Mortgage Rates Hold Steady, Edmonton Market Sizzles

Some of the info in this article from the Edmonton Sun is old news, but it does put all the bits and pieces into perspective. The Bank of Canada did not raise the "overnight bank rate" this past week for the first time in a while. They think Canada's inflation rate has begun to slow. Alberta on the other hand is booming. New records are being set in the housing market every month, and oil is now more expensive than they had projected. Well... I don't want to ruin the whole article for you... here it is by Neil Waugh of the Edmonton Sun.

After seven consecutive tugs on his torque wrench, Bank of Canada governor David Dodge left his big spanner in his tool belt last week.

The overnight bank rate – which the consumer banks key on to set their mortgage and other loan rates – stayed put at 4.25%.

“The outlook for economic growth and inflation in Canada is largely unchanged,” Dodge said in his monetary policy report update that was kicked out of Ottawa at the end of the week.

Sure, the only thing that remains constant in the economic-forecasting game is change.

Unpredicted strength in the Canadian dollar was compensated for by stronger than expected consumer spending.

While consumers did their thing, “it should be more than offset by a weaker outlook for net exports, owing primarily to the recent strength in the Canadian dollar,” Dodge reckoned.

Not great news if you are an Ontario plant worker. But here in Alberta, oil and gas exports are strictly a sellers’ market. So it’s no worries.

Of course, all bets are off if the American economy tanks – which means exports will decline even more.

But it’s Dodge’s primary job to hold the line on inflation by manipulating the economy with his bank rate.

Except an economist can’t make predictions without building some best guesses into his model.

“Prices for crude futures over the projection period are slightly higher than in April,” he admitted. Averaging over $74 US-per-barrel. Although natural gas prices are “somewhat lower.”

Settle down

While the consumer price index cranked up to 2.6% in April and May because of high energy prices, Dodge feels it will settle down to the 2% range for the rest of the year – which is just about where he wants it.

This got CIBC World Markets economist Avery Shenfield to chirp, “Dodge has it right.” Then Shenfield made the bold prediction that the Bank of Canada will stand pat “for the balance of 2006 as the world unfolds roughly in line with the policy updates projections.”

Over at the Bank of Montreal, senior economist Sal Gautieri called it an “adamant decision.” But he also warned that “resource pressure, especially in Alberta” could force the bank governor off the sidelines to slay the inflation dragon.

Dodge himself confirms there’s another “upside risk” out there that could change his game plan radically. And that’s “momentum in household spending and housing prices,” which could have a negative effect on output and inflation. At least from a bank governor’s perspective.

Real estate-related inflation could be alive and well in Edmonton. The Edmonton Real Estate Board and the upstart ComFree group posted their record-setting results for June over a week ago.

Last week it was Canada Mortgage and Housing Corp’s turn to report the happy news.

CMHC senior market analyst Richard Goatcher described the city’s new residential housing market as setting a “sizzling pace.”

In fact the capital region “achieved its best June performance on record.”

The 1,547 housing starts was up an amazing 31% from June 2005. For the first six months starts are up 14%. Single detached developers dug more than 800 basements for the third straight month. So far this year, 4,562 single family homes have been started, up 25% from 2005. And that was a record year.

Strong fundamentals

Goatcher talked about “strong economic fundamentals” – like low inventories of new and resale houses, employment growth and net migration.

Add them all together and it puts single detached housing starts “well on their way to an new annual starts record,” Fearless Rick predicted.

Of course, Dodge’s hold-the-line interest- rate policy will do nothing to buck that trend.

The housing boost certainly caught Bank of Montreal analyst Lindsay Scott by surprise. She described the strong June starts nationally as “higher than expected.” But she predicted that Dodge’s previous rate hikes may already be having their effect.

“Despite the latest increase in housing starts,” Scott said, “activity is expected to moderate in response to past increases in mortgage rates.”

But if they don’t, Dave Dodge may have to reach for the wrench again.