http://www.vancouversun.com/business/Expect+rate+home+building+slumps/1048374/story.html
Summary:
Due to the economic downturn in the economy, not only United States but Canada as well, the Bank of Canada has decided to cut interest rates down to 2.25%. Housing constructions have been reduced by around 8% compared to the previous year. Since the housing industry prices have dropped, the Bank of Canada decided to cut back on interest rates. Also, unemployment has been at an all time high in the US – approximately 533,000 people are jobless (around 6.7%). However, Canada’s experience in unemployment is just a miniscule quantity better than the US, with a 6.2% (71,000 people) laid back on their jobs. Interest rates are starting to become more lenient in Canada, giving the citizens the opportunity to purchase houses at a lower interest rate.
Connections:
In relation to Chapter 3 of our textbook, unemployment triggers low net income, annually, which affects the gross profit of an individual. In other words, less income tax will be paid at the end of a tax season for the government. The government will not be receiving as much tax as the previous years. Income of a company or a particular individual is used to calculate the amount of income tax to be paid at the end of the year. However, the Bank of Canada will not be gaining as much money as before when the interest rate was high. Now that it reduced to 2.25% for the housing industry, the government will be stimulating the economy with hopes up high.
Reflection:
To come to think of it, the prices of the estates will be reduced and there will be more people purchasing houses. In other words, with the interest rate reduced to 2.25%, many people will want to buy a house when the prices are low so they can save more. I think the interest rate should be boosted down a bit more so it will be attempting for the citizens of Canada. Also, it will be beneficial to them, as well. With all of that reduced to an all time low, purchasing housings will be easier than before. Unemployment will decrease and more people will have jobs when housings are low, for example, housing construction workers will accept more jobs. In addition, the government does not have to worry about the income tax not being paid or low income. Businesses will be able to purchase estates at a cheap price and more employees will be necessary for hiring.
Article Summarized by
- Jillian Mak
3 comments:
Jillian, in my opinion some of your analysis is 'on the mark'; while other aspects do not seem to really fit in. With regards to the lowering of interest rates, this alone will not stimulate the weakening housing market; because of the oversupply of inventory of available properties. Due to rising unemployment and fears of a failing economy, most people will feel less inclined to invest in the housing market. Reflecting upon this, I feel that nobody can predict what will happen in these uncertain economic circumstances, because most people will want to be on the safe side of making big investments; and only time will tell how long this lasts.
- K. Jagpal
As to kyron's comment I think that lowering interest rates alone would not be enough to stimulate the economy to invest in real estate. Even if it may be tempting for citizens to buy a house when the interest rates our low, if they are unemployed then no matter how low the interest may be they still cannot pay the mortgage. Also if only the construction business improve, it wouldn't help much as not alot of people are certified to work in a construction company so that wouldn't help the employment alot. Also if said citizens were to get a loan from the bank, how would the bank get enough money to lend to so many people. So in return they may bankrupt the bank or if they cannot pay of the mortgage then the economy would even worsen. Thus the government wouldn't get enough income tax and wouldn't be able to help the economy.
Jillian, you had made a very interesting prediction of the reduction of interest rate. It is true in some way that if the company kept decreasing the interest rate, more people would want to buy houses and it will boost the economy up. Further more, more workers could go back to work and this will decrease the stress of banks and government.
But if we imagine the continual reduction of interest rate in another way, an opposite effect would form. For example, if the interest keeps going down, the bank wouldn't get enough money to lend to others and also supporting its own operation. This will result in a economic disaster as the bank couldn't keep its normal operation anymore. More workers would get fired from the bank in order to reduce the bank's wages expense and keep its operation. Employless workers could not get enough money to buy houses they want, and they can not borrow money from a bank that nearly go bankrupt. Less houses would be sold and more employees would lost jobs in an result.
The banks were intended to reduce the stress of the citizens by lowering the interest rate. But on the other hand, it will also lead to another financial disaster if the rate goes under the minimum amount. That more problems would be formed as a result.
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