Softening Economy Should Slow The Rise Of Bank Prime. August 6th, 2010
Canada's Housing market is slowing and is expected to continue to slow as inventory rises
. Supply of resale homes has risen by 3% in the second quarter of 2010 while demand has fallen 9% during the same time period. The new CMHC rules that came into effect April 19th, 2010 combined with the HST caused a massive run up in prices with multiple offers being the norm in the first quarter of 2010 which added fuel to the decline in prices and the lack of willing buyers.
Housing sales in Toronto have fallen 34% In July from the previous month and prices have declined an average of 3.3%. Vancouver and Calgary where even worst and this is all happening when fixed and variable interest rates are extremely low. I would expect this trend to continue until at least the 2nd quarter of 2011.
Employment numbers for Canada and the US released today are also terrible with Canada expecting to gain 14k jobs but actually loosing 9k jobs and the unemployment rate edging up to 8%. The US was even worst as they expected to lose only 61k jobs but actually lost 131k jobs. We will most likely see one more interest rate hike this year since Carney seems to be committed to this but then I expect rate increases to stop.
Carney will have to wait to see going forward how the Canadian economy unfolds and for the US to start raising rates which at this point will not happen until 2012 and beyond. The Bank of Canada can only start raising rates again if the threat of inflation is there and the US starts it's tightening but from my perspective I don't see this happening and if deflation sets in we could see low interest rates for some time and more stimulus spending and easy money.
The two increases the Bank of Canada has done already has worked better and faster than anybody could have predicted so more interest rate increases could have a negative effect on the economy which nobody wants. People will need to feel stable with some security and housing prices will have to stabilize before they will start borrowing again and climbing interest rates will not provide this effect and news from the US that there housing market has not even hit the bottom yet will only cause more negative consumer confidence.
I was in Michigan last weekend helping to raise money for a children's hospital over there and I can tell you I did not see any signs of a bustling economy there. In fact the Shopping Mall was all but empty on a Saturday afternoon. If Americans don't start spending this will eventually spill over into Canada since they are our largest trading partner and further downward pressures which will ultimately create more belt tightening.