels and the housing market will flatten, if not grow.
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Again, you have a lot of valid points, but can't we just plan accordingly instead of fearing the wrath of a mythical burst? education and planning are key - I guess your posts are at least bringing attention to the matter like a protestor chained to a tree, or a big guy on a hunger strike - shock value 