Rates Are Headed Down
Just how great the economic fallout from a crumbling US housing market remains to be seen. Certainly US real estate is egregiously priced, either in relation o income or rents. Given the height of the run-up over the last decade, there seems to be lots of room to fall. US homeowners likely face an extended period of stagnation in US real estate values, if not outright mean reversion in housing prices.
But fortunately for the US economy, the consumer is now less dependent on housing wealth than at any time during this expansion, thanks to the recent upturn in labour income (see pages 4-5). And with the federal funds rate at its highest level in over five years, there is plenty of room for the Federal Reserve Board to cut interest rates and alleviate US households’ record debt-servicing burden.
Having not enjoyed the same run-up in valuations,the Canadian real estate market is far less at risk, or is at worst at risk of a much more modest correction. Like in the US, much will depend on the central bank.
Note the Canadian housing market crash of the early 1990s was as much about monetary policy overkill as it was about inflated property values. While housing market deflation is not nearly as great a threat north of the border as it is south of the border, there are other forces at play that will weigh heavily on interest rates.
Already over 90 cents, a soaring Canadian dollar is increasingly reflecting the country’s emerging role as an energy superpower. Every rise in oil, natural gas or uranium prices bolsters the country’s terms of trade, whether energy-consuming central Canada likes it or not. Even without any hurricanes in the Gulf of Mexico this summer, oil has averaged over US$70 per barrel in the wake of growing supply disruptions in Nigeria and sidelined operations at Prudhoe Bay. When a hurricane does hit the Gulf of Mexico, West Texas Intermediate is poised to break last year’s record high US$78 per barrel price.
In the meantime, uranium oxide prices have just set a new record high of US$52 per pound as soaring global electricity demand and mounting concern over CO2 emissions have spurred a construction boom around the world in nuclear reactors (see pages 6-8).
With economic growth in Ontario, the country’s industrial heartland, already faltering below 2%, it’s unlikely the Bank of Canada will allow the currency to move much higher. All the more so if the US economy weakens. While Canada’s monetary authorities can’t control global energy prices, they can still impact the Canadian dollar by adjusting their interest rate setting. Look for as many as three 25-bp rate cuts by the Bank over the next nine months to achieve that end, and keep an energydriven Canadian dollar from clobbering the rest of the economy.
[Click Here to view the CIBC World Markets - Monthly Economic Indicators report]
The Schacter Team - Langley Real Estate.