Amid speculation of whether Canada’s real estate market, as well as the economy, is in for a bursting bubble or a soft landing, Stephen Poloz, Governor of the Bank of Canada, decided to keep the interest rate at its current one percent. It has been at that record low rate since September of 2010. The statistics are reviewed by the bank in meetings held every six weeks and for the 26th meeting in a row the decision was to leave the status quo. The Bank of Canada is still expecting the soft landing scenario but is concerned about inflation, an indication that the bank may be considering cutting the rate.
Perhaps they are looking at the loonie, which has been loosing ground against the U.S. Dollar for the past few weeks. For much of the last two years the loonie has been neck and neck with the greenback, sometimes surpassing the dollar in value. Today for every loonie you exchange for a U.S. Dollar you’ll end up with 93.66 cents USD. It hasn’t been this low since May of 2010.
Doug Porter from the Bank of Montreal noted that the Bank of Canada is apparently fine with that scenario. Perhaps there is something to that thought. A lower loonie means more exports because of the lower exchange rate. More tourists come to visit and spend. That industry took a hit when suddenly it became less expensive to have a staycation in the United States than to cross the northern border.
Canadians on the other hand found they could cross that border and buy goods and even real estate for bargain or near bargain prices. Suddenly money from the United States was staying home while Canadian money was going south. Not the best scenario for a nation’s financial health. Scotia Capital’s Andrew Pyle agrees, noting that Canada needs more exports. One way to accomplish that is to lower the value of the loonie, which seems to be happening.
What about that bubble? Most analysts agree with the soft landing scenario rather than the sudden effects of a burst bubble, but the phrase still keeps cropping up. Poloz has done his best to dispel the bubble scenario, favouring the soft landing where home prices slowly stabilize. Poloz does acknowledge the high debt issue, as well as the real estate markets tendency for imbalance.
The Filch Rating Service is one that disagrees with Poloz, noting that the housing marking within Canada is overpriced, possibly to the tune of up to 21 percent. That rating service advised the Bank of Canada to raise interest rates within the next year. The biggest concern is how foreign economic fluctuations and disturbances will affect the Canadian marketplace.
But Poloz noted that the economy in Canada is improving, which will create jobs. Banks are being more stringent in their borrowing criteria and overbuilding is no longer an issue. All of these items lend towards Poloz’s soft landing scenario, rather than the bubble theory. The head of the Bank of Canada actually placed odds on the outcome with his soft landing theory having a probability of between 60 and 80 percent.
via:http://edmontonrealestateinfo.com/canadian-market/
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