Commentary: Interest rates will never reach 5%

However, Canadians might end up paying more in other ways, markets observer warns

Commentary: Interest rates will never reach 5%
At the rate that posted mortgage rates are increasing, several observers have noted that Canadians might soon need to present proof that they can afford payments at rates of 5.00% or higher, but an industry analyst has argued that this lies beyond the realm of possibility.

“The justification is that regulators want Canadians to be prepared when interest rates rise, but that’s a hollow excuse. It’s a punitive macroprudential rule that is disconnected from reality,” managing editor and chief currency analyst Adam Button wrote in a recent contribution piece for CMT.

“Interest rates can only rise if inflation accelerates, but every force in the world is pushing in the other direction. We’re in an age of no inflation and it will completely change borrowing, lending and how the mortgage market works.”

Button noted that the current state of the global economic system means that previous assumptions about inflation no longer apply.

“As the economy grows and companies expand, the supply of idle workers eventually runs out. That means more bargaining power for workers and wages rise,” Button explained. “This paradigm is now forever broken. [Globalization] means the supply of workers is no longer limited to where you are. Factories and many service industries can move to where workers are cheapest, and until there are jobs for the billions of workers on the planet there will always be slack.

“Even if all those workers could find jobs it still wouldn’t matter because automation is a far bigger driver of disinflation. Workers everywhere are being replaced by technology. It’s not just robots, but also computers, algorithms and improved processes.”

However, Button warned that home and commodity prices will continue to rise, despite the lack of inflation in the classic sense.

“Low rates have changed the economics of borrowing and investing. If you can borrow at 3.00%, virtually anything that returns more than that is a viable investment. So asset prices rise until even meagre returns are no longer economical. Add in scarcity, tighter land-use rules, foreign capital and the growing desire to live in urban centres and it’s a perfect storm for housing.”
“Ultimately, this is a big political problem. People want to live in cities and it’s unpopular for voters to be spending all their money on mortgage payments. It’s also bad for business to have workers commuting unreasonable distances.”

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