April 10, 2013


Weak employment could keep mortgage rates low

Central banks unlikely to tighten credit until economy improves


Despite the lukewarm data of the past few months Canadian housing sector stakeholders have done well in recent years. However one fear lingers: that interest rates, long at historically low levels, could bounce back up.


Earlier this month Atlanta Fed president Dennis Lockhart hinted as much when he said that America’s quantitative easing bond purchases (which have indirectly helped keep Canadian rates low) could wind up at “the end of this year.” The Bank of Canada, for its part, which has kept its policy rate at 1 percent for some time, has repeatedly expressed concerns regarding household indebtedness, and is thought to be willing to raise rates at the earliest opportune moment.


Changes in mortgage interest rates are crucial to housing, because they represent the single largest home ownership cost for most buyers. The good news (if it can be called that) from the latest jobs numbers on both sides of the 49th parallel, is that any interest rate increases are likely happen later, rather than sooner.


According to the Statistics Canada Labor Force Survey, the Canadian economy lost 54,500 jobs in March, a stunning amount, which brings net new job creation so far this year to below zero. “It doesn’t get much uglier than this,” notes Douglas Porter, the chief economist at BMO Capital Markets. The report’s underlying fundamentals are even darker. Private sector employment actually fell by 85,000 posts, which means that had governments not created new jobs, the overall picture would have been worse. In addition, the country’s unemployment rate rose to 7.2 percent.


The numbers from Canada’s largest trading partner were also disappointing. America’s economy created just 88,000 jobs during March, down from 268,000 in the previous month. That performance was below expectations, and far less than what is needed to get the US economy back to pre-recession employment levels.




However as Porter notes, there is some question as to what the bad numbers mean going forward. “Prior to today there had been a seeming disconnect between sluggish GDP growth and surprisingly perky employment gains,” said the economist. “While March’s hefty declines no doubt exaggerates weakness in the job market, renewed solid employment gains will be difficult to come by in a world of still soft domestic spending.”


This all leads back to mortgage interest rates, because employment gains are one of the biggest drivers of household formation and thus of new and existing home sales. These in turn are big drivers of ancillary purchases such as durable goods, furniture and decorations to fill these new homes. However with job markets performing so poorly, the Federal Reserve and the Bank of Canada will likely be unwilling to tighten money supplies, and thus choke of this key source of consumption growth, as this would in turn increase caution among businesses in taking on new workers.


The upshot is that mortgage interest rates, are unlikely to move much during coming months.




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