EFFECTS OF U.S. DOLLAR PARITY

On March 17^th 2010, trading of the Canadian dollar rose to just over 0.992¢ in U.S. dollars, bringing thoughts of Dollar parity with the United States.  The problems of the United States dollar are well known and documented.  Their greatest problem is the historic levels of debt in the nation.  Deficit spending is rattling the value of their dollar, because when the government needs money, they simply print dollars, degrading the value of the currency.  China has been happy to buy U.S. debt up to now, as the Chinese want to keep their Renminbi more or less pegged to the U.S. dollar.  However, the United States is planning on increasing their costs, and thus their deficit, not reducing it.  Another source of instability is whether or not China will continue this debt buying policy.  Many believe that dollar parity with the U.S. will be an extended period lasting at least many years.

Such a situation raises havoc in Canada as our exports to the United States look less attractive.  Canada already had problems convincing U.S. consumers to buy our products because of their debt problems.  This is another factor to compound the matter even more.  In fact, Canadians are more likely to buy U.S. manufactured goods because parity make them much more appealing.  Cross border shopping in New York State has become popular to those of us in South-Western Ontario, and I am sure in other parts of the country close the U.S. border as well.  The already reduced prices on the U.S. inventory of homes make them irresistible investments!  To us in Ontario, parity is a double whammy, as lower exports will mean, less good paying jobs, and also our real estate will have to compete with properties in the United States.

You may have heard that home prices are based on the previous sale price of a similar home in the same neighbourhood.  In practice, this is not the case, especially in a downward trending market.  Values of homes have more of a relationship with how many people are employed in the local area.  This is why the unemployment rate is so important to real estate investors.

Starting July 1^st 2010, the Bank of Canada will begin to raise its overnight lending rate, causing Canadian banks to raise mortgage rates.  Higher lending costs will remove some potential homebuyers from the market and will also begin to impede the mortgage service ability of some who have already purchased their home.  Many of them will forced to sell their home.  This process will not be an overnight thing, but the sale prices of homes will be forced downward because of this pressure.

Where will house prices end their fall?  I personally believe that the gains from spring 2009 to the present date are not caused because of improvements to the economic situation.  Wages have not increased, employment has not decreased, trade has not increased, and economic growth has not exceeded anything that we used to attribute to inflation.  So, the rise we have seen in home prices in 2009, I believe will be eroded.  Of course, I am speaking generally; there will be exceptions to this.  There are some asset types in Toronto that I am sure will hold their value, and there are also some property types in the GTA who have already seen an erosion of their home prices.  If you want to know my opinion on your specific case, please contact me I will be happy to perform this evaluation for you.  In general though, look for the average sale prices of homes to fall.

It has never been more important to use the services of a Realtor than in the current economic climate.  Whenever I assist a client purchase a property they know that the performance of the investment is well researched and fits into the goals for their life.  I always guide my clients to buy an asset that enriches their life.  Together, no matter the obstacles we will find the home of your dreams and a supporter for your future.