The Globe and Mail Published on Thursday, Apr. 29, 2010
Interest rates are rising – we all get that – but it looks like the Big Banks are pushing things a bit with mortgages.
After a pair of increases in the past two weeks, the posted Big Bank five-year fixed mortgage rate now stands at 6.25 per cent. Does that seem high? In fact, it’s just half a percentage point below the average level for the past decade.
We’re supposed to be in the early phase of what could be a long cycle of rate increases. The Bank of Canada hasn’t even started raising its overnight rate, which sets the trend for borrowing costs other than fixed-rate mortgages. The overnight rate could very well start rising June 1 (that’s the central bank’s next rate-setting date), but even then it’s not dead certain that rates will move.
Mortgage rates are linked to bond yields, which have been rising for a while now. But mortgage rates have been moving faster.
Thanks to the always helpful Bank of Canada online interest rate database, we know that the yield for five-year Government of Canada bonds has averaged 4.03 per cent since the beginning of 2000. Five-year Canada bonds had a yield of 3.02 per cent yesterday, which means they’re three-quarters of the way back to their average of the past decade.
The 10-year average for posted five-year fixed-rate mortgages is 6.75 per cent, which means this rate is almost 93 per cent of the way back to its long-term average. There is zero consensus that things have normalized after the financial crisis, but the banks are just about all the way back to pricing mortgages as if they were.
And, no, this “go big or go home” attitude to rates has not been extended to guaranteed investment certificates, which are one source the banks use for the money they lend out as mortgages. The current posted Big Bank five-year GIC rate tops out at 2.1 per cent, or 63 per cent of its 10-year average rate of 3.31 per cent.
John Turner, director of mortgages at Bank of Montreal, said the banks are simply reacting to the rising rate environment in setting borrowing costs for mortgages.
“It’s not about any of us trying to get ahead of things, because the market won’t let us,” he said. “It’s a very competitive market.”
Mr. Turner cited two factors that have driven fixed-rate mortgages lately. One is an effort by the banks to anticipate higher bond yields and avoid repeated increases in mortgage rates. “We don’t like to move rates because it causes dissatisfaction, and it causes disruption in the sales force.”
The other driver of higher mortgage costs is the rising cost of providing interest-rate guarantees for people who are smart enough to lock in a rate as soon as they start looking for a home. Mr. Turner said these costs haven’t been a factor much in recent years because the general trend for interest rates has been downward. Now, with rates on a definite upward path, rate guarantees are a bigger consideration for lenders.
Banks won’t say this out loud, but their own internal business considerations help set mortgage rates as well. Sometimes, this works in favour of borrowers. In February, for example, the banks lowered mortgage rates even as bond yields rose a tick or two. Now, the banks seem to be in a mood to emphasize profits over market share or, as it’s known in bank land, widen spreads between what they charge and what they pay.
“The banks normally do this when interest rates are moving,” said David McVay, a financial services industry consultant with McVay and Associates. “But their retail profits have been pretty strong, and they widened spreads quite well when they put up line-of-credit rates [in 2008-09]. That was a big boost to profits right there.”
Mr. McVay seconded Mr. Turner’s comment about the mortgage marketplace being too competitive for banks to be out of line with their mortgage rates. In fact, there is a huge variation in rates right now that demands some shopping around from homebuyers and people facing renewals.
One of the better deals in the mortgage market today is BMO’s offer of a 4.35-per-cent five-year, fixed-rate mortgage. You can’t take an amortization longer than 25 years with this mortgage, and there’s less room to make pre-payments than there is with a standard BMO mortgage. But a glance at the websites of several mortgage brokers yesterday suggests you won’t find a lower rate.
Thursday, April 29, 2010
Tuesday, April 27, 2010
Mortgage rates on the rise again
Garry Marr, Financial Post
A new survey says more than four out of five home buyers feel comfortable with their debt, but another hike in interest rates might get Canadians squirming next time they're polled.
Canada and Mortgage and Housing Corp. surveyed 2,503 mortgage consumers between Feb. 11 and Feb. 28 and found 81% were comfortable with their current debt levels. However, the survey was done before three successive hikes in interest rates that have pushed the five-year, fixed-rate, closed mortgage from 5.25% to 6.25% in less than a month.
"Rates were low throughout most of the time [of the survey]," said Pierre Serré, CMHC vice-president of insurance products and business development, adding it was unclear whether the 81% figure might fall because of the hike.
Based on an average Canadian home-sale price of $340,920 in March and a 5% down payment, the minimum allowed, mortgage payments for a five-year, fixed-rate product have climbed almost 10%.
As it has throughout this rate-hike cycle, Royal Bank of Canada got the ball rolling Monday by adding another 15 basis points to its fixed-rate product. Toronto-Dominion Bank was next, with most of banks expected to follow shortly.
