In a scheduled announcement The Bank of Canada (BoC) said today that it is leaving its benchmark target overnight lending rate at 0.25% and reiterated that it will leave it at that level until the end of the second quarter of 2010.

This announcement was widely expected by most analysts, the same analysts who also scrutinize the wording of every one of these announcements looking for hints of what direction the BoC may take with interest rates in the near future.

With the key overnight rate being at its lowest level since last April it is just a matter of time before the BoC will have to raise interest rates.  The big question is when that will happen, especially for those brave people who are trying to time the market, be it the mortgage market or real estate market, ultimately the interest rates obviously touch all parts of the economy.

Some pundits argue that the BoC will not be able to wait until June before raising the key overnight rate because inflationary pressures in the economy will force their hand to act sooner.  Other market watchers argue that the current economic recovery is very tenuous at best and a premature increase in the interest rate would touch off another recession.

That being said, there was some language from today’s announcement that supported the BoC’s June 2010 target.  The BoC has suggested that it is reluctant to raise rates at this time due to the current strength of the Canadian dollar. 

In a nut shell, there is a relationship between interest rates and the exchange rates:  An increase in Canadian interest tends to make the Canadian Dollar more attractive to the foreign exchange markets.  Increases in the interest rates therefore tend to increase the Canadian Dollar in value relative to other currencies (most notably the US dollar).

The BoC’s concern stems from the current strength of the Canadian Dollar, which is currently nearing parity with the US dollar (this is due to many other economic factors above and beyond just prevailing interest rates).  Many patriotic Canadians really enjoy a strong Canadian dollar, be for national pride or the great shopping deals they can get shopping south of the border, however, a strong Canadian dollar is actually bad for the Canadian economy:  As the Canadian Dollar goes up relative to the US dollar, our exports become more expensive to purchase and foreign consumers therefore decrease their spending on Canadian goods.  Given that Canada derives the bulk of its GDP (gross domestic product, a measure of economic performance) from exporting goods (mostly to the United States); a stronger dollar is generally negative for the Canadian economy, therefore, the Bank of Canada is suggesting that the current interest rates will remain unchanged for the next two quarters.

I will touch on the topic of interest rates and real estate bubbles (or the lack of them) in my next post.

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

Sean

UPDATE:  Several press releases out the day after I posted this showing inflation in December 2009 was lower than expected, check the web for many articles or see details in this Bloomberg Article and at The Globe and Mail as well.

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