Bay Street economists met last Thursday to discuss these indicators of Canada’s financial state:
1) The Canadian Real Estate Association reports resale home prices decreased 6.2% last month, in comparison to September 2007. The average price is now $315,461, compared with $336,321 last year.
2) Statistics Canada reported factory sales dropped 3.7% in August because of a decreased demand for Canadian commodities in the U.S.A.
The economists are urging the Bank of Canada to reduce the prime interest rate by 0.25% next Tuesday, October 21. The economists want the Government of Canada to use deficit spending to avert a recession.
Dr. Sherry Cooper is the chief economist for BMO Capital Markets. She said, “The boom has turned to bust.” Scotiabank’s economists agree with her, predicting 0.5% growth for Canada’s economy this year and shrinkage of 0.2% in 2009.
However, this is not nearly as deep a recession as is expected in other countries hit by the American mortgage meltdown. The C.D. Howe Institute’s Monetary Policy Council suggests “a government guarantee of interbank lending” would also bolster Canada’s economy. (The government already started this process by buying $5 billion worth of mortgage securities from Canadian banks today.)
Canadian banks are urging home buyers to lock in their variable mortgage rates, but this is probably not in your own best interest, because the 5-year closed rate at the Big 5 banks is now 7.20%.
Consider that your bank may be urging you to lock in because about one-fifth of the variable mortgages the banks negotiated recently are now unprofitable. Banks offered a 0.6 percentage point discount on variable mortgages up until 2 weeks ago. Today, you’ll pay 1 percentage point above the prime rate. So, if you are lucky enough to have a 3.35% variable rate mortgage, why jump to a 5.79% closed mortgage?
In most cases, you will be better off keeping the variable rate until its term expires.
Remember, most banks did not pass along the full 0.5 basis point interest savings to you last week, when the Bank of Canada dropped its rate. Banks are in business to make a profit, not to nurture and protect you.