The hike means that a typical Canadian homeowner with a 25-year amortization with that $340,920 home and 5% down is now paying $2,120.54 per month in mortgage costs, up sharply from the $1,930.03 it was costing them before the latest hike in rates. The dramatic shift is likely once again to push people back toward a variable product linked to prime.
The same mortgage based on the current prime rate of 2.25% would cost only $1,410.84 to carry. Still, many economists predict the Bank of Canada will begin raising its rates as early as June, lifting the prime rate.
The survey also found homebuyers are relatively cautious when taking out their mortgages. Only 20% of them took out mortgages based on amortizations of longer than 25 years. CMHC also said 68% of consumers plan to pay off their mortgage sooner than current amortizations.
"In talking to some lenders I've heard of lots of people who get extended amortizations but accelerate their payments," Mr. Serré said.
The survey came out the same day as new statistics from Re/Max which show the high-end of the housing market continues to soar. Re/Max surveyed 13 markets in the first quarter and found records for high-end homes sales in nine of them.
Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada didn't think the latest hike in rates would do anything to slow the market. "It's still minor. Interest rates overall, as far as I'm concerned, are still at historic lows," he said. "Are they climbing up? Yes. It's time to consider locking in. Are they going to skyrocket? I don't think so."
Bernice Dunsby, Royal Bank's director of home equity, said the one percentage point rise in rates was not that large a leap on a historical basis.
"It has been widely anticipated that rates would be on the rise. The cost of funds just continues to raise," said Ms. Dunsby. "The thing our clients are looking for is options that provide additional rate protection."
She said customers have been opting for mortgage products that divide their debt in half, some of it going long and some of it going short. But the percentage of customers just going short continues to slide with variable rate products becoming less popular at Royal Bank.
A new survey says more than four out of five home buyers feel comfortable with their debt, but another hike in interest rates might get Canadians squirming next time they're polled.
Canada and Mortgage and Housing Corp. surveyed 2,503 mortgage consumers between Feb. 11 and Feb. 28 and found 81% were comfortable with their current debt levels. However, the survey was done before three successive hikes in interest rates that have pushed the five-year, fixed-rate, closed mortgage from 5.25% to 6.25% in less than a month.
"Rates were low throughout most of the time [of the survey]," said Pierre Serré, CMHC vice-president of insurance products and business development, adding it was unclear whether the 81% figure might fall because of the hike.
Based on an average Canadian home-sale price of $340,920 in March and a 5% down payment, the minimum allowed, mortgage payments for a five-year, fixed-rate product have climbed almost 10%.
As it has throughout this rate-hike cycle, Royal Bank of Canada got the ball rolling Monday by adding another 15 basis points to its fixed-rate product. Toronto-Dominion Bank was next, with most of banks expected to follow shortly.
The hike means that a typical Canadian homeowner with a 25-year amortization with that $340,920 home and 5% down is now paying $2,120.54 per month in mortgage costs, up sharply from the $1,930.03 it was costing them before the latest hike in rates. The dramatic shift is likely once again to push people back toward a variable product linked to prime.
The same mortgage based on the current prime rate of 2.25% would cost only $1,410.84 to carry. Still, many economists predict the Bank of Canada will begin raising its rates as early as June, lifting the prime rate.
The survey also found homebuyers are relatively cautious when taking out their mortgages. Only 20% of them took out mortgages based on amortizations of longer than 25 years. CMHC also said 68% of consumers plan to pay off their mortgage sooner than current amortizations.
"In talking to some lenders I've heard of lots of people who get extended amortizations but accelerate their payments," Mr. Serré said.
The survey came out the same day as new statistics from Re/Max which show the high-end of the housing market continues to soar. Re/Max surveyed 13 markets in the first quarter and found records for high-end homes sales in nine of them.
Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada didn't think the latest hike in rates would do anything to slow the market. "It's still minor. Interest rates overall, as far as I'm concerned, are still at historic lows," he said. "Are they climbing up? Yes. It's time to consider locking in. Are they going to skyrocket? I don't think so."
Bernice Dunsby, Royal Bank's director of home equity, said the one percentage point rise in rates was not that large a leap on a historical basis.
"It has been widely anticipated that rates would be on the rise. The cost of funds just continues to raise," said Ms. Dunsby. "The thing our clients are looking for is options that provide additional rate protection."
She said customers have been opting for mortgage products that divide their debt in half, some of it going long and some of it going short. But the percentage of customers just going short continues to slide with variable rate products becoming less popular at Royal Bank.
Friday, April 23, 2010
Canadian economy expanding quickly, but will soon trail G7 countries: Carney
Julian Beltrame, THE CANADIAN PRESS
OTTAWA - Canada is leading the other G7 countries out of recession with the fastest growth in a decade, but it will be trailing those countries in a few years, the Bank of Canada said Thursday.
