Interpreting a Rate Cut

Earlier this year a Vancouver house with a $5 million assessed value was put on the market for $6 million. Guess how much it ended up selling for? Hint, it’s in the upscale Shaughnessy neighbourhood. 🙂

After 12 days and multiple bids from 10 prospective buyers the 78 year old home was sold for $8 million, lol. Welcome to Vancouver. You’re welcome to buy a house here, as long as you’re willing to pay $2 million over the asking price. 😛

Our hot real estate market is about to get even more extreme because yesterday morning the Bank of Canada announced another 0.25% rate cut. Holy pumpernickel! Now it will be even harder to raise rates in the future without pricking the bubble. 📌

The Effects of the Rate Cut ✂

The overnight lending rate was lowered to 0.5% in an attempt to boost capital expenditure and drive companies to spend more on hiring and manufacturing. However this will also unintentionally persuade already heavily indebted consumers to take on even more debt.

The problem with monetary policy is that it affects the entire country even though places like Vancouver really don’t need any further easing of credit. A better solution would have been to address the faltering economy in some parts of Canada, like Alberta, using targeted fiscal policy instead of a blanket rate cut. But that’s just my personal opinion.

In any case all 5 major banks subsequently cut their Prime lending rates by 0.15% to 2.70%. Debtors rejoice! For anyone who has variable rate interest loans, a 0.15% rate cut essential means for every $1,000 you owe, you’ll now pay $1.50 per year less to service that debt. It may not sound like a lot, but mortgages and line of credits can get pretty large, so the savings can really add up if you owe a lot. For me personally this directly translated into an extra $60 a month in savings! 🙂 Here’s how I did it.

• Step 1: Borrow $500,000
• Step 2: Wait for a rate cut
• Step 3: profit 😀

What will I do with my extra money? Probably use it to pay for the cost of even more debt I plan to rack up now, muahaha! This is the second time this year we’ve seen an interest rate decrease. So I figure based on logic, the more debt I have, the more I benefit from these rate cuts! Au bon pain! 😀

Here are some other ways the recent rate cut will help Canadians financially.

• Lower Canadian dollar – One Canadian dollar is worth $0.77 U.S. now. The lowest since 2009. Cheaper currency drives up tourism activity, manufacturing, and attracts production companies in the film industry.
• Increased spending – People can spend more and enjoy more lavish lifestyles. 55% of Canada’s economy is from household spending. More spending = more economic growth.
• Higher inflation – Demand increases as people are willing to pay more. This means increased rental income for landlords and REITs. Great for any real estate investor.
• Increased foreign investment in property and business – Foreigners can invest in Canadian buildings or set up companies here and hire workers at a lower cost relative to their own country. Maybe we can win back some auto manufacturers from Mexico. More business investment = more Canadian jobs!
• Stable housing market – More than 70% of Canadians own our own property. This is good news for the majority of us. Higher real estate prices = wealthier Canadians on average.

The rate cut doesn’t benefit everyone however. People who import goods from the U.S., keep a lot of money in a savings account, plan to travel overseas, or are currently waiting for a housing correction before buying a home will not be happy about the lower interest rate. To be frank I’m not happy with a prolonged period of cheap money either. Over the long run I believe this will do more harm than good. It’s too bad that policy makers are more concerned with the health of the economy in the next quarter than the next decade.

But what happens when rates increase? Luckily we don’t have to worry about what central banks will do next. We can take advantage of both rate cuts as well as rate hikes. 🙂 This is because some investments like real estate and existing bonds do well when rates go down. But other investments like insurance company stocks and mortgage investment corporations tend to do well when rates rise.

My low risk plan to get rich is to simply buy both types of investments to create a balanced portfolio. All of these asset classes I’ve mentioned pay either dividends or interest. So even though half of them will be on the losing side of the next rate adjustment, it doesn’t matter in the long run because they will all become winners eventually since they’re all constantly paying out 4% to 8% in distributions a year. Investors can get paid to wait. 🙂

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Random Useless Fact

Some people’s legs look like sausages 😝