The Bank of Canada raised its interest rate for the second time in less than two months. Financial institutions of all types will increase their rates to their customers – you and me – before the sun rises tomorrow morning.
Why does this move by the bank signal trouble?
Consider this: In British Columbia, real estate prices have been rising at a much faster pace than income. This increases the level of debt compared to income. This has created an illusion of affordability.
People have used the low interest rates to buy bigger, better, and newer homes than they could have qualified for at a higher interest rate. Looking forward, we will see that as interest rates go up, people who may have qualified for mortgages at the lower rates, no longer qualify for the same amount of money. This slows the economy. The number and amounts of transactions begin to dwindle, which also interferes with the earnings of all participants down the line – realtors, inspectors, lawyers, moving companies, utility companies, perhaps even furniture stores, and the list goes on.
Warnings of trouble don’t end with the exponential increase in real estate prices. Shopping with credit has also escalated over time.