The central bank's latest economic outlook released Thursday makes several bold predictions, including that Canada's fast start out of last year's slump is already slowing, that the housing boom is fizzling out, and that the country's long-term growth prospects are discouraging.
And governor Mark Carney is cautioning markets not to be so sure Canada's central bank will raise its key interest rates in a matter of weeks.
On Tuesday, the Canadian dollar shot up more than 1.5 cents to above parity with the U.S. currency after the Bank of Canada said it was dropping its promise not to raise rates before July at the earliest.
But Carney told a news conference Thursday that there is still considerable risk in the global economy, or to anticipating his next move.
"There is nothing pre-ordained from this day forward," Carney said to a question on interest rates.
Most economists interpreted Tuesday's statement as an alert to plan for higher rates in June, but some argued Carney had left himself plenty of wiggle room.
"The Bank of Canada has limited scope to raise interest rates in the next several months," said Brian Bethune, chief economist with IHS Global Insight.
"While we may see one or two token moves to raise the overnight rate by a quarter of a point in the June to October window, action to raise rates will be very limited" by the fact doing so would further boost an already strong dollar.
In Thursday's report, the bank said it is planning for the dollar to hover around parity for the next three years and listed it as a major impediment to strong growth because it will make exports less competitive in global markets.
The dollar hovered just above and below parity throughout the Thursday trading day.
The report says Canada's economy expanded by 5.8 per cent in the just past quarter, the largest advance since 1999, but growth will likely slow to 3.8 per cent in the April-June period, and to 3.5 per cent the rest of the year.
It gets worse. Economic growth will average 3.1 per cent in 2011 and 1.9 per cent in 2012, about half what it will be in the United States and lower than both Europe and Japan.
"There is some good news here, our economy has returned to growth," said Carney, noting that more Canadians will find jobs and those who have had their hours reduced are more likely to be called in to work longer.
But as he has in the past, Carney warned that the longer-term prospects for the Canadian economy is modest unless the corporate sector starts investing heavily in new machinery and equipment to become more productive.
Canada is also facing a bigger issue of an aging workforce than the United States, exacerbating the divergent trend line between the two economies.
"This is in the hands of the private sector," Carney said. "If we want to grow faster, we're going to have to work smarter, invest better, (and) build new markets."
The bank said it fully expects businesses to step up investment this year, but it could hardly get worse - business investment actually declined in the fourth quarter when the rest of the economy was rebounding.
A big reason the economy has shot out of recession is that Canadian consumers, particularly home-buyers, have "front-loaded" their purchases because of record low interest rates.
But Canadians that bought homes in the past six months, or took advantage of the now defunct home renovation tax credit, won't be doing so in the future, hence bringing an end to the housing sector boom.
Housing, which is contributing about 0.6 per cent to economic growth this year, will actually be a slight drag next year, the bank forecasts. That doesn't necessary translate to an outright decline, but it does foresee prices and sales levelling out.
For the bank, that is a good thing because it regards the housing market as too hot for home-buyers' own good. It has warned repeatedly that households should make sure when they purchase a home that they will be able to afford the monthly payments once interest rates rise.
In the main, the bank's view of the Canadian economy and the world is actually brighter than the previous published analysis issued in January, while noting the high level of uncertainty.
The world economy will grow at around four per cent for the next three years, the bank says, led by China and other emerging countries. This should help Canada's export sector, the bank said.
The advanced countries, which borrowed heavily to soften the blow from the 2008-09 recession, will end up with lower activity going forward. Europe will be the weakest major economic region, with growth rates of 1.2 and 1.6 per cent over the next two years.
The bank also issued a more detailed explanation of its fears about inflation that provides more ammunition to analysts who expect Carney to raise the policy rate from 0.25 per cent to 0.5 per cent at the next opportunity, June 1.
The report says underlying inflation is higher than it had expected it to be at this point in the recovery because wages unexpectedly held up during last year's recession. Shelter costs have also increased faster than expected, it said.
The bank also warns that Canadians can expect prices to receive a 0.6-per-cent boost after July 1, when Ontario and British Columbia move to a harmonized sales tax.
The new tax will cut costs to businesses, however, and the bank says cost savings will likely be transmitted into prices in the second half of they year and trim inflation by 0.3 percentage points.
Total inflation, the amount Canadians actually see when they go to the store, will be higher than two per cent for the rest of this year before returning to target in the second half of 2011, it said.
OTTAWA - Canada is leading the other G7 countries out of recession with the fastest growth in a decade, but it will be trailing those countries in a few years, the Bank of Canada said Thursday.
The central bank's latest economic outlook released Thursday makes several bold predictions, including that Canada's fast start out of last year's slump is already slowing, that the housing boom is fizzling out, and that the country's long-term growth prospects are discouraging.
And governor Mark Carney is cautioning markets not to be so sure Canada's central bank will raise its key interest rates in a matter of weeks.
