Central Bank interest rate hikes and real estate bubble

January 2006


One of the reasons that the real estate market has been so hot is because interest rates have been so reasonably low for a long period . However now that the central bank has made it clear that it intends to keep raising the rates this rise in property values may be coming to an end. Since rising property values have fuelled through property based lines of credit house renovations and other consumption activity the end of the property bubble could cause a major slowdown in the economy if the central bank lets the air out of the bubble too quickly. Recent data in the US on new house construction and sales suggest that a slowdown is underway there. The same sort of thing may be happening in Canada in the months to come. While some people undoubtedly welcome the rise in the rates because of the higher interest they will earn on their savings many others probably a much larger number will be disappointed by the slowdown in economic activity that the rise in rates will promote. More reluctance to use lines of credit for further investment in ones property, less consumption secured by property and a general slowdown is probably unwelcome news to the majority. Time will tell us if the central bank has overshot the mark. My guess is that has done so.