Image: Michelle Meiklejohn / FreeDigitalPhotos.net
November of 2009 marked the fifth month in a row that property prices rose that year, with a 0.4% increase in home sale prices. As the end of year came and went, the burgeoning housing market carried the Canadian economy over to 2010 on a positive note, boosting confidence in the real estate market and making the prospects for 2010 look very optimistic.
Many people have been predicting the rapid downfall of the housing market though, comparing the current situation in Canada to the one in the States that led to the mortgage crisis – with interest rates as low as they are, more new home-buyers are rushing to take advantage of the opportunity to buy a home, while economists fear that a large portion of new home-owners, as a result, will not be able to pay their mortgage once interest rates inevitably increase again. In response to these fears, some analysts are calling for an increase in interest rates in order to cool down the hot demand for property, but the Bank of Canada says there’s no need to take any prohibitive action. In fact, the bank says, raising interest rates at this point could stall the economic recovery as the housing market is one of the country’s leading recovery factors.
According to the bank, the increases in house prices are not out of line with current supply and demand. Property bubbles, like the one that burst in the U.S., triggering a global economic downturn, are most often driven by credit expansion. The current swell in the market, on the other hand, is due to more temporary factors, like the incentive offered by the low interest rates and the built-up demand for property.
Because home sales and prices are being driven by these factors, the Bank of Canada states that while the housing market needs “vigilance,” it does not need “alarm.” The current low interest rates and demand for property are not stable factors, but an increase in interest rates at a time when inflation is expected to remain low for at least another year and a half would drive down economic growth and delay economic recovery.
To that end, the Bank of Canada has stated that it will keep its benchmark rate at the current record low of 0.25% until July of this year.
Heleen Jacobsen
Broker of Record with InfoMarket Group GMAC Real Estate
www.infomarketgroup.com
