Point two five – it’s only a tremor.
Sit back, relax and ignore it.
Sip your tea if you can.
|Kenton Friesen, Business Edge|
|Higher interest rates may eventually bring equilibrium to red-hot housing sector.|
The trouble is not with the tremor itself, it’s what it may point to.
Is there a real threat of dishes falling off walls and seismologists going nuts, or is it a barely perceptible oscillation merely meant to add a little variety to a workday?
The Bank of Canada’s quarter-point interest rate increase to 2.25 per cent last week would have been yawnable in the yo-yo market of the late 1980s and early 1990s (it bounced from 8.58 per cent up to 13.9 and then down to 4.41 in just over five years) and laughable in the crazed market of the early 1980s (with the rate cresting at 21.03 per cent in August of 1981 and swings of up to 1.66 percentage points in one month).
But this is different.
This puts an end to the investor’s fiesta of free-falling interest rates. (The central bank cut its overnight rate 10 times between January 2001 and January 2002, diving from 5.75 to two per cent in an attempt to keep the country out of recession.)
This takes us off the record-setting low that hasn’t been matched since 1955. Analysts predict the hike is the first of a series that could take us close to five per cent in 2003.
Now, if analysts were always right, we’d all be sitting pretty – locking when things should be locked, floating when there’s no fear of drowning.
But the unpredictable turns and timing in the markets are keeping Edmonton’s real estate investors guessing.
Case in point is Canada’s twisted initiative to raise its base rates ahead of any other industrialized nation, including our big brother to the south.
United States Federal Reserve chairman Allan Greenspan appears in no rush to raise U.S. interest rates, perhaps allowing the economy to gather some steam before shaking the system.
But here in Canada, the powers must feel we’ve gathered enough steam, though critics including Bank of Montreal economist Sherry Cooper said she is disappointed the increase has come at such an uncertain time.
The quarter point does not come as a complete surprise. In the second week of March, Bank of Canada governor David Dodge made some candid remarks about a potential increase in rates.
At the time, many analysts believed the first hike would come this fall, though some, such as Ted Carmichael, chief economist at J.P. Morgan Securities Canada Inc., speculated it would arrive as early as June 4 (the next pre-set date for rate adjustment).
Does this early move mean another step-up is coming in June?
What is the average mortgage holder to do? And what about the casual investor who owns some revenue properties and could lose a shirt with a wrong guess?
One thing’s for certain. When prime rates for mortgages sit at 3.75 per cent and banks are offering floating deals well below that, the option of going lower is pretty slim.
A clue that we were reaching the bottom came more than three years ago in December of 1998 when the chartered banks’ prime rate was 6.75 per cent and the five-year rate was 6.6, the lowest in recent history.
One month later, the five-year rate jumped to 6.9 per cent and has remained above prime since.
Richard Goatcher, the Canadian Mortgage and Housing Corporation’s senior analyst for Edmonton, sees the impact of the recent hike falling on first-time homebuyers who are buying insured mortgages at five per cent down and needing to qualify for minimum three-year mortgage terms.
“The long rates are moving up much more than the short rates,” says Goatcher.
“There are a certain number of buyers out there who are right on the margin – another increase in rates and they no longer qualify. Any time those rates kick up even half a percentage point there’s going to be a group of buyers who are now priced out of the market.”
The other short-term impact will be a shaking of the fence, knocking all those waiting for the lowest possible rates into buying mode.
But if rates continue to rise, the fence-shaking will be short-lived and the higher rates will eventually bring some equilibrium to Edmonton’s red-hot market.
It’s an eyes-wide-open time as money looks like it might start costing something again.