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Bank of Canada Cutting Rates Again. Are Low Interest Rates Here to Stay?

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In this special solo episode, Andrew la Fleur provides 5 thoughts on interest rates as they pertain to real estate investors. Andrew has been saying for years that low interest rates are “the new normal” and now the Bank of Canada will likely lower rates this month yet again. This episode is especially for you if you are thinking about investing in a condo but are afraid of rising interest rates in the future.

Episode Transcript

Hi! Welcome back to the show. On today’s show, I want to talk to you a little bit about interest rates. On the show, I’m going to give you basically five of my thoughts on interest rates. They’re not necessarily all connected to each other. They don’t all necessarily follow a particular narrative or are made to make a particular point. They’re just 5 observations or thoughts that I have about interest rates that I just wanted to put out there to you, the listener, to you, the condo investor, and to you, the person who is thinking about investing in real estate.

Interest rates, they seem to be this funny thing that, for some people they elicit a lot of excitement. For some people, they elicit a lot of fear. Whether it’s they get excited about investing in real estate because they see it as a great opportunity to take advantage of a particular interest rate, or whether people use it as a fear or a reason to not invest in real estate because they fear of what may come in interest rates. It’s something that we can’t control.

That’s one thing that we know for sure. It’s something that is out of our control as condo investors. At some point, we need to make a decision whether we’re going to act or not based on the fact that we can’t control everything. Really, in a lot of ways, I think investing in real estate is a reflection of life itself. The fact that we do not control everything. We do not always control our own destiny as much as we would like to.

At some point, we just have to decide are we going to act, are we going to do something? Are we going to take action and move forward? Or are we going to sit on the sidelines continually and look for excuses to not do anything? That’s a bit of a tangent. Anyways, here’s five points. The reason I particularly want to bring up these five points was based on the fact that maybe you’ve heard it by now. Maybe you haven’t, depending on when you’re listening to this episode. It sounds like another rate cut is very likely coming to the bank of Canada this month, the month of July, 2015 depending on when you’re listening to this Podcast. It’s either right now or it’s in the past.

It looks like interest rates will be coming down because the Canadian economy is, as a whole overall, is not doing very well, even though the Toronto economy here where we’re primarily investing is coming along fine. The overall economy, primarily because of the oil price shock in Alberta, the overall economy of Canada is not doing very well. In fact, we may be entering into a technical recession being defined as two quarters with negative growth.

Much to many people’s surprise, once again, there was a rate cut in January and now here we are again talking about potentially another rate cut again in July. Much to people’s surprise, we may be dealing with even lower interest rates than we’ve already got. As it stands, you can get variable mortgages for 2 to 2.5 … Sorry. 2% to 2.25%. You can get fixed rate mortgages right now for around 2.6, 2.7, 2.8 percent. Very very cheap money right now. A great time to be an investor in real estate. It might get even better with these if lower interest rates are coming up.

I will make another point as well and that is I always recommend to go variable on your mortgage for investors. I always go variable. Most of my clients go variable. I could talk more about that on another episode. Basically, always want to go variable. Variable rate is essentially the interest rate. The fixed rate is really an artificial rate that the banks create for those who are risk averse, who don’t like the idea, again, of something that changes, of having things influx. People who are comfortable with that, which many people are not, then the bank created this concept of the fixed rate where they lock in your rate. In order to give you that benefit, they charge you a premium on what the actual mortgage rate is. Keep that in mind. Again, if you’d like to hear more about that, we’ll talk more about that in another episode.

Here’s the five point I want to talk about. First point is that, low interest rates are here to stay, in my opinion. What I mean about that is, again, people ask me all the time, “Well, what happens when interest rates go up? Or are they going to go up next year? Or are they going to go up in two years? Or are they going to go up if I buy this pre-construction condo? Are they going to go up by the time the condo is finished in 3 or 4 years?”

It’s my belief that the low interest rates that we’re experiencing are here to stay. That it’s already been about 7 years of very, very low interest rates, historically. I could certainly put money on the fact that 7 years from now, we’ll still be having the same conversation of, “Wow. Isn’t it amazing how low interest rates are. Wow! When are interest rates going to go up?”

I really don’t see any significant increase in rates happening any time in the next several years. Sure, interest rates may go up a quarter point, they might go down a quarter point. You’re going to have these natural fluctuations from quarter to quarter from year to year. Overall, this is the new reality, in my opinion. This is the place that we’re in. There are several reasons for that. Some of which, I’ll talk about on this episode coming up. That’s the first point I wanted to make.

The second point that I want to make is that interest rates are an excuse, or they’re used as an excuse for people to either not invest or to invest. You can only do that for so long. At some point, you need to take action … Okay, Alexander, edit that portion out.

Alexander, just edit that part out starting from the second point and I’m going to start that again. Here we go. The second point that I want to make is that interest rates are an excuse, or they are used as an excuse for people who’d been sitting on the sidelines and not investing in real estate, not taking action. You can only use that excuse for so long. Again, how long are you going to be saying, “Interest rates are going up, so therefore I’m not going to invert in real estate.”

