The party is over

Based on some information from Benjamin Tal, Senior Economist at CIBC, shared with us this week, one thought remains…if Prime Rates increases by 2.75% to 3% higher (target rate 5-5.25% Prime rate) by the end of 2011 and the US housing market remains in the crapper, how can we have such a difference in Prime rates and still have a solid economy in Canada?   Benjamin said Canada will be going “solo”, not sure if that bodes well for us.

Other things I learned from Benjamin:

1)  Strategic Defaults – US homeowners not electing to pay their mortgages because their home value is lower than their mortgage.  The Americans always come up with terms to make lack of financial knowledge sound sexy.  Who remembers sub-prime, NINJA loans, and the list goes on)  Click on Strategic defaults to find out the size and magnitutude of this potential problem in the US.

2)  10 Millions (yes million) have a negative equity position of greater than 20%.  What this means is that if your home is valued at $300,000, over 10 Million would have mortgages over $375,000 and greater on that same home…yikes!

3)  US Labour Market is still a long way from full employment.  April stats show the U.S. at 9.9% unemployment rate and that is only for the reported ones.  The Canadian unemployment rate in April was at 8.1%, we aren’t much different here, but when you consider population differences here, there are alot of unemployed Americans, how long will it take to dig out of that one?

4)  Greece is an indication of what to expect for other countries, taxes will increase/government spending will reduce.  I knew I shoud have been paying attention in that Economics class, I would have never thought Greece would have such an impact on all of us.  There is no doubt all countries have been spending like banshees to keep their economies going, but like any good party, there is the next morning.  Benjamin is simply stating our “next morning” is coming, brace yourself for tax increases and reduced government spending.

5)  Average home prices are overshooting by up to 7%.  Let me think this through, when there are 20 people bidding on the same home, doing this for 2 years or more, the prices may be a tad bid inflated…I buy that.  Good thing it’s only 7%, not over 20% like 10 million Americans.  The good news for Winnipeggers  is our Average home price is $207,342 vs $341,893 for the rest of the Canada, large urban markets have seen huge increases in prices the overshooting might be more in those markets according to my opinion.

6)  53% of homes have a mortgage.  Funny thing is Will Dunning, Economist at CAAMP said that 60% of homeowners have a mortgage, with average equity of 53% in his recent report.  In any event, a lot of people don’t have mortgages, good news for those that will inherit these properties over time, bad news for economic activity as most are sitting on the “dead equity” in their home.  I have a mattress that could use some stuffing too!

7)  Supply is rising while demand is falling.  This is the part of the Economics class I wasn’t blipping in, I understand this.  The temporary euphoria of low rates to stabilize the economy created a lot of home buying to take advantage of these rates, it only makes sense that when all the talk about rates increasing comes along, demand starts falling as most have jumped in the pool already, those with their toes in the water will have to make a decision if they like the temperature very soon.

8)  The Bank of Canada is taking interest rates to normal vs worrying about target inflation rate.  With inflation at 1.8% vs a 2% target rate the Bank of Canada will make a decision next week for the short term on rates.  It is hard to remember normal when that hasn’t been around for close to 2 1/2 years.  Thanks for the wake up call on the word “NORMAL”.

Benjamin, thanks again, you are a wealth of knowledge always keen to share your insights and perspectives.  the message for all of us, get ready for interest rate hikes, the party is over!