By Tom Bradley
Last month we had record auto sales in Canada and the U.S. Vehicles are zooming off dealer lots. Meanwhile, it continues to be a sellers’ market for real estate in most parts of Canada (give buyers a deadline and watch the offers come in).
I guess we shouldn’t be surprised by this. We have near-zero interest rates and obliging banks, and these big ticket items are tightly linked to borrowing rates. The lower the lease or mortgage payment, the more affordable the purchase.
Cars and houses are great examples of the distortions being caused by artificially low interest rates. When governments and central banks interfere with the natural flow of the capital markets, they cause distortions. For every action, there’s a reaction. While the Bank of Canada and the Federal Reserve in the U.S. worry that the economy is too fragile to stand on its own two feet, they are juicing the healthy sectors and encouraging people to carry more debt. Instead of accepting slower growth that comes with a ‘debt-burdened’ economy, they keep trying to achieve employment and growth levels associated with past, ‘debt-induced’ eras.
A few years ago, if you’d told any economist or central banker that we’d still have near-zero rates with unemployment at 6.1% in the U.S., a healthy housing market and booming car sales, they’d say you were being ridiculous. Of course interest rates would have been allowed to normalize in those conditions.
Welcome to the whacky world of central bank micro management.