How Interest Rates affected the Canadian Economy

Interest Rates | Bank of Canada

Homebuyers in today’s market benefit from historically low mortgage interest rates, as well as those who are renewing or refinancing their existing mortgages. 2009 marked the year for an all time historical low. Back in the 1980s, the banks had the highest interest rates that surpassed even the 20% range for a 5-year term mortgage. The demand for money was high, as was the inflation, therefore the government had to hike up rates to dampen the demand for money.

The confluence of events was heavily tied to the Baby Boom Generation entering into the home ownership age, as individuals were going into their 20s, coming out of university, and starting careers and families. Demand for mortgages ballooned, not only for housing, but food, gas, etc. After about a decade, heading into the late 80s, interest rates came down, and the housing market softened because homeowner’s couldn’t borrow anymore. The demographics drove interest rates down at that point, and demand was not as strong.

In October ’87,  what is referred to as Black Monday, stock markets around the world crashed, and mass panic caused the crash to escalate. The government reacted by lowering interest rates in an attempt to revive the economy. Demand started coming back, and people started spending again. As confidence was coming back into market, the government was able to start increasing the rates again.

The next big crisis occurred in ’97, known as the Asian Contagion. Countries in Asia suffered a series of currency devaluations, beginning in Thailand as the result of the government’s decision to no longer peg the local currency to the U.S. dollar. This resulted in stock market declines, a reduction in import revenues and government upheaval. This ultimately affected other economies in other parts of the world such as U.S., Europe, and Russia. Investors began to throw money into stock market, as money was cheap.

The year 2000-01 was the period of the dot-com bubble burst, and the 9/11 attack. It was said that Alan Greenspan jacked interest rates up too quickly. There was ‘irrational exuberance’ in stock market. The U.S. Federal Reserve raised the interest rates six times early in 2000, and as the economy began to lose speed, the markets crashed in march, and money became expensive again. People took out loans to put in the stock market, but when interest rates went up and stocks were sold off stocks, everything came tumbling down when everybody rushed for the exit.

Around 2003-04 rates came down because of the stock market crash, and cheap money attracted borrowers to real estate investment. The term ‘ninja loans’ was used to describe these borrowers with no income, no jobs, and no assets. The investment banking industry gave people with no income mortgages which sold to third parties (derivatives). People defaulted on their mortgages and there were loans that went bad, leading to a sour housing market in the states. Subprime mortgages brought unqualified people holding mortgages with no equity in their homes, and the oversupply took prices down.

The most recent crisis is labelled the Subprime Crisis. The U.S. is still presently wallowing in the subprime mess as a result, and may take another 5 years to work itself off, and because of the credit crisis which compounded the subprime crisis, the government’s hands are tied and it is unable to raise interest rates.

The low point was in 2008-09 brought about by the financial crises, the government wanted to stimulate the economy because the financial crisis was creating so much fear in economy, and banks froze and the governments ratcheted rates down. The current mandate is to get the economy going and not kill off demand.