Interest rates

Interest Rates.

by Joe Samson, Calgary Realtor

WOW, what an incredible year we had, real estate prices have increased by 36.4% since last November, interest rates are on route to drop next year, and Alberta’s economy is humming away at an unprecedented rate and no end in sight for a real estate turnaround.

In my last newsletter I had provided a few fundamental points explaining some of the major influential factors that affect the real estate market and why there isn’t going to be a bubble in Alberta. This month I would like to share with you what is happening with interest rates and the driving factors behind it.

First things, first. Let’s take a look at why Bank of Canada needs to control the cost of borrowing or interest rates. In a well balanced economy a healthy economy’s growth is 3% per year otherwise known as the speed limit of the economy. If the economy is churning too fast than people will earn more and proportionally spend more as well. An unfortunate side effect of this situation is that the demand for certain products increases and causes greed among suppliers therefore prices will rise or inflation will occur. To keep inflation under control Bank of Canada adjusts its lending rates to keep the economy’s “speed limit” where it should be. In a circumstance where the economy tends to be underperforming (below 3% GDP) Bank of Canada will decrease the posted lending rate to stimulate spending and investing which will generate a higher demand for certain products and services therefore creating employment opportunities which will ultimately cause people to earn and spend more money and causing the economy to “speed up” again. When the economy is performing above the normal “speed limit” than the exact opposite is expected to happen to interest rates. Rates go up, people will earn and spend less, unfortunately some companies will have to lay people off due to lower demand for their products or services and the economy will eventually slow down until the interest rates are adjusted downwards again.

All right, but where in the world are we today and where are we heading to? One of the major misbelieves that I would like to iron out is that Canada isn’t as US dependant as many might think. Today the US is only responsible for 15% of the world’s combined economy where China and India makes up almost 50% of the total global GDP. In a nutshell it means that it’s extremely important to look at a global picture than just what is happening in our neighbour’s backyard.

For simplicity, let’s use oil as an example to prove my point and I think we all agree that it plays a very important factor in our local economy.

Not that long ago George W. Bush has admitted that the US is addicted to oil (by the way of which we have lots of) and they need to outsource more reliable exporters other than the Middle East and South America. As I had mentioned before, and have the world’s fastest growing economy with the highest amount of growing middleclass citizens. alone has 25 million people moving into the major cities each year that needs to purchase a vehicle, house, build factories etc. All this comes with a higher desire of consuming more commodities such as oil.

Not that long ago George W. Bush has admitted that the US is addicted to oil (by the way of which we have lots of) and they need to outsource more reliable exporters other than the Middle East and South America. As I had mentioned before, and have the world’s fastest growing economy with the highest amount of growing middleclass citizens. alone has 25 million people moving into the major cities each year that needs to purchase a vehicle, house, build factories etc. All this comes with a higher desire of consuming more commodities such as oil.

Absolutely nothing as far as Quebec and Ontario is concerned. Alberta is doing exceptionally well with a 6.9% GDP (remember 3% is normal) where in the East, they are toying with a recession if interest rates would go up. Quebec and Ontario is heavily manufacture oriented to the US market, however the US is slowing down therefore ordering less products from Canada due to lower demand and secondly due to a more expensive Canadian dollar.

This is a very unique dilemma to the decision makers at the Bank of Canada because they have to control the economy of Canada equally with the same principal which is adjusting interest rates. If they would decide the faith of the interest rates based on the Western economy it would be guaranteed to go up for the reasons I had discussed before. However if int

As a conclusion it only makes sense to make the decision (lower interest rates) that will create the best possible results to the most economically sensitive region within Canada

One might wonder about how Albertans are going to be able to afford to survive with prices escalating so fast? The fact is that Albertan households are in the best shape among the rest of the country. The average Albertan household has $250,000 of net assets compared to rest of Canada ’s which is $200,000. Most workers in Alberta had enjoyed a 6.3% increase in their disposable income where the rest of the country only saw a 3.9% raise. A general prerequisite for real estate prices to increase is that people need to earn more money before they can spend it on housing, this is known as the Housing Affordability Index. As obvious as it may sound this indicator plays a very important role of the prices of real estate. In Calgary the average family spends 37% of their pre-tax household income on housing vs. someone in Vancouver who spends 72% of their pre-tax earnings on housing.

The bottom line is that there is no need to worry about the housing bubble or prices not having any room to grow, or cost of living becoming too expensive because as strange as it sounds Calgary is still one of the most affordable Cities to live in and it sounds like it’s going to be even more attractive once interest rates begin to fall.

by www.JoeSamson.com

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