On Tuesday, the Canadian dollar shot up more than 1.5 cents to above parity with the U.S. currency after the Bank of Canada said it was dropping its promise not to raise rates before July at the earliest.
But Carney told a news conference Thursday that there is still considerable risk in the global economy, or to anticipating his next move.
"There is nothing pre-ordained from this day forward," Carney said to a question on interest rates.
Most economists interpreted Tuesday's statement as an alert to plan for higher rates in June, but some argued Carney had left himself plenty of wiggle room.
"The Bank of Canada has limited scope to raise interest rates in the next several months," said Brian Bethune, chief economist with IHS Global Insight.
"While we may see one or two token moves to raise the overnight rate by a quarter of a point in the June to October window, action to raise rates will be very limited" by the fact doing so would further boost an already strong dollar.
In Thursday's report, the bank said it is planning for the dollar to hover around parity for the next three years and listed it as a major impediment to strong growth because it will make exports less competitive in global markets.
The dollar hovered just above and below parity throughout the Thursday trading day.
The report says Canada's economy expanded by 5.8 per cent in the just past quarter, the largest advance since 1999, but growth will likely slow to 3.8 per cent in the April-June period, and to 3.5 per cent the rest of the year.
It gets worse. Economic growth will average 3.1 per cent in 2011 and 1.9 per cent in 2012, about half what it will be in the United States and lower than both Europe and Japan.
"There is some good news here, our economy has returned to growth," said Carney, noting that more Canadians will find jobs and those who have had their hours reduced are more likely to be called in to work longer.
But as he has in the past, Carney warned that the longer-term prospects for the Canadian economy is modest unless the corporate sector starts investing heavily in new machinery and equipment to become more productive.
Canada is also facing a bigger issue of an aging workforce than the United States, exacerbating the divergent trend line between the two economies.
"This is in the hands of the private sector," Carney said. "If we want to grow faster, we're going to have to work smarter, invest better, (and) build new markets."
The bank said it fully expects businesses to step up investment this year, but it could hardly get worse - business investment actually declined in the fourth quarter when the rest of the economy was rebounding.
A big reason the economy has shot out of recession is that Canadian consumers, particularly home-buyers, have "front-loaded" their purchases because of record low interest rates.
But Canadians that bought homes in the past six months, or took advantage of the now defunct home renovation tax credit, won't be doing so in the future, hence bringing an end to the housing sector boom.
Housing, which is contributing about 0.6 per cent to economic growth this year, will actually be a slight drag next year, the bank forecasts. That doesn't necessary translate to an outright decline, but it does foresee prices and sales levelling out.
For the bank, that is a good thing because it regards the housing market as too hot for home-buyers' own good. It has warned repeatedly that households should make sure when they purchase a home that they will be able to afford the monthly payments once interest rates rise.
In the main, the bank's view of the Canadian economy and the world is actually brighter than the previous published analysis issued in January, while noting the high level of uncertainty.
The world economy will grow at around four per cent for the next three years, the bank says, led by China and other emerging countries. This should help Canada's export sector, the bank said.
The advanced countries, which borrowed heavily to soften the blow from the 2008-09 recession, will end up with lower activity going forward. Europe will be the weakest major economic region, with growth rates of 1.2 and 1.6 per cent over the next two years.
The bank also issued a more detailed explanation of its fears about inflation that provides more ammunition to analysts who expect Carney to raise the policy rate from 0.25 per cent to 0.5 per cent at the next opportunity, June 1.
The report says underlying inflation is higher than it had expected it to be at this point in the recovery because wages unexpectedly held up during last year's recession. Shelter costs have also increased faster than expected, it said.
The bank also warns that Canadians can expect prices to receive a 0.6-per-cent boost after July 1, when Ontario and British Columbia move to a harmonized sales tax.
The new tax will cut costs to businesses, however, and the bank says cost savings will likely be transmitted into prices in the second half of they year and trim inflation by 0.3 percentage points.
Total inflation, the amount Canadians actually see when they go to the store, will be higher than two per cent for the rest of this year before returning to target in the second half of 2011, it said.
Thursday, April 22, 2010
Bank signals higher interest rates only weeks away, as dollar soars
By Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada signalled Tuesday it is poised to start raising interest rates in a matter of weeks, a move that will make borrowing costs higher on everything from car loans to mortgages.
Over the last few weeks, Canadians have already felt the impact of expectations that rates were due to rise - most major Canadians banks started hiking fixed-rate mortgage rates by as much as 0.85 per cent.
But with the central bank now saying it is prepared to move off its emergency 0.25 per cent overnight rate as early as June 1, the whole menu of variable and short-term rates are being brought into play.
"The one that will be affected is the prime lending rate... so the whole gamut will go up when the Bank of Canada raises its rate," said Bank of Montreal economist Michael Gregory. Those include variable-rate mortgages, lines of credit and short-term car loans, he said.
