Financial Update
One of the big questions on most economists' mind nowadays is how much the U.S. Federal Reserve will cut interest rates. The U.S. still accounts for a quarter of the world's GDP and due to our globalized world a slowdown in the United States will impact everyone else as well, including us here in Canada. If the Federal Reserve believes that home prices in the U.S. will fall further significantly and wants to prevent a recession induced by falling home prices, the only option seems to be a sizeable decrease in interest rates. Falling interest rates in turn could lead to a rally in stock and bond prices benefiting investors who stay invested during these turbulent times. And if you are able to add to your portfolio, you could be reaping extraordinary gains.

Economic News
The Canadian economy just keeps chugging along thanks to still strong global demand for our commodities. Our economy grew at a 2.9% annual rate in the third quarter of 2007, only moderately slower than the 3.5% second-quarter pace and first-quarter 3.8% increase. Along with these strong GDP numbers came strong employment as well: 63,000 and 42,600 new jobs were created for the months of October and November, respectively. Yet in the backdrop of these strong economic numbers we have an inflation figure that is well behaved: the core CPI for October and November came in at 1.8% and 1.6%, respectively. The fact that these recent inflation figures are below the Bank of Canada's 2% target gives some room for the Bank to drop rates as needed to fend off any lurking recessionary forces in wake of the U.S. housing market-induced credit crunch.

Housing Market Highlights
The Canadian housing sector continues to outperform expectations, and is in stark contrast to its U.S. counterpart where recession continues unabated. The November housing start figure came in at 227,900 and that is virtually unchanged from October's 227,600. There was a noticeable increase of housing starts in Ontario. The year-to-date average now sits at 231,200 compared to 229,800 for the same period last year, and these numbers are quite strong on an absolute basis. It is expected that the housing sector will remain robust in 2008, although the level of activity should be less than what it was for 2006 and 2007.

Interest Rate Dynamics
On December 4th the Bank of Canada decreased interest rates by 0.25%. This move from the Bank translated into a corresponding decrease in the Prime Rate at the banks, lowering the rates on variable rate mortgages and most line of credits. Based on current economic data, it is widely expected that the Bank of Canada will lower its key lending rate one more time by another 0.25% sometimes in early 2008. There was no corresponding decrease for fixed rate mortgages. In fact the opposit held true. Fixed rates have been on the up and up for the past few months and it is not expected that they will come down significantly. In this rate environment a variable rate mortgage where the interest rate is tied to the Prime Rate may make more financial sense.

As for the rates, fixed mortgage rates have increased over the past few weeks. Currently the best 5-year fixed rates are at the 6% range, while the best 10-year rates are well over 6%. Variable rate mortgages are over 5%. The Prime Rate is currently 6.00%. A 1% interest rate differential on a new $100,000 mortgage equals to about a $55/month difference in mortgage payments.

Arpad's Take
The Prime Rate will decline from 6% in 2008. (Last changed: December 2007)

Fixed-rate mortgage rates peaked in the second half of 2007. (Last changed: December 2007)