Canadian Interest Rates Anticipated to Go Down Further/No Cause for Alarm for Canadian Home Prices
January 24th, 2008 Categories: First Time Buyers, Latest Real Estate Market News & Stats, Mortgages, Economics, Finance, Real Estate News
Canadian Interest Rates To Fall Further
As world stock markets roil and the spotlight turns on U.S. Fed Chairman Bernanke to follow up Tuesday’s sharp 75 basis point rate cut with another cut next week, Canadians are wondering what will happen to interest rates here at home.
Last week I was hearing rumors that even if the Bank of Canada were to cut rates, some or all of the major Canadian banks might break precedent and not follow suit. However the relatively more conservative 1/4 point cut in rates this week by the Bank of Canada did result in all major banks reducing their rates accordingly, impacting mortgage rates.
The Bank of Canada has communicated that they are prepared to cut rates further. A communique I read today from the Toronto Dominion Bank Financial Group said we can anticipate a further 50 basis point (1/2%) rate reduction on March 4th with the potential of another 25 basis point cut on April 22nd.
This is good news for homebuyers.
Canadian Home Prices: No Cause for Alarm
The TD communique also indicated that despite tighter credit conditions, strength in domestic demand is expected to remain supported by continued income growth associated with increases in commodity prices since October, which has led to further gains in our terms of trade.
With respect to Canadian home prices, and the rationale for their 50 basis point prediction I quote from today’s TD report:
Home prices remain on the upswing in most major urban centers, and there is little concern that the Canadian housing market will start to mirror the slump in the U.S. In fact, we believe national home prices will rise at a rate of 5-7% in 2008, compared to a U.S. market that will likely absorb losses of around 5% or more. However, we believe that by the next meeting (i.e March 4th), data on the U.S. economy will provide a smoking gun, showing clear signs of a sharp economic slowdown. Given that inflationary pressures remain well in hand, a 50 basis point cut would provide much-needed insurance against the degree to which a U.S. economic downturn would lap onto Canadian shores.
Certainly, inflation will not provide a barrier to a more aggressive Bank of Canada. The central bank has indicated that increased competitive pressures in the retail sector and the one percentage point GST cut at the start of the year will cause both core and total CPI inflation to fall below 1.5% by the middle of this year before returning to their 2% target by the end of 2009.
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