By Kiyoko Fujimura

About every month and a half, the Bank of Canada has the opportunity to change the key benchmark interest rate for the Canadian economy. And, while it may seem somewhat boring that Mark Carney has left it where it is for the past ten consecutive opportunities, it’s really not.

The last time rates rose was in September 2010. This was before the real gravity of Europe’s economic troubles were known and when the US was still potentially on its way to recovery.

But as the US struggles to find its footing and even the strong European economies, Germany and France, face a potential downgrade to their bonds by Standard & Poor’s — the international economy is scary, uncharted territory.

So what does that mean for Canadians? And, in particular, what does it mean for the housing market?

Basically it means that we won’t know for some time whether or not the housing market is really in trouble. I wrote a post last week which received some criticism because I said we couldn’t know if the market was over-inflated until interest rates rose. But, someone pointed out that key interest rates didn’t rise in the US and their housing market still burst. While that is true, they were missing a large piece of the puzzle.

Here’s what was different in the US: remember the term “sub-prime mortgages”? That essentially meant that lenders gave out introductory rates that were below prime and would rise to the market rate after, say, a year of holding the mortgage. So rates on these mortgages did, de facto, increase (at least for these sub-prime products). Once they defaulted and the supply of homes increased, prices dropped across the board. This has a domino effect since it left more and more homeowners “underwater” (which means that their mortgages were larger than the market value of their homes). So, their best option in many cases was to default. The whole thing’s pretty wild when you think about it.

Anyway, Canadian banks, in their usual style of being more conservative than their American counterparts, did not give out mortgages like this. So the Canadian market has to wait to see interest rates actually rise to determine whether or not we’re in a housing bubble, probably.

There are other things that could set it off — a huge increase in unemployment obviously could instigate housing bubble “pop.” But, I just don’t see that happening anytime soon, especially with rates staying put. Who knows… maybe I’m just an optimist.

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