The Financial Post recently featured an article with the compelling title: “When will interest rates start to rise?”
It is a question that is on the minds of just about everyone these days especially current and prospective homeowners. With interest rates at historic lows, the housing market has been very active across the country. The latest survey from the Canada Mortgage and Housing Corporation (CMHC) shows that 90% of those surveyed believe a home is a good investment, and 70% feel that now is a good time to buy a home. Sales figures reflect this sunny outlook housing sales in June, 2009 were up 8.7% over May and up 17.9% over June, 2008.
Buyer’s optimism is fuelled by the Bank of Canadas (BOC) decision to maintain interest rates at 0.25%, and its promise to hold rates at that level until June of 2010. But can the BOC keep that promise?
It is that question that is at the heart of the Financial Post article. The key factor is inflation. If inflation increases, interest rates could go up. Those who believe that inflation is a real risk are predicting that interest rate increases made in response to inflation will be dramatic.
Of course, many experts hold the opposite view. They believe that because economic growth has been fairly slow, and because there is excess capacity in the economy, there will be less opportunity to increase prices. Wages will also stay in check, as workers scale back wage demands in order to hold onto the jobs they have.
So what’s the bottom line for new home buyers? While the predictions by economists that the recession is over and reports about major hikes in home sales bode well, they are not telling us the whole story. Keep an eye on other economic indicators, like the next Stats Can jobless report, due out this Friday. These numbers will tell us a lot about the state of the economy, the likely pace of recovery, and the potential for inflation to increase.
