August 15, 2013
Interest rates heading up
Housing stakeholders have been casting a worried eye at steadily rising long-bond yields which have been pushing up mortgage costs during recent months. Rates on ten and 30 year issues have jumped 79.5 and 73.5 basis points respectively in Canada so far this year (as of August 14th). This in turn has boosted mortgage interest rates, which largely track the bond markets.
Homeowners, realtors, the construction industry and other housing sector stakeholders, all of whom have been relying on cheap interest rates, to breathe life into a sector which shows increasing signs of tiring, will all be affected if the trend continues. Interest represents the single largest home ownership cost and when rates rise, valuations and building activity suffer.
As usual, the events in Canada have been driven by developments south of the border, where bond rates have also risen. Comments by Ben Bernanke and other Federal Reserve officials, regarding the possibility of tapering the central bankís bond buying program have sent US long rates up by 95.8 and 84.2 points on 10 and 30 year issues. These in turn were the primary drivers of Canadian rate increases.
Tightening may not necessarily all bad
However buried in Bernankeís comments were so many loopholes and escape clauses, that first indications are that any tapering program is likely to be implemented slowly, over a long period of time, leaving markets plenty of time to adjust. For example while Bernankeís target for the US unemployment rate is coming in range, labour force data obscures the fact that as it lowers, the millions of Americans that have given up looking for work, will start trickling back into the workforce. This in turn will make the unemployment rate target harder to hit.
Bernanke also set a fairly ambitious inflation target that need to be reached, for an extended period of time, before the Fedís bond buying program is to end. Although US Labour Department data released today (August 15th) show that the 12-month inflation rate inched up to 1.7 percent in July, from 1.6 percent in June, that is still far from the US central bank chairmanís 2.0 percent long-term target.
However the most important takeaway from the US central bankís tapering talk can been seen in recent economic data, much of which has been pointing up. The countryís trade balance, manufacturing confidence numbers and spring economic growth have all been positive.
Thatís important because while interest rate costs are a key driver of Canadaís housing sector, they are only part of the story. The other part is the economy itself. True, job creation has ambled along at a snailís pace of 10,000 per month in the last six months, which as Avery Shenfeld an economist at the CIBC points out, is hardly enough to push down the unemployment rate.
However as data from our largest trading partner begins pointing up (an average of 189,000 jobs per month have been created during the past year there) this inevitably boost Canadaís economy too. All we need to know now is whether that boost will be stronger than the hit that from those rising interest rates.
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