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World Economies Remain Strong


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World Economies Remain Strong

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World Economies Remain Strong

  1. 1. Mark Herman’s Economic Supplement Canada and World Economies Remain Strong Despite the US Credit Crunch Loose lending guidelines in the US allowed speculators and others to purchase multiple properties without properly qualifying. Most of these loans are categorized as “sub-prime” mortgages and typically had a very low interest-only payment (at 1.75%) for the first 2 years and then an “interest rate reset” for the final 4 years (to 8% or Prime + 2%) which is much too high for most owners to pay. Many US sub-prime mortgages are “Negative Equity” mortgages meaning the payment is not even enough to pay the interest and more is owed at the end of the loan than at the beginning. With the reduction of US house prices, 10% of sub-prime mortgages are now expected to go into foreclosure as the mortgages are now higher than the home value and the owners have little, if any, equity left. The World Economy • The four biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are the least dependent on the United States: exports to America account for just 8% of China’s GDP, 4% of India’s, 3% of Brazil’s and 1% of Russia’s. (See “US Not Driving Global Economy” above.) • Over 95% of China’s growth of 11.2% in 2007 came from domestic demand. China’s growth is widely expected to slow this year but to a still boisterous 9-10%. • Exports from China and South Korea to the US are down; however, total exports continue to rise as exports to developing nations remain robust as they trade amongst themselves and domestic spending within these developing nations has been, and remains very strong. The Canadian Economy The Canadian economy and housing market are faring much better then the US (see the four graphs on the next page.) Canadian mortgage lending guidelines have always been much stricter and the sub- prime market is substantially smaller. There are very few interest only mortgages and negative amortization loans are not available at all. Mark Herman Accredited Mortgage Professional Mortgage Alliance Mobile: 403-681-4376 Toll Free Fax: 1-866-823-1279 7142 36 Avenue NW, Calgary, Ab, T3B 1T8
  2. 2. Mark Herman’s Economic Supplement Canadian Economy Continued The Royal Bank of Canada recently stated that, “strong consumer and business spending will more than offset ongoing export-related weakness resulting from slower U.S. growth and the high Canadian dollar.” There has been a healthy 20 per cent improvement in Canada's terms of trade over the past five years, as strong demand for Canadian natural resource products from China and other emerging markets has produced a surge in prices. Combined with an unemployment rate that is at a 30-year low and solid wage gains, this has sharply boosted Canadians' disposable incomes over the past two and half years, helping fuel the pace of both consumer and business spending, the bank said. Mark Herman Accredited Mortgage Professional Mortgage Alliance Mobile: 403-681-4376 Toll Free Fax: 1-866-823-1279 7142 36 Avenue NW, Calgary, Ab, T3B 1T8
  3. 3. Mark Herman’s Economic Supplement Alberta Economy • 77 people / day move to Calgary, • 60% of all office building construction in Canada is in a 14 square block area in downtown Calgary, • Calgary’s office construction is greater than all of Vancouver, Winnipeg and Montreal combined, • In mid-October oil futures broke the $90/ barrel mark, • The Canadian dollar closed at $1.10 US – the first time that is has been valued so high since 1965. Alberta will supply a larger portion of the increasing world demand for energy as: • China’s middle class reaches 330 million people – equal to the population of the USA, • Mexico, Russia, and Saudi Arabia continue to grow so fast that they now consume a large portion of their oil production internally leaving substantially less for export to the rest of the world, • OPEC’s oil reserves continue to decline and there is more talk of the world having already reached “peak oil” production while demand continues to rise daily, • A tight supply /demand balance and high geopolitical risk from exporting countries including Nigeria, Iran, Iraq and Venezuela is providing support to crude oil prices at the US$80/bbl level. Short term supply shocks from storms in the Gulf of Mexico could send prices over US$100/bbl. Below: Prices for new and resale homes in Alberta are forecast to continue to rise. Mark Herman Accredited Mortgage Professional Mortgage Alliance Mobile: 403-681-4376 Toll Free Fax: 1-866-823-1279 7142 36 Avenue NW, Calgary, Ab, T3B 1T8