September 11th, 2006

 

Blurb: Canadians like to attribute their success to brains and hard work. But our raw material wealth also has a lot to do with it.

 Canada’s raw materials party

By Peter Diekmeyer • Bankrate.com

 Last week’s decision by the Bank of Canada to maintain a second consecutive pause in its rate tightening campaign, following a similar move by the U.S. Federal Reserve Board, leaves Canada’s key rate at 4.25 percent, a full percentage point below the U.S. central bank’s rate.

 Despite this, the Canadian loonie continues to show unprecedented strength against the U.S. dollar. Furthermore, according to several experts, Canada’s economy is slated to outperform that of its southern neighbor next year. So what are Canadians doing right, that their southern neighbors aren’t? Well, sitting on a pot of gold, for one.  

That’s right. While many Canadians tend to attribute their success to their sharp minds and hard work, the bottom line is that much of our recent run of good luck has more to do with what we are sitting on, than it does with what we are doing.

 That’s because buried among Canada’s daunting geography, sits a wealth of natural resources that are the envy of the world. Whether it be diamonds, nickel, bauxite, oil and yes… gold too, whatever the world needs, Canada seems to have. Even better, with the rise of resource hungry emerging economies such as China and India, those resources are worth more than ever. But what many people don’t realize is the fact that those resources play a big role in keeping the cost of home ownership in Canada down.

 The Canadian dollar: a petro-currency?

Probably the most obvious example of Canada’s natural resources wealth is the huge amounts of oil it owns, much of it located in Western Canada. Alberta’s tar sands are thought to contain so much oil, that if it can all be recovered, it would constitute the largest reserves in the entire world. Even better, the prices we are getting for that oil are skyrocketing. So far in September they have traded at an average of $68.30 a barrel, compared to as low as $14.37 a barrel as recently as 1998.

 But oil isn’t the only commodity whose strong prices have benefited consumers lately. Gold, aluminum and nickel prices, have all skyrocketed in recent years. In fact according to Jean-Christophe Daignault, an economist with National Bank Financial, a typical Canadian investor’s primary market index is comprised of 45 percent worth of raw materials stocks. 

 Canada’s raw material wealth carries benefits far beyond the cash that they bring. “A soaring Canadian dollar is increasingly reflecting the country’s emerging role as an energy superpower,” comments Jeffrey Rubin, an economist with CIBC WorldMarkets. “Every rise in oil, natural gas or uranium prices bolsters the country’s terms of trade.”

 How the strong loonie affects house prices

A soaring loonie, which has been trading in the U.S. $0.90 range and which Rubin expects to spike to as high as $0.92, is good for Canadian homeowners for three reasons. Firstly, a strong loonie makes it cheaper for Canadians to fund import purchases such as foreign built cars, which leaves families with more money left over to buy or upgrade new homes. A stronger loonie also helps keep down the prices of imported raw materials that go into building and furnishing Canadian homes.  

But even more important, a strong Canadian dollar gives the Bank of Canada far more flexibility in keeping interest rates low. And low interest rates mean that homeowners’ monthly payments stay low. One common reason that central banks have to raise interest rates is so that they can maintain market confidence in their currencies’ strength and durability. But Canada’s raw materials boom has made such actions unnecessary and is one of the key reasons that Canada’s central Bank rate, which for many years was much higher than the U.S. Fed funds rate, is now lower.   

CREA and housing starts

Although housing starts fell slightly during August, they continue do well on a historical basis in large part due to Canada’s real estate wealth. For the first eight months of 2006, the number of housing starts increased by 2.7 percent compared to the same period last year, which in itself was already a fairly strong year.

 Existing home sales also remain strong. Although they fell slightly in July, the last month for which there are data available, the number of transactions made for the first seven months of the year remains ahead of the number made during the same period in 2005.

 The big question is how long Canada’s string of good luck will continue. China, one of Canada’s key raw materials markets has seen its economy grow in the double digit range for several years now and many analysts are expecting a cool off period. Other economies, notably that of the U.S. are also expected to lose steam, which could lead to a global slowdown. That in turn would affect raw materials demand.

 That would be bad news for Canada. All countries have people with brainpower and who are willing to work. And in an increasingly integrated world it’s getting easier for emerging economies, with low labor costs, to export that brainpower. But few countries, in fact probably none, have higher a per capita concentration of coveted natural resources than Canada does. So we may as well enjoy the party while it lasts.

 Sept. 6, No change

July 11, 2006, No change

May 24, 2006, +1/4%, 4 ¼% 

April 25, 2006, +1/4%, 4.0%

March 7th, 2006, + 1/4%, 3 3/4%

January 24, 2006, + 1/4%, 3 1/2%

December 6, 2005 + 1/4%, 3 1/4%

October 18, 2005 + 1/4%, 3.0%

Sept. 7, 2005 + 1/4%, 2 3/4%

October 19, 2004 +1/4% 2 1/2%

September 8, 2004 +1/4% 2 1/4%
April 13, 2004 -1/4% 2%

 

The Bank of Canada’s rate announcement schedule.

 

October 17, 2006
December 5, 2006

 Peter Diekmeyer (www.peterdiekmeyer.com) a freelance business and economics writer.

 

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