IMG_5880.PNG

It’s been several years now that the Bank of Canada has warned that interest rates will rise, in a bid to prevent Canadians from taking on debt.

Well it looks like they have given up.


BoC Governor Stephen Poloz now says the crown corporation will no longer talk about what it is (not) doing.

My guess is that after talking down spending for so long, the BoC realizes it isn’t working anyway so why bother continuing to discredit itself.

Instead they will just make rate announcements as normal without much other commentary.

10 Year History of Rates

IMG_5882.PNGSource

The overnight rate has averaged 2.05% for the past 10 years.  Banks take a ~2% spread, so Prime at most banks(the rate for consumers like you and me) has been under 4% for over 10 years!

IMG_5881.PNGSource

 

Current State of Interest Rates

With mortgage rates commonly under Prime now, we are in a prolonged record-low interest rate environment. “Low rates” are the new normal.

Since residential rental property in strong economies like Kamloops can provide 20%/yr Return on Investment, it’s no wonder borrowing hasn’t slowed.

In the debt based economy of the world, NO ONE can afford to service debts if interest rates rise to previous levels, and large scale default is bad for everyone!

 

Inflation

Even with low interest rates, governments cannot afford to service their debt, so they print money to pay the bills.

I wish I could do the same, but since I can’t I will do the next best thing(buy income producing assets).

Printing money accompanies inflation.

This means that property values(along with the cost of everything else) are guaranteed to rise given enough time.  It is a simple fact of our economic system that the money supply will always grow, becoming worth less with every dollar printed.

As I have pointed out before, the inflation target is plainly stated by those who control our money, as outlined in this chart I pulled from the BoC website:

IMG_5879.PNG

With an average inflation of 2%/yr any REAL assests (like property) will automaticly rise in value by 20% over 10 years,!

Proof of Inflation

This brand new chart is from Stats Canada Daily Reports that I subscribe to.  It show how the price of new Canadian homes has been increasing.
Capture1

 

Walmart increases food prices 

When the king of retail is increasing prices, it is wise to take notice.  From the article: “In 2013 Canadian food retail prices rose 1.2%, according to Statistics Canada, with fish and vegetables seeing the biggest price hikes, with respective growth of 4.1% and 5.2%.”

The article also points out a prediction, “the University of Guelph’s 2014 Food Price Index Report predicts retail food prices will increase between 0.3% and 2.6% in 2014, faster than the consumer price index.”

 

In Summary

What should a savvy investor do in the face of inflation eroding hard earned savings ? My answer is to make sure my income grows faster than increases in prices.

I am growing income with rental properties because of high demand for housing, rents are increasing each year, prices of houses will rise faster in my market than inflation, and the cost of owning property in this low interest rate environment is very appealing.

 

Make no mistake, Canadian interest rates will rise.

 

But it will be slow, and not until the U.S. does so.

 

I don’t see that happening for a long time, perhaps another 10 years 🙂

 

Happy investing,

Stay S.A.F.E.