The bank is also risking sending the Canadian dollar into the stratosphere by moving significantly and robustly before the U.S. Federal Reserve moves off its own zero per cent interest rate policy.
The loonie soared within minutes of the central bank's 9 a.m. ET policy statement, which, while leaving the rate unchanged for now, made no secret of where it is headed.
The bank's governing council declared that with the economy and inflation growing faster this year than had been previously thought, there was no need to stay with its "conditional commitment" to leave rates unchanged until the end of the second quarter, or after June 30.
"This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions," the council wrote.
"With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus."
Hence, the council went on, it was withdrawing the conditional commitment.
The bank also said it was ending its key emergency lending instrument that helped inject liquidity into money markets during the crisis, which economists called a clear signal about the central bank's future intentions.
The dollar rose about 1.5 cents shortly afterwards, breaking through the parity ceiling with the U.S. greenback. It closed up 1.58 cents at 100.12 cents U.S.
The currency move suggested that while the market had expected bank governor Mark Carney to signal a tightening bias, it was surprised by the hawkish tone.
"Removing the conditional commitment to keep rates on hold until July and ending purchase and resale agreements are as good as cementing a June 1 hike," said economists Derek Holt and Karen Cordes Woods of Scotia Capital in a note to clients.
Holt added in an interview that the language from the bank opens the door for a bigger-than-expected hike in June, perhaps by as much as half a point.
Not all analysts believe the market is right to anticipate a June hike, however. Some say Carney is still leaving himself some wiggle room to stay at the lower bound until July 20, while others are advising the governor to wait until the Fed acts.
"I would keep rates unchanged until the Fed moves, because otherwise you create this problem on the Canadian dollar," said Brian Bethune, chief economist with IHS Global Insight.
A strong loonie is regarded as a brake on economic growth because it makes the price of Canadian exports less competitive in foreign markets.
In the statement, the central bank conceded the point, listing the "persistent strength of the Canadian dollar," along with poor productivity and low U.S. demand as "significant drags" on the Canadian economy.
But economists suggested the bank's language suggests it is prepared to live with a strong loonie.
Even so, economists that favoured a rate hike said the bank can only get so far ahead of the Fed. They note the Canadian bank has flown solo twice before in the past two decades, only to have to subsequently pull back.
"The need for emergency rates have passed but we still have a need for low rates," Holt explained.
C.D. Howe's monetary policy council, a sampling of nine economists, sees the bank's policy rate rising to 2.5 per cent by the spring of 2011. That is a significant hike from the current level, but it is still below what would be considered normal and only slightly above the rate of inflation.
While the tone on interest rates was hawkish, the bank's view on the economy was only mildly more rosy. It upgraded this year's growth to 3.7 per cent, from a previous prediction of 2.9 per cent, but it lowered its forecast for 2011 to 3.1 per cent, and it believes 2012 will only bring a 1.9 per cent advance.
It now expects the economy to return to full capacity in the spring of 2011, a full quarter before the previous estimate it made in January.
The bank did raise the temperature, slightly, on inflation.
It said core prices have been firmer than projected, but that they were expected to ease slightly in the second quarter of this year and remain near the bank's two per cent target over the next two years.
Total headline inflation, which includes volatile items such as gasoline prices, was expected to be higher than two per cent this year, but returning to target in the second half of 2011.
OTTAWA - The Bank of Canada signalled Tuesday it is poised to start raising interest rates in a matter of weeks, a move that will make borrowing costs higher on everything from car loans to mortgages.
Over the last few weeks, Canadians have already felt the impact of expectations that rates were due to rise - most major Canadians banks started hiking fixed-rate mortgage rates by as much as 0.85 per cent.
But with the central bank now saying it is prepared to move off its emergency 0.25 per cent overnight rate as early as June 1, the whole menu of variable and short-term rates are being brought into play.
"The one that will be affected is the prime lending rate... so the whole gamut will go up when the Bank of Canada raises its rate," said Bank of Montreal economist Michael Gregory. Those include variable-rate mortgages, lines of credit and short-term car loans, he said.
The bank is also risking sending the Canadian dollar into the stratosphere by moving significantly and robustly before the U.S. Federal Reserve moves off its own zero per cent interest rate policy.
The loonie soared within minutes of the central bank's 9 a.m. ET policy statement, which, while leaving the rate unchanged for now, made no secret of where it is headed.
The bank's governing council declared that with the economy and inflation growing faster this year than had been previously thought, there was no need to stay with its "conditional commitment" to leave rates unchanged until the end of the second quarter, or after June 30.
"This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions," the council wrote.
"With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus."
Hence, the council went on, it was withdrawing the conditional commitment.
The bank also said it was ending its key emergency lending instrument that helped inject liquidity into money markets during the crisis, which economists called a clear signal about the central bank's future intentions.
