Lower bank rate could fuel boom

The Bank of Canada is expected to slash interest rates by as much as one per cent over the next 12 months, according to a recently released report from one of Canada's leading financial industry experts.

And that spells good news for the Victoria real estate market.

In his September forecast, CIBC World Markets chief economist Jeff Rubin predicts the central bank will drop its overnight lending rate - the one-day lending rate between major participants in the money market - by 100 basis points to 3.25 per cent by December 2007. Rubin expects the rate change to occur over a series of four 25 basis point reductions.

He blames a "badly sagging central Canadian economy" as the main reason for the forecast. "Even with a 100-basis point interest rate cut, the Canadian gross domestic product will grow by a disappointing 2.5 per cent in 2007."

However, there remains a marked difference in economic performance between Central Canada and British Columbia. Recent provincial government forecasts call for a 3.6 per cent economic growth in 2006 and a 3.1 per cent improvement for 2007. Continuing strength in the housing market coupled with high employment and healthy retail sales will contribute to the growth, says the Ministry of Finance.

Rubin acknowledges the disparity between East and West. "Surging energy and resource prices have pushed the Canadian dollar well beyond the tolerance of much of the Canadian economy," he said. "While this has significantly benefited Alberta (and B.C.), it has hurt Central Canada."

Victoria Real Estate Board president Scott Kendrew says any interest rate reduction will benefit Victoria's housing market. "It will encourage buyers because it will make housing more affordable."

Kendrew points out that interest rate adjustments are often triggered by the economic woes or fortunes of central Canada and are not reflective of B.C.'s or Alberta's booming economies. "Any corrective measure for Eastern Canada frequently makes our situation even stronger," he says.

Current VREB statistics for 2006 show a seven per cent increase on the six-month average selling price. While Kendrew hopes that trend will continue, he would rather not see a major spike in house prices. "For every boom there is a bust, and I don't want to see that happen," he admits.

On the investment side, Kendrew is equally optimistic. "For money market investors, lower interest rates are not particularly desirable and that should encourage investors to turn to the real estate market."