Now that Barack Obama has been re-elected and political gridlock continues in the US, there’s real worry that Washington won’t be able to reach a budget deal to avoid the fiscal cliff. The cliff refers to more than $600 billion in spending cuts and tax hikes that are due to automatically take effect on January 1st.
Now, it’s true that such dramatic cuts and tax increases would slash the 2013 US deficit, chopping it roughly in half to $641 billion. But economists warn that this benefit would be vastly outweighed by damage to the economy. Average US households could pay $3,500 more in annual taxes causing them to spend less, 3.4 million jobs could be lost driving the unemployment rate above 9%, stock markets could plunge sharply, and the US could fall back into recession.
Obviously, all this has consequences for Canada too, since the two economies are so closely linked. If the US were to go into recession, we’d soon follow. Resulting job losses could lead to reduced demand for new homes, lower prices and a rise in foreclosures. Commercial real estate could suffer even more quickly, since retail and office space are directly tied to consumer spending and business bottom lines. A recession could also hit small to mid-sized home builders hard as they struggle to access credit.
One tiny bright spot in all this doom and gloom could be Canada mortgage rates. Just the thought of the fiscal cliff is already driving long term bond yields lower. So if the cliff actually happens and sends Canada and the US into recession, mortgage rates would remain low for the foreseeable future.
However, the hope is that once US lawmakers fully appreciate the consequences of their stalemate, just maybe they’ll come up with a compromise that allows the economy and housing market to continue their slow, steady growth. If you’d like more information on how the fiscal cliff could impact your mortgage, feel free to call me today.
Before I go, tell me, does the ‘Fiscal Cliff’ concern you?