The dollar rose about 1.5 cents shortly afterwards, breaking through the parity ceiling with the U.S. greenback. It closed up 1.58 cents at 100.12 cents U.S.
The currency move suggested that while the market had expected bank governor Mark Carney to signal a tightening bias, it was surprised by the hawkish tone.
"Removing the conditional commitment to keep rates on hold until July and ending purchase and resale agreements are as good as cementing a June 1 hike," said economists Derek Holt and Karen Cordes Woods of Scotia Capital in a note to clients.
Holt added in an interview that the language from the bank opens the door for a bigger-than-expected hike in June, perhaps by as much as half a point.
Not all analysts believe the market is right to anticipate a June hike, however. Some say Carney is still leaving himself some wiggle room to stay at the lower bound until July 20, while others are advising the governor to wait until the Fed acts.
"I would keep rates unchanged until the Fed moves, because otherwise you create this problem on the Canadian dollar," said Brian Bethune, chief economist with IHS Global Insight.
A strong loonie is regarded as a brake on economic growth because it makes the price of Canadian exports less competitive in foreign markets.
In the statement, the central bank conceded the point, listing the "persistent strength of the Canadian dollar," along with poor productivity and low U.S. demand as "significant drags" on the Canadian economy.
But economists suggested the bank's language suggests it is prepared to live with a strong loonie.
Even so, economists that favoured a rate hike said the bank can only get so far ahead of the Fed. They note the Canadian bank has flown solo twice before in the past two decades, only to have to subsequently pull back.
"The need for emergency rates have passed but we still have a need for low rates," Holt explained.
C.D. Howe's monetary policy council, a sampling of nine economists, sees the bank's policy rate rising to 2.5 per cent by the spring of 2011. That is a significant hike from the current level, but it is still below what would be considered normal and only slightly above the rate of inflation.
While the tone on interest rates was hawkish, the bank's view on the economy was only mildly more rosy. It upgraded this year's growth to 3.7 per cent, from a previous prediction of 2.9 per cent, but it lowered its forecast for 2011 to 3.1 per cent, and it believes 2012 will only bring a 1.9 per cent advance.
It now expects the economy to return to full capacity in the spring of 2011, a full quarter before the previous estimate it made in January.
The bank did raise the temperature, slightly, on inflation.
It said core prices have been firmer than projected, but that they were expected to ease slightly in the second quarter of this year and remain near the bank's two per cent target over the next two years.
Total headline inflation, which includes volatile items such as gasoline prices, was expected to be higher than two per cent this year, but returning to target in the second half of 2011.
Tuesday, April 20, 2010
By Julian Beltrame
By Julian Beltrame
OTTAWA — It’s a minority view, but some economists are advising the Bank of Canada to hold off on raising rates — for a long time.
The reason, says Carl Weinberg of U.S.-based High Frequency Economics, is that the Canadian economy is not nearly as strong as recent data suggests and inflation is at acceptable levels.
He says Canada’s central bank could easily keep interest rates at record lows until next year and not worry about inflation getting out of hand.
That flies in the face of the prevailing view of economists, who believe Bank of Canada governor Mark Carney will start raising rates in July — or possibly even in June.
Carney is expected to give a strong hint into his thinking this week, starting on Tuesday with a scheduled interest rate announcement.
No one thinks he will move this week on the policy rate, which is at an emergency level of 0.25 per cent, but the governor is expected to issue a new forecast on both growth and inflation that will tip off when he will act.
Carney made a conditional pledge last spring not to raise rates until the end of the second quarter of 2010 unless inflation becomes a worry.
That’s going to be a high hurdle for him to jump if he does intend to move early, says Michael Gregory of BMO Capital Markets.
“If they go before June, there’s only one reason if they wanted to maintain their credibility, and that’s the inflation projection has changed,” he said.
“But that’s sending a pretty sharp inflation warning and I’m not sure what’s on the ground now justifies ringing that alarm bell.”
Statistics Canada reported last month that the core inflation rate, which the Bank of Canada watches closely, was 2.1 per cent in February while overall inflation was 1.6 per cent.
Both are within the central bank’s target range for the annual inflation rate, set at between one and three per cent.
The Canadian Press
OTTAWA — It’s a minority view, but some economists are advising the Bank of Canada to hold off on raising rates — for a long time.
The reason, says Carl Weinberg of U.S.-based High Frequency Economics, is that the Canadian economy is not nearly as strong as recent data suggests and inflation is at acceptable levels.
He says Canada’s central bank could easily keep interest rates at record lows until next year and not worry about inflation getting out of hand.
That flies in the face of the prevailing view of economists, who believe Bank of Canada governor Mark Carney will start raising rates in July — or possibly even in June.
Carney is expected to give a strong hint into his thinking this week, starting on Tuesday with a scheduled interest rate announcement.
