Rates heading down

Posted September 2006

There's much discussion recently on the weakening U.S. housing market, and what impact this sector will have on the overall U.S. economy and consumer spending. The forecast for Real GDP growth in the U.S. in Q2 of 2007 is only 1.0%, versus the actual 2006 Q2 growth rate of 2.9%.

This forecast may seem a bit dismal, but on the upside, the U.S. labour income is back on the rise and may offset some of the fallout from the loss of home-equity purchasing power. Since wage growth is typically the way Americans have financed consumer consumption in the past, this strength factor should help assist the US economy in coming months.

Also, if we look at the U.S. Federal Reserve rate, it's at the highest level in 5 years, allowing the room to lower rates to help boost their economy. In fact, there's already a prediction of a 50 basis-point decrease of their benchmark rate coming over the next 9 months.

In comparison, the Canadian housing sector has not experienced the same run-up in prices, so the economic threat here seems to be far less than what the U.S. is currently experiencing.

But, our Canadian Dollar may hit 92 cents this year, which would (at least) hit the Ontario economy for a below-2% growth rate. In response, the Bank of Canada will want to exert downward pressure to keep our dollar lower, with a prediction of three separate 25 basis-point reductions in prime, spread out over the next 9 months or so.

These rate decisions, if they occur, will help keep our energy-driven CDN Dollar from doing damage to the Canadian economy.

Bond yields are also predicted to fall by over 50 basis points in the next 9 months. With all of these rate corrections to assist market downturns, the housing market is unlikely to see any rate increases for the next while, and potentially more rate reductions.