Saturday, December 12, 2009

Klump on interest rates

“Repeating its concern voiced in October, the Bank reiterated the risk that the strong Canadian dollar poses to economic growth,” said CREA Chief Economist Gregory Klump. “They also opened the door to keeping interest rates on hold longer than expected. Low interest rates are likely to continue to fuel home price increases.”
CREA Dec 8, 2009

One thing to note about interest rates is the market impact probably has more to do with the change of rates as opposed to their current level. Keeping rates low will not have the same effect going forward as lowering them. Interest rates do not increase the cost of construction and they only impact the payments during the initial period of the loan. So over the last year we had a reduction in interest rates which helped stoke demand. Another factor contributing to nationwide price appreciation was the change in consumer confidence. Last year when the world was ending it was reflected in falling home values. Now real estate is hot again. This positive change in sentiment will at some point be priced in to the market. Actually, I think the current outlook is too optimistic and going forward it will become more negative.

The current strength of the Canada wide market will not continue much longer (wild guess mid 2010). This is because the contributing factors of increasing consumer confidence and decreasing rates are set to be removed, if not reversed.

Canada wide market
October 2008 $282,583
October 2009 $341,079 +20.7% (weighted average shows 14% increase)

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