Bank of Canada expected to keep interest rates stable

Among metropolitan areas, 21 of 34 saw declines in the value of construction with the steepest being in Vancouver.

A report by Reed Construction Data warned Monday Canadian home prices may be poised for a fall.

The report by the national construction industry comes in advance of the Bank of Canada’s decision today on whether to cut interest rates further to stimulate the weakened economy, raise them to rein in rising inflation, or keep them steady while it weighs the conflicting risks.

Prices won’t rise more than inflation this year and could fall as much as five per cent in inflation adjusted terms, says the analysis by the research firm’s chief economist Alex Carrick that paints a much darker outlook for the housing sector than the real estate industry is currently projecting.

“Nationwide, the Canadian Real Estate Association is forecasting home prices to increase by 5.3 per cent year over year in 2008 and 4.2 per cent in 2009, versus 11 per cent in 2007,” it noted.

“This is almost certainly too optimistic,” it warned. “The real, inflation adjusted, change in housing prices this year is more likely to be . . . between zero per cent and minus five per cent for the country as a whole.”

It is the second report in a week that warns that while Canada’s housing market has so far avoided the meltdown that has occurred in the U.S., and that has now spilled over into European and Asian housing markets, it will not escape unscathed.

“Canada has thus far avoided a housing adjustment,”’ Export Development Canada economist Peter Hall noted last week.

“But Canada’s turn may come soon,” he added. “Although imbalances in the marketplace appear to be small, starts are currently well ahead of requirements, and are unlikely to continue indefinitely at today’s pace.”

That view was echoed in the construction industry analysis.

“There are many signs that the pendulum may be starting to swing back toward lower volumes of new housing starts . . . through 2009,” it says, citing more spending caution due to high gasoline prices and a riskier job market, higher levels of unsold inventories facing builders, the slowdown in the migration of workers to Western Canada and falling home sales.

Further, it says that the pace of housing construction, averaging 223,000 a year since 2002, has been outstripping basic demand which it estimates to be in the order of 200,000 per year.

“Even with respect to one of the few positives for housing starts, low interest and mortgage rates, the outlook may be clouding over,” it observed. “It is unlikely that interest rates will be dropping further this year, given the increasing concerns that central bankers around the world are having about inflationary pressures.”

The Bank of Canada is widely expected to keep rates stable today as it continues to weigh the risks of economic weakness against the threat of higher inflation from rising oil and world food prices.

The central bank admits inflation is “headed higher” but also “sees slack emerging in the economy,” observed Avery Shenfeld, economist at CIBC World Markets which expects the bank will “sit on the fence for now.”

However, many analysts expect that its next interest rate move, when it comes, will be to start raising rates again. Inflation, now at 2.2 per cent, has risen above the central bank’s two per cent target and is expected to rise above the upper limit of its one-to-three per cent target range.

(prepared by The Vancouver Sun/Victoria Times Colonist/Canwest News Service)