“The hidden cost will be revealed in the inevitable market correction when we have a repeat of 2008 stemming from too many indebted investors not thinking ahead and then getting wiped out in a domino effect that hopefully won't drag the entire market down along with them,” Brandon Sage, a real estate investment consultant with the Landlord Property & Rental Management, told CREW.
His comments identify the reality for many investors who will undoubtedly be more active in the market following the Bank of Canada’s move to slice the interest rate by 25 basis points. It also highlights the long-term outlook on the mind of many investors who worry about a possible market correction.
The market was rife with speculation building up to the announcement, with analysts suggesting a rate drop would have little economic impact because rates were already extremely low.
Brokers suggested that a slight lowering of rates would have little effect, except to perhaps attract stragglers to the enticing low rate environment.
With an election year in full swing, many believe that the federal government is trying to show it can manage the economy as signs of the 2008 recession creep into the minds of investors as well.
“I view the cut as an election year goodie being undertaken by a federal government worried about how it can tell the Canadian public with a straight face they are good economic managers when their record demonstrates otherwise,” said Sage.
“Its record on guiding lending is especially foul as it was changing the laws before 2008 to permit the same reckless lending that took the U.S. down and were only stopped in doing so by the collapse of the American markets.”
“The truth is, though, that we simply can't keep turning to lowering interest rates as the solution all the time and eventually need to turn to the complex solutions that are what is required to solve complex problems.”
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The lowering of the overnight interest rate is terrific for many investors in the short term, but the hidden cost in the long term is perplexing for others, who say an inevitable market correction is coming.