The Bank of Canada Decision And How It Affects You

On Tuesday the Bank of Canada decided to leave its key lending rate unchanged at 1%, meaning that the prime rate for variable rate mortgages also will remain the same until at least their next meeting. I came across this article which I found very informative and talks about a number of various economic factors and statistics.

Keeping in mind I am a mortgage broker and not an economist, I will try to summarize what I think are the most important parts for most Canadians and Greater Vancouver residents. Its a long explanation, but I promise I do have a point.

The Canadian dollar is worth more than ever compared to the US dollar, currently near $1.05 US. This is great for cross border shopping (ask my wife), but is bad news for Canadian retailers and exporters to the US. The US government cannot give their money away for free right now, which is what they do with a US “prime” rate of near zero. So they are giving their money away via an economic policy called quantitative easing. Essentially they are just printing more money, which means that the Canadian dollar continues to be worth more since their is more US currency in existence and circulation.

With these factors causing the Canadian dollar to be valued higher and higher, it is difficult to see the Bank of Canada then raising the prime rate, causing the Canadian dollar to be worth even more US dollars again and further killing exports to the US.

I saw an election ad the other day that criticized the current government for a factory in Ontario closing down and moving operations to the US. In my opinion, this is a good example of what is happening all across the country to businesses who export to the US, who can no longer compete because their revenues are significantly less than before and costs are higher due to items like the cost of oil increasing.

While now there has been word that quantitative easing is coming to an end, Wall Street believes that the Federal Reserve rate will stay low for up to 2 years, which means the Canadian dollar still looks attractive compared to the US dollar.

What does all this mean for your mortgage and real estate?

On the negative side, the Canadian economy is going to have a tough time growing in these economic conditions with such a strong dollar for an economy that has always relied on exports. Therefore, you may not make as much money, employment growth may be slow. However, variable mortgage rates should stay low, and my opinion is that they will stay low past next July that the media has been advertising as the date of increase in rates.

What also occurs to me is that if real estate prices have been growing in such conditions, I can only imagine the kinds of real estate price increases that it will see in the time of a strong economy. It is scary to think of this in Vancouver where the statistics show an average price increase of 18% over the past year, and while the past low rates may have steadied home prices, when unemployment is down and economic conditions have improved, and the government thinks the conditions are right again to loosen up on high ratio lending (possibly), it could be a very good time to buy a home now for the appreciation in value that it could attain.

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