Image: Danilo Rizzuti / FreeDigitalPhotos.net
Canada has begun to see a turnaround in its housing market – some would say the beginnings of a housing market bubble – because of historically low interest rates. This week, the Bank of Canada, in its quarterly Monetary Policy Report, suggested that they respectfully disagree. Even more importantly from a real estate perspective, they suggest interest rates will be low for the foreseeable future.
The key concern driving interest rate policy is inflation. Although the Bank feels that inflation will grow in 2010, they do not see it breeching 2% until the fall of 2011.
Because of this, the Bank suggested they would not change the benchmark rate until at least this summer. And with inflation projections so low, Canadians are unlikely to see interest rates rise until the end of 2011 (although the Bank warned that they retained “considerable flexibility” in changing the rate if conditions change unexpectedly). This is good news for homeowers’ planning variable rate mortgages, as it suggests that interest rates will likely remain within manageable levels for at least two years.
Governor Mark Carney also expressed more positive views on the housing market, and distanced himself from some of the concern Jim Flaherty expressed about it in December. For instance, the Bank does not seem worried that the low interest rates are producing a bubble.
“Following a period of vigorous growth, housing investment is projected to slow through 2010 as pent-up demand subsides and affordability declines,” Mr Carney said.
David Wolf, a spokesperson for one of Mr Carney’s deputies, went even further to calm fears that interest rates would be used to cool the housing market. He said, “If the bank were to raise interest rates to cool the housing market now – when inflation is expected to remain below target for the next year and a half – we would, in essence, be dousing the entire Canadian economy with cold water just as it emerges from recession.”
As always, one should take the Bank of Canada’s projections with a grain of salt: they have been wrong in the past. And no one can predict with perfect confidence where the economy will be in two years. Banking too much on their predictions could get you into trouble.
But this is a period of historically low interest rates. Taking advantage of them now could be one of the best ways for you to save money in the long term. Furthermore, they can only go up from here. If you aren’t taking advantage of them now, how much more uncertain will you feel when they are even higher?
Heleen Jacobsen
Broker of Record with InfoMarket Group GMAC Real Estate
www.infomarketgroup.com
