Raising Prime Rate Now, Dumb

Raising Rates Now Dumb

The Organization for Economic Co-operation and Development (OECD) issued a statement Tuesday suggesting that the Canadian government isn’t doing near enough to cool the hot housing market.  They are suggesting that the Bank of Canada (BOC) should raise the overnight lending rate from its current position of 1% to 2.25% by the end of this year.  The impact on the prime rate would likely be an increase to 4.25% from 3.0%.  Clearly the OECD, a Paris based international body, doesn’t know what it’s talking about.

This move would increase variable rate mortgages to about 4.25%.  All this would accomplish on the real estate side is the elimination of the variable rate mortgage as an option for Canadian homeowners.  Instead, they would choose a 5 year fixed mortgage rate at about 3.29%.  Changes in the BOC overnight rate and resulting prime rate have nothing to do with changes to fixed mortgage rates.  5 year fixed mortgage rates are tied to changes in the bond market which are impacted by international investor appetite for the security of the Canadian economy.

Increasing the prime lending rate would provide international investors an opportunity to get markedly increased yields on short term investments.  The net effect of this would be a skyrocketing dollar and further collapse of our manufacturing sector.  Sure, hitting our manufacturing sector while it’s down would slow some housing markets like Windsor and St. Catharine’s, but would have little impact on cities like Toronto and Vancouver.

The only reason to cool the housing market is to avoid an overshoot and resulting collapse.  This is an unlikely scenario especially given the mortgage lending restrictions already put into place by the federal government.  Our lending policies may require further tweaking, but let’s hope the feds listen to someone a little closer to home.

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