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U.S. rate hike expected to boost B.C. exports and Vancouver home prices

The United States Federal Reserve board has judged the economy to be strong enough to withstand an interest rate hike, and announced an increase 0.25-0.50 per cent today.
real estate
The interest-rate hike could drive Metro Vancouver house prices higher and increase interest from foreign buyers, even as some mortgage rates are expected to rise in response to the announcement. Photo Dan Toulgoet

The United States Federal Reserve board has judged the economy to be strong enough to withstand an interest rate hike, and announced an increase 0.25-0.50 per cent today.

The Dow Jones Index was up in reaction to the news, while the Canadian dollar dropped slightly.

Markets were widely expecting the move after various economic indicators showed the U.S. economy was finally gaining enough sustained momentum to make the move.

So how will this affect B.C.'s economy?

The interest-rate hike could drive Metro Vancouver house prices higher and increase interest from foreign buyers, even as some mortgage rates are expected to rise in response to the announcement.

That’s because the rate hike will strengthen the American dollar and push the Canadian dollar lower, say economists.

“Americans will find [Canadian] real estate cheaper,” said Thomas Davidoff, a professor of economics at the University of British Columbia’s Sauder School of Business.

“This will probably make the yuan [China’s renminbi] more expensive relative to the loonie, which will make it cheaper for Chinese investors, who are an important block here.”

Economists don’t expect to see any dramatic moves in the Canadian dollar or mortgage rates because the market has been “pricing in” the rate hike, which has been anticipated for months. 

While a low Canadian dollar is painful for vacationers planning trips outside the country and can make some consumer goods more expensive, overall it’s a good-news story for both the United States and Canada, said Ken Peacock, chief economist and vice-president of the Business Council of British Columbia. 

The Federal Reserve has been holding interest rates at historic lows for over seven years as the economy has recovered, much more slowly than initially thought, from the shock of the 2008 financial crisis and subsequent recession. 

Economic indicators, especially job-growth creation, are now showing the U.S. economy is healthy enough to withstand gradual rate increases. While the economy has been boosted by cheap money that bolstered consumption of consumer goods and real estate, Peacock said low interest rates are also “distortionary.”

“It encourages and supports consumer consumption, particularly in real estate,” he said. “It encourages people to go out and take big mortgages. So you tend to get these asset price appreciations in residential real estate, and we’re not seeing the same level of investment in the business sector.”

Bank of Canada governor Stephen Poloz has expressed concerns about Canadians’ level of household debt and has said exports now need to take precedence as the main economic driver for Canada. The current ratio of Canadian debt to disposable income is higher than it was in the United States immediately prior to the financial crisis, Peacock said.

The Bank of Canada lowered its interest rate twice in 2015 in response to the effect of low oil prices on the Canadian economy. The rate currently stands at 0.5 per cent; the Federal Reserve has adopted a rate range of 0 per cent to 0.25 per cent.

While money will be attracted to United States bonds and other investments, a lower Canadian dollar and a stronger U.S. economy should be good for Canadian exports, said Peter Hall, chief economist for Export Development Canada. 

“Our currency is a commodity currency, and commodities are all down,” he said. “At the very moment that we need it, we’re getting this break from the dollar.”

Peacock warned that while a low Canadian dollar provides an economic stimulus, manufacturers shouldn’t make the mistake of becoming overly reliant on the low dollar to give them an advantage.

“The low Canadian dollar hasn’t replaced the economic boost provided by oil production, but it’s exactly what you’d need to happen.

jstdenis@biv.com

@jenstden

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