Hello. This is a non-math blog post by me. This post comes from me housing hunting with family in the super-crazy Toronto (and surrounding area) housing market. I have been following some alternative finance people from Youtube (and here) who have been talking about our current low interest rates environment.
Expect more blog-style posts from me on this topic of the Toronto housing market. I find this stuff interesting enough for sharing.
I am no financial advisior even though I know some bits and pieces of finance, economics and real estate matters. Use the information presented here at your own risk. Real estate in your region may vary from the Toronto (and surrounding area), Ontario, Canada.
Interest As A Cost Of Borrowing
For the borrowing, interest is simply the cost of borrowing. Borrowing a $100,000 loan at 1% (annually) has a cost/interest of $1,000. The borrower has to pay back the original loan of $100,000 loan and any ongoing interest that is being accumulated over time. This calculation is very simplistic and I do recommend to use a financial calculator of sorts. (If you can handle the math, then you can learn the mathematics of compound interest.
Low Interest Rates Does Not Favor Savers But It Makes Borrowing Cheaper
Low interest rates does not favour those who save their money in the bank. If an interest rate is at 1%, then for each $100 dollars in a savings account you get one dollar back (annually probably). Interest rates in the old days (few decades ago) were much higher than 1%. Interest rates being low tempts many people to borrow money quite cheaply for large ticket items such as cars and housing.
Cheaper Borrowing = More Buyers
Cheaper borrowing from lower interest rates allows for many people to access credit and loans to purchase real estate. These home buyers are not just limited to families and to those looking for a living space. Some of these buyers are investors and speculators who hope that price of real estate will go up in price and then sell for profit. These profit hunter buyers do increase demand which results in higher home prices. Higher prices do push some of the families out of the housing market (in Toronto).
One small point that I would like to add is that with more buyers bidding wars do happen. There are some crazy buyers out there. I will share a few stories on house hunting in Toronto (early 2020) in future posts.