Make 2007 the year for your Shuswap Salmon Arm real estate investment ..... "Analysts believe mortgage rates will fall"

Many experts believe mortgage interest rates, still near their historic lows, will fall as much as one per cent within the next year.

Mortgage rates are generally tied to bond market yields, which in turn are tied to the overnight lending rates that central banks such as the Bank of Canada and the United States Federal Reserve charge their best clients, such as major banks.

"The single most important thing in the entire world is the U.S. short-term interest rate, determined by the Federal Reserve," said Brad Willock, senior portfolio manager with RBC Asset Management Inc.

Central bank rates in North America hovered around 20 per cent in the early 1980s, then fell to their lows in the wake of terrorist attacks in 2001, touching 1.0 per cent in the U.S. and 2.0 per cent in Canada. Overnight rates gradually crept up until June of 2006, remaining on hold since then at 5.25 per cent in the U.S. and 4.25 per cent in Canada.

Financial institutions, which often try to anticipate central bank moves, reduced long-term mortgage rates slightly in recent weeks, putting fixed rates around 6.5 per cent for terms from six months to five years, and variable rates around 6.0 per cent.

In its March meeting, the Federal Reserve kept its rate unchanged at 5.25 per cent, sending out a mixed message that inflation isn't a big concern but a recession is possible.

"The unemployment rate in the U.S. is at a 30-year low, around 4.5 per cent, and the U.S. central bank won't cut rates when it's so easy to get a job," said Willock. "But right now it appears to us, given inflation and the economy, that this rate shouldn't be this high much longer. We anticipate the rate will fall in May, June or July, down a point [one per cent] or so over the next year or 18 months."

Benjamin Tal, senior economist with CIBC World Markets, agrees.

"We see relatively settled mortgage rates over the next few months, with the potential of actually lower short-term rates, given the slowing of the U.S. economy and Canadian economy," said Tal. "Best-case scenario is no change over the next few months, with the real possibility of actually cutting rates. The risk of higher rates at this point is moderate at best.

"Longer-term, we believe interest rates will remain relatively low and the next peak will be lower than the previous peak."

Former Federal Reserve chairman Alan Greenspan recently explained that the new global economy is keeping prices down, which keeps inflation in check and prevents central banks from raising rates.

"If you're happy with your mortgage rate, that's compliments of China," said Tal. "I think they've been having a significant impact in mortgage rates over the past few years by keeping inflation at bay. The anti-inflationary aspect of the globalization of the North American economy means that labour does not have the same bargaining power that it used to have, and companies don't have the same pricing power."

Also, Tal thinks the central banks have made wise decisions.

"The good news is that, as opposed to previous cycles, for the first time the Fed and the Bank of Canada did not overshoot, did not raise interest rates too much. This time inflation was very well behaved, despite the booming oil markets."

Nick Majendie, chief portfolio manager with Canaccord Capital, also sees rates falling.

"We think the economy is weakening quite rapidly and could even be close to a recession as we speak," said Majendie. "The key reason is that the U.S. is already in recession in the housing and auto sectors. You haven't seen the bottom yet, in our view.

"I think there will be enough evidence of economic weakness by the middle of the year that it will give them the cover to reduce rates. The Fed fund rate is 5.25, I see it staying at 5.25 until the middle of the year, then the Fed reducing that rate by one per cent through to March of '08. The cost of labour has come down globally, but as China and India get more middle class, their wages will go up and that will put upwards pressure on inflation globally."

Aron Gampel, deputy chief economist with Scotiabank, feels rates will fall a bit but could spike at the hint of any bad news.

"Our view is that interest rates are going to continue to move lower, probably half a percentage point, potentially even more, between now and the third quarter or year end, when they bottom," said Gampel. "We've got the Bank of Canada easing twice, once in the third quarter and once in the fourth quarter.

"If you're looking at mortgage rates, the balance is shifting to slightly lower, and at worst they will stay the same. But these markets can shift on a dime and there are a lot of risk factors out there -- a sharply weaker U.S. dollar, which could occur, could force interest rates up and limit how much rate decline you get in long-term mortgage rates."

His approach is that an economist "should forecast often."

One observer who feels rates won't fall this year is Kate Warne, Canadian market strategist with Edward Jones.

"I think on both sides of the border the central banks will leave rates unchanged for quite awhile," said Warne. "For some period of time, and I'd say at least through 2007, we're looking at really no tendency towards either rising or falling rates until we see either the economy weaken more or grow stronger.

"On both sides of the border the things to watch are what's happening to long-term rates, and we see them basically not moving a lot, and the second thing is to keep watching jobs. As long as job growth is solid in both countries, then consumers have income and continue to spend."

(prepared by Ray Turchansky, CanWest News Service/ Vancouver Sun)