There are a number of economic headlines I’d like to review this week. The first are the sovereign debt crises in Turkey and Venezuela. Capital markets reacted negatively fearing possible economic contagion from these nations defaulting on their debt obligations. The Turkish Lira has dropped in value by 35% since the US imposed new tariffs leading to a massive sell off of the Turkish LIRA. The largest economic risks are to Germany and the European Union who hold the majority of Turkish debt. Add the uncertainty of Brexit negotiations and uncertainty of future US trade policies in Europe, markets have become volatile. On the flip side at a macro level, the German economy as well as the global economy remain healthy. The countries in question are small with Venezuela’s devaluation already widely priced into markets given their recent turmoil and runaway inflation. In response to the news, bond yields have stayed flat with no changes to fixed rates expected in the near term which is positive.
Closer to home Canada’s Manufacturing index for July came in slightly below market expectations. Rising gasoline prices and recent US tariffs are being attributed to the lower than forecast number. Overall the report indicates manufacturers remain upbeat about production levels for the next 12 months.
Rising fuel prices were also cited with Canadian inflation hitting a 7 year high of 3% last month. Statistics Canada released their report last Friday showing fuel and airline transportation costs have risen by 25.4% and 28.2%. Of interest to us is mortgage interest costs rising by 5.2% over the last year. we expect interest rates to continue trending higher on a gradual basis as our economy continues to perform well. Core inflation which excludes volatile items such as energy show inflation to be right at the 2% limit set by the Bank of Canada. In our view the Canadian economy continues to operate near capacity which makes the odds of another rate hike by the Bank of Canada a virtual certainty by the end of the this year. We will be watching the release of the 2nd quarter Gross Domestic Product figures on August 30th. If Q2 GDP come in stronger than expected, we may see another hike in the Bank of Canada overnight rate as early as next month.
Several clients have been asking us if they should wait to buy since R/E sales numbers and home prices have been falling this year. While this kind of advice is best determined on a case by case basis, there are some general guidelines we can share. When considering the value of waiting versus buying, we can’t look at the market in general terms. We need to consider your desired area, the number of available listings, the number of recent sales, and your price point. We also need to factor in the cost of continuing to rent versus making mortgage payments. If rents and mortgage payments are comparable, we account for approximately 40% of your mortgage payments going to repayment of principal. While these are some of the larger determinants to apply when thinking of buying or waiting, we strongly recommend working with Team RRP and a knowledgeable realtor to review your specific needs and establish a plan.
A specific example which is timely is student housing. Should your children rent or is it best to buy and own while they go to University? We have seen the pros and cons of such a plan. Some parents who bought before recent double digit appreciation in our market are thrilled! They advise the cost of their children’s education has been more than paid for by their equity appreciation since buying a condo for their children’s student housing. While this is true there are also nightmare scenarios where building condition (Special Assessments), location, and a short time horizons have led to losses.
We suggest the idea of owning versus renting should be explored in depth. Our team is here to advise on what mortgage option is best for you in Vancouver. Team RRP has built an extended network of professionals to help you make an informed decision.
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