At some point in time, you’ve got to say to yourself, or I’d like you to challenge your thinking by asking yourself, “What if low interest rates are actually here to stay? What if interest rates don’t go up? What should I be doing today to take advantage of the fact that we do have really low interest rates? We’ve had them for the last 7 years. Likely, we’re going to continue to have them for the next several years. Even if the rates do go up, it’s going to be very marginally. It’s not going to be anything significant over the next several years.” How much longer are you going to use interest rates as an excuse for not taking action?

The third point would be that higher interest rates, if and when they do come, are actually a good thing. It’s just a reminder for everybody to … We’re all afraid of higher interest rates. Again, I’d just like to remind everyone that higher interest rates are actually a good thing. Higher interest rates are a sign that the economy is doing well. That the economy is picking up. That there are more investments being made. That more money is exchanging hands. This means, generally, that there are more jobs being created. That there’s more demand for labor and prices go up. Labor rates go up. Wages go up.

Generally, there is more demand for people to purchase real estate, which results in higher real estate prices. If interest rates do go up, as an investor, you’re thinking, “Well, my cost of money is going up. Therefore, my monthly cash flows could potentially be affected and go down.” The flip side of it is that higher interest rates indicating a stronger economy, more people looking to purchase real estate, the asset price itself is going up.

Again, as a real estate investor, you are winning either way. This is part of the beautiful multi dimensional aspect of real estate is that you can win in so many different ways when you are investing in cash flowing real estate.

The fourth point I’d like to make is that, it’s kind of going in contradiction here. Like I said, these are somewhat disjointed. They’re all, I think, around the top of interest rates. The fourth point is that the government actually has a huge incentive to not increase interest rates. This is something that many people don’t think about. Many people don’t realize, but, again, the governments over the past several years since the great recession, governments around the world, but definitely Canada and the US, have taken on massive amounts of debt. Therefore, they have huge incentives to not have higher interest rates. If the interest rates are going up, the costs, the payments on those debts will go up.

They would much rather have lower interest rates, in fact, even lower than they are now sort of wash away the debts, so to speak, that they’ve created. They don’t want these debts that they have to become more costly. They’d want them to become less costly, or stay the same, which is a huge incentive for governments everywhere to not have higher interest rates in the future. They have massive debt loads that they will not be paying off from the Great Recession for many, many years to come, probably a couple of decades. That is a huge point to keep in mind as well.

The fifth and final point I’d like to make about interest rates is around the question of, “Well, they can’t get any lower, right?” Well, a lot of people believe that to be true, right? You often read interest rates have nowhere to go but up. Interest rates are so low, historically low, that they can only go up from here. Therefore, the people again use that as some kind of a psychological barrier for not taking action, not getting into real estate, because they feel like we’ve hit some kind of a concrete wall in interest rates that can never be passed. I’d look to, again, challenge your thinking on that a little bit.

Interest rates can definitely go lower. The number 0 as an interest rate is just an arbitrary number. There’s nothing stopping governments from going below that number. Look at … Switzerland is one example. Short term rates in Switzerland are currently at -.75%. Negative interest rates are definitely out there.

Switzerland is not the only country with a negative interest rate environment. Canada is not in a negative interest rate environment, nor is the US. All that to say that, again, just to challenge what you’re thinking on that idea that, “Well, interest rates have nowhere to go but up.” That’s not true. Interest rates can continue to go down. They can go to 0. They could go below 0, theoretically

That is, again, something to keep in mind about interest rates. It’s something, again, as real estate investors, we are in unique times. We are in really great times, in my opinion. It’s just a great, great time to be borrowing large sums of money because it’s very, very cheap to do so. Again, if you’re buying cash flowing real estate with that money, it’s a great, great investment that you’re making.

If you already are in the market as I am, and as many of my clients are, when you hear things like the Bank of Canada lowering interest rates, you smile to yourself a little bit because you are going to be making more money every time that happens, assuming that you’ve taken out variable mortgages. Assuming that you’ve got good properties that are producing good cash flow and that you’re a long term investor, you’re not looking to flip properties. You’re looking to buy and hold properties and build wealth over the long term. Then, it’s always a nice surprise to wake up and read the papers and see that there might be a rate cut coming. That your cash flow situation is going to improve in the months ahead.

Obviously, that being said, you’re not going into this naively and thinking that all rate cuts are a good thing. Rate cuts are, again, an indication, just like rate hikes are an indication of a growing economy and as a strengthening economy. Lower rates are a sign of a weakening economy as well. That’s the reason why the government is looking at doing it now.

We obviously do not, as investors, want to see an overall weaker economy. As long as the local economies that we are a part of here in Toronto continue on and as long as job numbers are still strong, which all indications seem to be pointing to that they will be, then that is a good thing for us as individual condo investors here in the greater Toronto area.

That’s everything I’ve got for you for today on this episode. I hope you enjoyed it. A little bit of a different take on things. Maybe you learned something new. Maybe you think I’m crazy and you disagree with everything I said. Either way, I’d love to hear from you. Feel free to drop me a line, andrew@truecondos.com. Give me a call, 416-371-2333. Or if you’d like to work with me, if you’ve been listening to the Podcast for a long time and you are ready to take action, please do reach out and let’s get started today.

Thank you very much for listening. Until next time, have a great week. Have a great start to your summer. Again, if you’re listening to this at time of publication, or at the start of the summer 2015, I hope you have a great, great summer. We’ll talk to you soon.

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