With the current state of the US economy, the fragile state of several European countries and the general malaise of the world economy, the Bank of Canada is sending a strong signal out about how solid the Canadian economy is with another prime rate increase. Or alternatively they are setting the stage for us to get pushed backwards a few steps.
Shortly after the September 8th Bank of Canada rate increase of a quarter percent, the countries major banks quickly upped their rates as well, leaving the majority of the banks sitting at a prime rate of 3%.
This increase was expected by some and unexpected by others including myself. As I mentioned above and in previous articles about the Bank of Canada Rate announcements, with so much uncertainty around the economy, not just in Canada, but also around much of the world, it seemed a bit aggressive to raise our rates for the third time this year.
The down side to the increase is it will tighten up some of the use of credit currently out there as businesses and individuals will start to tighten their belts and reduce spending due to increased carrying costs when it comes to borrowing money. This usually leads to a general slowdown in retail sales and in my area of concern, Real Estate transactions.
For many of the homeowners with variable rate mortgages this will trigger a slightly higher monthly payment, although not really a substantial increase, and may push some to lock in their mortgages at a fixed rate further decreasing their disposable monthly cash. For the majority of homeowners with fixed rates, nothing changes, other than the concern that when they have to renew they will most likely be facing higher rates.
The upside of the increase though, is that is signifies to other economies around the world that our conservative policies are working. This has already been seen with the slight increase in our dollars value as foreign investors see the Canadian dollar as a safe refuge for their money. Extended over the next six months it may also provide a boost to our manufacturing base as foreign investment looks to Canada as a safe investment bet. Coincidentally most of the manufacturing is located in Ontario where the rates are set and the votes come from, hmmm.
Longer term this can only be good for our energy industries. As manufacturing improves, demand for energy also increases. Ultimately, this leads to more money being spent on large projects in our neighbourhood as profitability in that industry increases.
After seeing Augusts’ residential Real Estate statistics, we could really use some extra spending in the province to help stimulate the housing industry! Sales are down from last year and it looks like many home owners have been taking their properties off the market as inventory is dropping much faster than sales numbers would have them.
Once again, the current increase in rates won’t help the situation. So it appears as if the next month or two may continue the trend of a slow Real Estate market, but hopefully the steady economic numbers that are trickling out, along with the US’s latest expenditures on their new and improved stimulus package will help boost us up even more. So, sit back and we can all watch as we hope for positive news to eventually arrive from this latest announcement!
