Jan 232015
 

Today’s post is about something of interest to a lot of people. 😀 Earlier this week the Bank of Canada surprised just about everyone with an interest rate cut from 1.00% to 0.75%. The Canadian dollar dropped to the lowest it’s been in years. Over 20 economists were surveyed prior to the Bank’s bomb shell reveal and not a single one of them expected the news, lol. Maybe economists are just there to make weather forecasters look good. 😛

Even our country’s most prolific real estate blogger, Garth Turner, was taken by surprise. Just last week a commentator on his site named BlackDog pointed to a report which predicted this week’s interest rate cut, and Mr. Turner promptly replied to dismiss the report. Not even a best-selling Canadian author of 14 books on economic trends saw this announcement coming. It just goes to show how difficult it is to read the minds of central bankers. 😕

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The Rate Cut is good for:

  • Debtors who have variable rate mortgages, lines of credits, car loans, student loans, or other types of floating rate debts. Every $100,000 of debt one has will translate to about $20 a month of LESS interest one has to pay. 🙂
  • Investors in the stock market. Lower cost of borrowing is a type of monetary stimulus that has the same effect of printing money. The U.S. stock market has gained 100% over the last 6 years since it began it’s Q.E. programs.
  • Existing bond holders. Lower coupons on new bonds mean existing bonds are worth more.
  • Industries like manufacturing, exports, hospitality, tourism, companies with primarily $USD revenue, or any other businesses that benefits from a lower Canadian Loonie.
  • People who have debt in general. Lowering interest rates is inflationary which diminishes the value of one’s debt.
  • Home owners. Rate cuts drive real estate prices higher.

The Rate Cut is bad for:

  • Savers. High interest savings accounts are looking less attractive with the threat of inflation.
  • Consumers. Canadians import a lot of food and staple items from the U.S., which will cost more for us with a lower $CAD.
  • Cross border shoppers. Trips to the U.S. will become more expensive.
  • People living on a fixed income, like pensioners.
  • Retailers who’s suppliers are from outside of Canada

Thank you Stephen Poloz for this rate cut. 🙂 I appreciate your continuing support to prop up the already inflated housing market in Vancouver and increasing my home’s value. You’ve successfully penalized all the savers and risk adverse members of the investing community by lowering the returns on their GICs and term deposits. You have instead rewarded the speculators and heavily leveraged investors, such as myself, by leaving more money in our pockets, 😀 and encouraging even more borrowing activity! 🙂 Hurray for cheaper financing and more incentive to use debt because that’s exactly what Canadians need more of right now. I applaud your push for higher inflation with this rate cut. The 2% CPI in 2014 just wasn’t high enough. I’m sure making it even more expensive to live in this country is exactly what consumers want, especially when more people are out of work now than a month ago. 😛

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Jan 142015
 

The basic concept of debt is simple. It’s when someone borrows money from another person. But once we start looking at different forms of debt such as sovereign debt, treasury bonds, mortgage-backed securities, demand loans, etc, it can start to sound like a different language to many of us. 😕

Even the money in your wallet right now is just another form of debt. It may not be your debt but if you trace back that money to its initial point of creation you’d discover who’s debt it belongs to. 😉

Year of the Debt

It has come to my attention that there is a lot of misinformation and confusion about the topic of debt on the internet. That’s why I’m making the proclamation that 2015 will be the year of the debt. I dedicate this year to write more about debt and its impact on our lives. I have even created a new section on the blog that’s all about debt.

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Most consumers are told that being in debt will hold them back from spending, investing, and living the life they want. But this is not entirely true.

Canadians now have more debt than ever before yet our average household net worth continues to reach record highs. So debt and wealth doesn’t have to be contradictory. In fact, often times debt can increase our financial well-being.Alberta has the highest household debt of any province, but they also have the highest household incomes. 🙂

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Nov 242013
 

Hello friends in Regina! 😼 What a fantastic game over the weekend 🙂 Our household debt to personal disposable income in Canada is around 163% today. In the U.S. the ratio is only 140%. This ratio is greatly affected by the price of homes. The Canadian housing market has done well since the last recession, but home prices in the U.S. have fallen. So Canadian indebtedness has continued to grow while U.S. households have deleveraged which has lowered their debt to income ratio.

So why do home prices continue to climb up here? I believe there are many reasons but by far the main contributor is the monetary policy of keeping interest rates low for so long. Interest rates have been overall falling for the past 3 decades. When interest rates are lower borrowers can afford to borrow more, which they often do 🙂 And banks are willing to lend more because they only consider ratios, incomes, and whether or not the borrower can afford the minimum payments.

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So with such a high debt to income ratio (163%) are we in a lot of financial risk like the U.S. was back in 2007 when their ratio was also 163% at the time? I recently read a study by an economist on TD Bank’s website (It’s in PDF format) that looks at the differences between Canadian and U.S. debt-to-income ratios and explores why they should NOT be directly compared.

The study suggests the methodologies used to calculate the ratios are different in Canada and the U.S. For example we have different ways to fund health care and tax personal incomes that should be factored into the disposable income amount. But after adjusting for various methodological differences, the Canadian indebtedness ratio in 2013 is lowered to just 156%. And instead of 140%, the U.S. ratio increases to 152%. So we’re not all that different after all 🙂

Mortgage rates have not gone up in Canada for quite some time now. But Canadian wages HAVE been increasing every year since the recession. What happens when our incomes rise, but our mortgage payments stay the same? Yup, it becomes relatively easier to service that mortgage 🙂 The interest costs we pay to own a home relative to our incomes have never been more affordable in my life 😯 Continue reading »