No one thinks he will move this week on the policy rate, which is at an emergency level of 0.25 per cent, but the governor is expected to issue a new forecast on both growth and inflation that will tip off when he will act.
Carney made a conditional pledge last spring not to raise rates until the end of the second quarter of 2010 unless inflation becomes a worry.
That’s going to be a high hurdle for him to jump if he does intend to move early, says Michael Gregory of BMO Capital Markets.
“If they go before June, there’s only one reason if they wanted to maintain their credibility, and that’s the inflation projection has changed,” he said.
“But that’s sending a pretty sharp inflation warning and I’m not sure what’s on the ground now justifies ringing that alarm bell.”
Statistics Canada reported last month that the core inflation rate, which the Bank of Canada watches closely, was 2.1 per cent in February while overall inflation was 1.6 per cent.
Both are within the central bank’s target range for the annual inflation rate, set at between one and three per cent.
The Canadian Press
Interest rates must rise, but some analysts wonder what's the hurry
By Julian Beltrame
OTTAWA — It’s a minority view, but some economists are advising the Bank of Canada to hold off on raising rates — for a long time.
The reason, says Carl Weinberg of U.S.-based High Frequency Economics, is that the Canadian economy is not nearly as strong as recent data suggests and inflation is at acceptable levels.
He says Canada’s central bank could easily keep interest rates at record lows until next year and not worry about inflation getting out of hand.
That flies in the face of the prevailing view of economists, who believe Bank of Canada governor Mark Carney will start raising rates in July — or possibly even in June.
Carney is expected to give a strong hint into his thinking this week, starting on Tuesday with a scheduled interest rate announcement.
No one thinks he will move this week on the policy rate, which is at an emergency level of 0.25 per cent, but the governor is expected to issue a new forecast on both growth and inflation that will tip off when he will act.
Carney made a conditional pledge last spring not to raise rates until the end of the second quarter of 2010 unless inflation becomes a worry.
That’s going to be a high hurdle for him to jump if he does intend to move early, says Michael Gregory of BMO Capital Markets.
“If they go before June, there’s only one reason if they wanted to maintain their credibility, and that’s the inflation projection has changed,” he said.
“But that’s sending a pretty sharp inflation warning and I’m not sure what’s on the ground now justifies ringing that alarm bell.”
Statistics Canada reported last month that the core inflation rate, which the Bank of Canada watches closely, was 2.1 per cent in February while overall inflation was 1.6 per cent.
Both are within the central bank’s target range for the annual inflation rate, set at between one and three per cent.
The Canadian Press
OTTAWA — It’s a minority view, but some economists are advising the Bank of Canada to hold off on raising rates — for a long time.
The reason, says Carl Weinberg of U.S.-based High Frequency Economics, is that the Canadian economy is not nearly as strong as recent data suggests and inflation is at acceptable levels.
He says Canada’s central bank could easily keep interest rates at record lows until next year and not worry about inflation getting out of hand.
That flies in the face of the prevailing view of economists, who believe Bank of Canada governor Mark Carney will start raising rates in July — or possibly even in June.
Carney is expected to give a strong hint into his thinking this week, starting on Tuesday with a scheduled interest rate announcement.
No one thinks he will move this week on the policy rate, which is at an emergency level of 0.25 per cent, but the governor is expected to issue a new forecast on both growth and inflation that will tip off when he will act.
Carney made a conditional pledge last spring not to raise rates until the end of the second quarter of 2010 unless inflation becomes a worry.
That’s going to be a high hurdle for him to jump if he does intend to move early, says Michael Gregory of BMO Capital Markets.
“If they go before June, there’s only one reason if they wanted to maintain their credibility, and that’s the inflation projection has changed,” he said.
“But that’s sending a pretty sharp inflation warning and I’m not sure what’s on the ground now justifies ringing that alarm bell.”
Statistics Canada reported last month that the core inflation rate, which the Bank of Canada watches closely, was 2.1 per cent in February while overall inflation was 1.6 per cent.
Both are within the central bank’s target range for the annual inflation rate, set at between one and three per cent.
The Canadian Press
Monday, April 19, 2010
New Mortgage Rules are Implemented Today
New Mortgage Rules & How They Affect You!
On April 19 our government will lay down three major rule changes to “prevent” a housing-price bubble and keep homeowners from getting “overextended.”
These new rules apply to government-backed insured mortgages only.
5-Year Fixed Qualification Rates
The New Rule: Borrowers will now need to qualify using a 5-year fixed rate regardless of the mortgage term they choose. If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate, like 4.09%.
The Government’s Reasoning: “This initiative will help Canadians prepare for higher interest rates in the future.”
The Effect: It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use the current three or five year mortgage rates to calculate a borrower’s debt service ratio. For many discount lenders, this means the qualifying rate will go from something like 3.25% to 3.89%—not a huge difference.
