The real estate industry can breathe a sigh of relief, as can many homeowners — interest rates aren’t going up any time soon.
The Bank of Canada said Tuesday that interest rate increases aren’t likely any time soon, given the economic uncertainty in Europe and many challenging economic situations across the world. In that environment, an interest rate increase will just cause more trouble.
Nonetheless, homeowners with large mortgages would be wise to try to lock in low rates for as long as possible and, at the same time, do all they can to reduce their total debt.
Interest rates will not stay this low forever, just as they didn’t stay at 20 per cent in the early 1980s. Those high rates had a lot to do with the last significant housing price correction in the Metro Vancouver area.
At that time, some people simply walked away from their homes, as the mortgages had very high interest rates and the homes were going down in value. It was a situation very similar to that in many U.S. cities in the past four years.
In B.C.’s Lower Mainland, the housing market has been very stable since the late 1980s. Prices have gone up, and down a little bit in the 1990s, but for the most part they have been on a steady upward trajectory.
In recent years, prices have jumped to levels where many people are having difficulty buying a home. This is particularly true of single-family homes. Only low interest rates have kept many people in the market.
While there is still affordable housing available in Langley, for the most part it is in the form of apartments. These are not suitable for all buyers, particularly those with growing families.
Interest rates also have other effects, on retired people on fixed incomes. Low interest rates cut deeply into their purchasing power, as they are dependent on investment income for at least part of their income.
A long period of low interest rates, as we have seen, can wreak havoc on pension plans. The low rates are at least partially responsible for many companies abandoning defined benefit plans, and placing more of the burden on planning for retirement on their employees.
It all makes for many challenging situations. Saving is of limited benefit, but so is borrowing too much.
The best approach is to keep expenses under control and pay close attention to interest rates.