Bubble? What bubble?

At the root of the Real Estate Bubble Myth is the fact that interest rates are on the rise and the inexplicable truth is that, all of a sudden, everybody is so worried and concerned about it. Interest rates have been steadily on the rise both in the United States and, by reflection, in Canada since mid-2004, so I will leave to psychiatrists and psychologists the arduous task of explaining the newest, interest-rates phobia. I will, however, delve into the reasons as to why interest rates have been on the rise for these past 18 months.

Interest rates are the most important mechanism of Monetary Policy used by Central Banks to expand or reduce the available pool of capital at any given time. Central Banks use this mechanism to control the level of aggregate demand for goods and services, a primary cause of economic fluctuations. By reducing the money stock the cost to the banks for using the available capital is raised and passed on to consumers with a mark-up factor. This, in turn, discourages consumer spending on goods and services and, conversely, stimulates consumer saving. The effects are widespread and reverberate throughout the economic basket including, of course, real estate. What, however, pays to bear in mind is that it is not so much the amount of the increase that is important but, rather, the time given for the economy to adjust. The effect of a one percent interest rate hike in one month is going to be very different