The Verdict: A sound and necessary change, although many lenders are already using similar guidelines.
90% Maximum Refinancing
The New Rule: No longer will you be able to refinance your home to 95% of it’s value. 90% will now be the new refinance maximum.
The Government’s Reasoning: “This will help ensure home ownership is a more effective way to save.”
The Effect: Borrowers will be less able to pay off high-interest debt with lower-cost mortgage money. On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when house prices fall). It also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt.
The Verdict: Not good news for people who need to restructure debt in an effort to pay more principal and less interest. On the other hand, a 90% refinance limit is beneficial in that it deters people from racking up debt and using their homes as a proverbial ATM machine.
80% Maximum Insured Financing On Rentals
The New Rule: People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously.
The Government’s Reasoning: To reduce speculation.
The Effect: The number of investors creating rental housing will drop notably. Investors will need to borrow down payment funds elsewhere (assuming it’s allowed) or use higher-cost, non-insured lenders to get 90% financing. Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).
The Verdict: How the government can go from 100% rental financing (17 months ago) to 80% today is confounding. The intent is understandable, but the government could have increased net worth requirements, increased beacon minimums, tightened debt servicing guidelines, or limited the number of insured rental mortgages a person can qualify for. Instead, the solution was near-draconian, and it will have an effect on the rental stock in Canada. Will it cause a material rise in rents? That’s a tough call, but it will definitely reduce the supply of rental units and limit Canadians’ investment options.
What to Expect:
• Undoubtedly there will be a rush of applications to beat the April 19 deadline.
• The government says “Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.”
• The 80% rental rule will crush the income property financing business for some lenders and brokers.
• If history is a guide, certain lenders will implement these guidelines early (i.e. before April 19).
Interestingly, Minister Flaherty took a small jab at lenders in his release today, saying these rule changes are designed to “help prevent some lenders” from “facilitating” irresponsible lending.
"If some lenders aren't willing to act themselves, we will act,” said Flaherty. That’s bold talk given that Canadian lenders have exceptionally low default rates, and already conform their mortgages to all existing government guidelines.
On April 19 our government will lay down three major rule changes to “prevent” a housing-price bubble and keep homeowners from getting “overextended.”
These new rules apply to government-backed insured mortgages only.
5-Year Fixed Qualification Rates
The New Rule: Borrowers will now need to qualify using a 5-year fixed rate regardless of the mortgage term they choose. If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate, like 4.09%.
The Government’s Reasoning: “This initiative will help Canadians prepare for higher interest rates in the future.”
The Effect: It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use the current three or five year mortgage rates to calculate a borrower’s debt service ratio. For many discount lenders, this means the qualifying rate will go from something like 3.25% to 3.89%—not a huge difference.
The Verdict: A sound and necessary change, although many lenders are already using similar guidelines.
90% Maximum Refinancing
The New Rule: No longer will you be able to refinance your home to 95% of it’s value. 90% will now be the new refinance maximum.
The Government’s Reasoning: “This will help ensure home ownership is a more effective way to save.”
The Effect: Borrowers will be less able to pay off high-interest debt with lower-cost mortgage money. On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when house prices fall). It also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt.
The Verdict: Not good news for people who need to restructure debt in an effort to pay more principal and less interest. On the other hand, a 90% refinance limit is beneficial in that it deters people from racking up debt and using their homes as a proverbial ATM machine.
80% Maximum Insured Financing On Rentals
The New Rule: People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously.
The Government’s Reasoning: To reduce speculation.
The Effect: The number of investors creating rental housing will drop notably. Investors will need to borrow down payment funds elsewhere (assuming it’s allowed) or use higher-cost, non-insured lenders to get 90% financing. Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).
The Verdict: How the government can go from 100% rental financing (17 months ago) to 80% today is confounding. The intent is understandable, but the government could have increased net worth requirements, increased beacon minimums, tightened debt servicing guidelines, or limited the number of insured rental mortgages a person can qualify for. Instead, the solution was near-draconian, and it will have an effect on the rental stock in Canada. Will it cause a material rise in rents? That’s a tough call, but it will definitely reduce the supply of rental units and limit Canadians’ investment options.
What to Expect:
• Undoubtedly there will be a rush of applications to beat the April 19 deadline.
• The government says “Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.”
• The 80% rental rule will crush the income property financing business for some lenders and brokers.
• If history is a guide, certain lenders will implement these guidelines early (i.e. before April 19).
Interestingly, Minister Flaherty took a small jab at lenders in his release today, saying these rule changes are designed to “help prevent some lenders” from “facilitating” irresponsible lending.
"If some lenders aren't willing to act themselves, we will act,” said Flaherty. That’s bold talk given that Canadian lenders have exceptionally low default rates, and already conform their mortgages to all existing government guidelines.
Subscribe to:
Posts (Atom)
