Why Interest Rates Are Going To Stay Low!

The panic is on. China is raising rates. Portugal is paying 8% on their bonds. Ergo, rates must rise in Canada. Ain’t going to happen.

The economic recovery in Canada and particularly in the USA is very fragile. It would not take much to put these economies back into recession. We have democratically elected governments. Inflicting economic pain on the voting population is not a wise idea. Especially when the USA is gearing up for Presidential elections in 2012 and Canadians are in the middle of an election that is likely to produce another minority government. This makes significantly higher rates very unlikely.

The USA has a massive debt. Canada has debt but Canada is far closer to balancing its budget than the USA is. As goes interest rates in the USA, Canada follows. The USA is Canada’s largest trading partner. Canadian’s can not allow their currency to become uncompetitive with the USA dollar. Canada can not buck interest rate trends in the USA.

It would be financial suicide for the USA to raise their interest rates and thus the amount of money that they pay. Large powerful sovereign governments (e.g. USA, China, Germany) get to decide how much money they are going to pay in interest. Why, would they increase their interest bill, especially the USA?

The USA will only raise rates, as a very last resort, and only if they face a flight of capital out of the country. This may happen in the USA. Not today but perhaps in 2 years if they don’t get their financial house in order. My prediction is interest rates are not going to rise appreciably over the next 2 years.

So, what does this mean to purchasers of real estate? Stay variable for now. You will save a ton of money. Keep your eye on the budget discussion in the USA (and Canada). If the Republicans (read Tea Party) make significant headway on reducing spending and putting the prospect of a balanced USA budget as a near certainty, then interest rates will continue to stay low. If they don’t do this, then the USA will face a loss of confidence and I would not have debt for all of the tea in China.

$15 Trillion Gone!

There is a large concern, especially in the USA that the deficits currently being ran by the Obama administration are highly inflationary. It seems obvious at first blush that they are. The projected deficit for 2010 is 1.17 trillion.

Immediately many people think, lets start buying inflation hedges. The best example being gold. The price of gold is the highest it has ever been and it is currently $1,345.44/oz.

On the other side of this is a huge deflationary hole of $15 trillion caused by the housing price collapse in the USA. The numbers look like this and the sources are Wikipedia and The American Institute for Economic Research (AIER).

USA Population 2010 310,467,000 Wikipedia
People/Household 2.59 AIER
% Own Homes 2008 64% AIER
% Renting 36% AIER
Average House Price 2007 $313,600 Wikipedia
Average Rental Price 2007 $156,800 50% Less
Price Reduction 2007-2010 50% Assumption
Net Loss $15,412,588,800,000
NB Price reduction in 2008 was 20% (Wikipedia). No numbers available for 2009 and 2010. Assume 20% also for 2009 and you are getting very close to 50% without considering any price drop in 2010.

Read 15 trillion dollars!

So, the question is which number has a bigger effect on inflation? A $15 trillion dollar reduction in real estate wealth in the USA or budget deficits of $1.17 trillion per year.

The take away is no inflation in the short term and very real prospects of deflation. The net is bet on at least 7 or 8 years of very slow growth. A $15 trillion hole is an awfully big hole to fill.

So, what does that mean for recreational property buyers? Unfortunately for developers no urgency on the part of buyers. Prices will remain stagnant for many years to come. So, the issue for buyers is how soon do you want to be enjoying that special recreational retreat?

The time tested approach to building wealth in Canada has been to buy real estate and wait. Not wait to buy real estate. I think the same can be said for recreational enjoyment. These years that you have now are often the most precious. We often don't realize that until we are looking in the rear view mirror. So, while selection is good, you don't have to offer on the first property. However, for the property that lines up with your needs, hopes, and desires make an offer and get it done!

Demand for Recreational Property in BC

It is official. If you thought it was difficult to find the perfect recreatonal property within a reasonable drive time of Calgary or Vancouver, it is going to get even more difficult.

BC is forecasted to have the highest population growth of any province in Canada over the next 25 years with Alberta a close second according to "Canadian Population Forecast". In 2009 in BC/Alberta you only had to compete with 8.2 million people to get the perfect BC property. In 25 years you will be competing with an additional 3.25 million people, or close to 40% more "wanna be" property owners.

Who cares? If you want your family, to have what you had or would like to have, the best time to buy real estate, especially recreational property real estate is now. Prices are down and selection is excellent.

Where Are We At In The Real Estate Cycle?

We seem to be going thru a real estate cycle very similar to 2000-2007 right now. Affordability of real estate due to the current very low interest rates is impressive. This was the same situation in 2000-2002.

The Canadian government can not raise rates significantly until the US does. The US is a long ways away from raising rates. A minority Canadian government can not raise rates in large increments without massively hurting Ontario. Very high Canadian interest rates compared to US interest rates would cause the Canadian dollar to spike, in turn crushing Ontario manufacturing. This would be political suicide.

A lot of savvy people are starting to understand that now is a good time to acquire real estate. In many markets we already see a sellers market. This has happened in Vancouver and many parts of BC. It is starting to happen in Calgary. Real estate agents are beginning to complain about a lack of listings in many jurisdictions. Throughout Canada, the Canadian Real Estate Association (CREA) is predicting a record year.

At this juncture, the major risk is a double dip recession. World leaders and regulatory authorities with their hands on the money and power levers are absolutely committed to avoiding this possibility. The lessons of 2008 and 2009 are fresh in everybody’s mind.

The rule in real estate is to buy and wait, not wait to buy. It is difficult to time the cycle perfectly. However, this may be the absolute best buying opportunity you will have for real estate for the foreseeable future.

Is Now a Good Time to Buy?

According to Ozzie Jurock, Western Canada's well known real estate guru, now may be a very good time. In the past, Ozzie, has been and is still quite keen on Kootenay waterfront real estate. With developers (including Arrow Lakes Developments Ltd) offering pre sales pricing on Galena Shores, savvy buyers should take a look!