http://www.cbc.ca/money/story/2010/01/11/bank-of-canada-housing-bubble-david-wolf.html
------- "Raising interest rates could hurt entire economy."
Summary:
As we head for the year 2010, many plebeian of Canada predict that the economy will be better and some say we are still in the recession. However, housing have always been of the main concern of the economy. David Wolf, an adviser of banks, suggested that interest rates should be increase to decline the mortgage loan. He thinks that house prices are getting crazier and increasing the interest rates would be keen to do so, this is how the economy will continue to aplomb. Wolf also suggested a few ways to cool the market. Some of them include: raising the down payment for houses, cut back on the on the duration of the house payments, and planning out the ability of the house owners to pay off the amount they owe.
Connections:
In chapter 3, we had a review on the Amortization Expense. In addition, we learned about a new contra account, Accumulated Amortization, an account that records a portion of the assets has been eliminated. According to this article, David Wolf says that increasing the interest rates now would help the Canadian economy. But that means when we do the accounting analysis, we have to keep in mind that the interest rates increase and the amortization period would take longer to finish than planned. For example, if a company planned to have the building paid off in 40 years; but now the bank decides to increase the interest rates. This could be cumbersome for the company because they now have to extend the amortization period of the building (also an increase for interest expense). There would also be hard to do the contra assets for the building because the building will lose its value as time goes by (depreciation). This effects the accumulated amortization for the company. Offering low mortgage rates for the houses will also effect the starting of the business.
Reflections:
I think the increase of interest rates will make life brutal for low income family. For low income families, it had been hard for them to pay off their mortgages for their houses, but now with the interest rates rising, this makes it impossible for them to pay off their loans in their life time. I agree to the proposal for increasing the down payment for house, this could help people reconsider if they really want to buy houses and make sure that they have the ability to repay the loans. Also, it is important for families to think about paying the minimum payment of interest is not a smart move because it would be hard to keep up the payments if the interest rates increase. It is also important to not take on too many debts if we could not pay it off, now that we also have to consider the interest rates associative to it. Paying interest rates are just like paying for this that we didn't want to purchase. I really suggest the government to keep their interest rates but also decrease the period of amortization because this would help the owner's end their loans efficiently.
Thursday, January 14, 2010
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One of the confusing points in your reflection was that you associated interest rate with amortization. The article itself is suggesting different ways to slow housing market down to prevent from bubbles being formed and popped eventually. However, even interest rate is escalated or mortgage term is shortened, amortization period will not be extended. Amortization expenses are determined by its value, excluding from the interest paid. In addition, the term of useful lives for building is not affected by the interest rate. More importantly, homeowners or low-income owners will not pay much attention to amortization expenses because they are not planning to sell it in short term. On the other hand, you have also raised an excellent point of "increasing down payment". This procedure does make it harder for buyers to pay for their house because they have to accumulate more cash. Since larger portion of the house value has been paid, people will be more cautious and more willing to pay off their loan off as they know they can now pay less interest.
ReplyDeleteYour article focuses on two things: raising the interest rate in mortgages already made, and increasing the down payment for future mortgages.
ReplyDeleteFirst, I want to state that increasing the interest rate in mortgages has no effect on the amortization expense. Buildings do depreciate, but that has nothing to do with increasing interest rates. Increasing the interest rate of a mortgage will only mean either higher monthly payments or an extended mortgage. This will not affect the amortization period as the building’s worth does not change—only what you are paying for it does.
Second, I agree that increasing the down payment on housing will hurt businesses and potential homeowners. Buyers will need to put down a heavier down payment, which will deplete their bank account, and might threaten their ability to pay off future payments. And when people are unable to pay their mortgage payments, they give up on their houses. Is this not what happened in the states? Did the recession not occur because people who were unable to pay mortgages managed to obtain one? Why would we chance this happening again by increasing down payments or interest rates?
~ Li Ming