Statistics Canada reported today that the Canadian Economy increased in the first quarter of 2010 by an annualized 6.1%, putting it close to its pre-recession peak, compared to 4.9% growth in the last quarter of 2009.  This is the fastest rate of growth in the economy in the last 10 years.

With the Bank of Canada (BoC) on the eve of an interest rate announcement on June 1, 2010, most economists are calling for an interest rate increase to address the expanding economy, although some economists (most notably David Rosenberg) feel that the economy continues to send mixed signals about its direction over the next few months.  See today’s Globe and Mail for details.

Further to the Globe and Mail article, the largest driver of Canada’s economic expansion has been by far and away the real estate market, with statistics suggesting that Canadians are increasing their personal debt, although this has been done with people using more credit for homes but using less credit for everything else.

With the updated, and more stringent, mortgage borrowing regulations being enforced on April 19th of this year, many markets are starting to see a significant increase in listing inventory in the entry-level and mid level markets, which is certainly the case in Greater Victoria.

If the Bank of Canada were to factor in the effect of the HST on the real estate market (HST set to become law July 1st in BC and Ontario), they may well decide to wait another month before deciding to increase rates for the first time since the credit freeze of 2008.  Incidentally, if the BoC does decide to raise the overnight rate tomorrow, Canada will be the first of the G7 to raise rates since the 2008 crisis.

Finally, commodity prices have been shakey of late — when added to the spectre of a stronger Canadian dollar under rising rates (which decreases exports, which contracts the GDP), I can make many arguments against the BoC leaving the rates alone for another month.

That all being said, I also feel that a 25 basis point increase (+0.25%) in the interest rates shouldn’t be cause for concern.  We have been at “emergency level” interest rates for a very long time now — keeping interest rates at all time historical lows simply is not sustainable in the long term.  Interest rates will need to increase at some point, and they will, but rising rates should NOT be a cause for panic, no matter how ugly the media may make that sound.  If you speak to almost anyone who lived with the mortgage through the 70s and 80s, any rates below 10% look really, really good!

Whether rates are increased tomorrow or next month or later is a judgement call.  Perhaps a few small increases in the near future are warranted as it could give the BoC a tiny bit of latitude in a few months time should the HST prove to be as large a burden on the economy as many people think it will be.

Thanks for reading, as always, please contact us for all of your real estate needs in Victoria, BC.

Sean

The Victoria Real Estate Board (VREB) recently started sending brief surveys to REALTORS® who represented buyers of properties sold in Greater Victoria through the MLS® system in the preceding month.

The results from December were posted late last week.  In reviewing them, I noticed some interesting points:

• 31% of buyers were first time home buyers
• 52% of buyers were moving from one property to another
• 17% of buyers were buying the property for investment purposes

Of these metrics, I will be most interested to watch for any trends in the ratio of first time home buyers to all other buyer types over the next year.  I suspect it will remain relatively stable, even with an expected increase in interest rates later this year, given the relatively diverse economy base that we have in Victoria.

Another trend that will be interesting to watch is number of investors buying property for revenue purposes.  We have seen increased interest in revenue properties since last year as some people have been shy to enter (or re-enter) the stock markets after the meltdown of 2008.  Some people certainly have jumped back into the financial markets, which rallied very nicely in the last half of 2009, however, I have been hearing from many people who favour tangible assets — one that they can see/touch/feel such as land or art, versus equities or very low yields on bonds.

The financing aspects of the purchases in December were as follows:

• 51% financed via a conventional mortgage (at least a 25% down payment)
• 30% financed via a high ratio mortgage (less than 25% down payment)
• 20% paid cash (no financing)

The high ratio mortgages are normally first time home buyers, which pretty much matches up with the 31% of first time home buyers in the first category. 

I had clients who bought in December who were first time buyers who actually used a conventional mortgage, rather than take advantage of the first time home buyer’s program.  Their decision was based on the fact as they were buying a nearly new home, they would likely need minimal upkeep costs in the near term and they would rather have more equity in the home as a method of forced savings — even in the face of very low interest rates. 

Although many people would have likely chosen different financing methods in this circumstance, I thought I’d mention this particular case to illustrate that not every single first time buyer will use high ratio financing.  Note that the financing statistics do not sum to exactly 100% due to rounding.

I will keep up the review of these new monthly surveys and post any trends of interest here as I come across them.

Thanks for reading and please feel free to contact us for any of your real estate needs in Victoria, BC.

Sean