In this episode of Get Real Wealthy Season 2, Quentin talks about interest rates in Canada.
As a real estate investor, interest rates are really important and they matter for several different reasons. First are the effects that they have on property prices, at least what is said in the media. Be careful when you hear the media associate increases in interest rates with increases in property prices, as it doesn’t necessarily work this way. Similarly, a decrease in the number of sales, doesn't mean a decrease in property prices.
As for the cap rates, they are a combination of different things. For commercial assets, an interest rate increase means that you're actually going to see increases in cap rates because a third of the cap rate, the value of that comes from interest rates, but also remember cap rates are the quality of the asset and the location of the asset. So, what happens when we lower interest rates? So, when we lower interest rates, we're actually bringing forward purchasing from the future to today. When we're pulling forward those purchases today, we are affecting the future purchasing power, depending on what exactly or who exactly is doing the purchasing.
The Bank of Canada looks at CPI, which is the consumer price index and inflation, as well as employment. when they're considering interest rate increases. They also look at the value of the Canadian dollar, the real GDP, the US funds rate, etc. Housing prices are also connected with different rules that have come in over the past. Quentin says that if the Canadian government really wants to see a change, they actually need to work on the supply side of the issue.
Quentin adds homework for the listeners in this episode. He says “I want you to go and look at the amount of debt that the Canadian government has compared that to the last few years to where it is now. And I want you to find out what is the interest amount that the Canadian government pays on its debt. Now you've got to remember that that interest rate right now is quite low. Okay. And let's say we have an interest rate of 0.25% and the interest that is paid on that debt is $1. And the interest rate goes to, let's say, 0.5%. That means that interest that's going to be paid is let's say approximately $2 That can be a huge change depending on what that rate is. And if you find out what that answer is, and you send me a tweet or you send me a message on Instagram at @Qmanrei, I will send you a free copy of the book of your choice that I've written. So the first person to do that I will send you that book…”