Denise Deveau, Postmedia News · Mar. 30, 2011
Cheryl Hutton and Aaron Coates always thought getting a mortgage would be a challenge. But within 18 days of visiting a mortgage broker, they were able to close a deal on a new townhouse in Calgary without a hitch.
Now in their early thirties, both have careers in the theatre, something Ms. Hutton says has been a bit of a sticking point with banks. "In our industry we never fit the paperwork guidelines 'for the banks.' For some reason, people don't think we pay our bills."
Although it was their first home purchase, Ms. Hutton says it was surprising how easy the whole process was once they had someone who could walk them through it. "He sat us down, told us what our options were, showed us that it was possible and explained all the steps we needed to take. If it wasn't for him, we may not have made the leap."
Sorting through a mortgage process and negotiating rates can be overwhelming for first-time and seasoned home buyers alike. That's why people such as Ms. Hutton and Mr. Coates turn to brokers to do the legwork for them.
Yet mortgage brokers will tell you that a good portion of home buyers out there don't really understand what they do. "Part of the challenge we have in our world is that people aren't really sure what a mortgage broker is," says Gary Siegle, regional manager for Invis Inc., a mortgage brokerage firm in Calgary.
Brokers should not be confused with "rovers," mortgage specialists attached to a specific financial institution who visit customers outside of banking hours, Mr. Siegle explains.
"They only deal with that bank's product. A broker, however, is an intermediary whose job is to make a match between a lender and a borrower. We represent the individual, not the bank."
About 30% of mortgages in Canada are done through a broker, according to Perry Quinton, vice-president, marketing, for Investor Education Fund, a Toronto-based non-profit financial information service.
"The reason more people don't know about them is because the banks are so visible. It's easy to gravitate to them when you have your savings accounts, credit cards and investments there already," Ms. Quinton says.
Going for the comfort factor could cost you however, she adds. "A broker has access to different lenders including banks, and can shop rates and features. A half per-cent may not sound like much but that could make a difference of about $20,000 for a $250,000 mortgage amortized over 25 years. Any little bit helps."
Mr. Siegle confirms that shopping around can deliver significant savings.
"Let's take today's average posted rate of 5.44%, and you get a point off that at your bank. So you think you just got a really great deal. But the vast majority of rates we deal with as brokers would be another 30 basis points lower -around 4.14%. And if you look at preferred deals that don't offer features such as prepayment privileges, it can get as low as 3.89%. That's another 25 basis points below what's generally available."
The reason for that is simple, he says. "We offer wholesale rates, banks offer retail."
For anyone considering a broker, Ms. Quinton advises people to do a bit of groundwork first if they have the time.
"It helps to educate yourself about options and what you can afford. Look at all your living expenses, including student loans and credit card debt. Chances are you are understating those."
Another thing to look into is the different types of available mortgages and features, including interest rates, payment frequency, amortization, cash-back programs and the ability to make lump sum payments.
"Knowing these things before you go in can save you a lot of money," she adds.
Any mortgage broker you choose should always meet the right licensing and education requirements, so be sure to check their registration.
If you're not completely prepared, however, that shouldn't be a concern when working with a good mortgage broker, Mr. Siegle says.
"After all, mortgages are pretty much all we do. So even if you come in cold, good brokers will walk you through the process and ask all sorts of questions," Mr. Siegle notes.
"You just need to be prepared to answer them openly and honestly so they can get you the best deal possible."
Thursday, March 31, 2011
Tuesday, March 29, 2011
Post-crisis, bank risk on rise again
Barbara Shecter, Financial Post
A term as emblematic of the heady pre-financial crisis days as “covenant-light” is not something one expects to hear these days from a high-ranking official at Canada’s top financial watchdog.
But that’s exactly the term used on Sunday by Ted Price, assistant superintendent at the Office of the Superintendent of Financial Institutions, to justify a push for more action by regulators even as a recovery appears in flight.
Covenant-light, which refers to lending with few strings attached and therefore more risk, is one that has been mumbled darkly in recent private gatherings of business heavyweights. In these circumstances, executives will acknowledge that less than three years after the worst financial meltdown since the Great Depression, risk has been repriced yet again — and back to the levels before the crisis set in.
In some cases, they say, the strategy is being employed to push off the inevitable — a non-payment of debt — while ensuring that minimum monthly payments continue to trickle in for as long as possible.
Peter Nerby, a senior vice-president at Moody’s who is responsible for the ratings of Canadian financial institutions, said he is worried about the apparent relaxation of loan agreements and the appearance of increased risk-taking at some North American financial institutions.
“It absolutely is making a comeback,” said Mr. Nerby, who is based in New York, adding it is “appropriate” for the regulator to draw attention to such behaviour.
While Mr. Nerby said it would be an “extreme case” where covenants are so light that a default is virtually impossible to be triggered, even anecdotes of such cases are a chilling reminder of an infamous pre-crisis statement by Citigroup chief executive Chuck Prince. In 2007, just before the liquidity dried up and forced markets around the world into turmoil, Mr. Price said his job as head of one of the world’s biggest financial institutions was to continue to dance as long as the music continued to play.
In a speech delivered Sunday at the Latin America Economic Forum in Calgary, OSFI’s Mr. Price likened the phenomenon of increasing competition, diminishing returns and increased risk appetite to a replay of a bad movie. And he urged more regulatory intervention because, he said, the unhappy ending will not miraculously change without some purposeful editing.
The repeating cycle has brought back other pre-crisis instruments such as structured derivatives, this time based on volatile commodities, he said.
“If we want a better outcome, supervisors and business leaders had better do something different this time around,” Mr. Price warned.
He did not restrict his warnings to the behaviour of bankers and their regulatory supervisors. Indeed, his comments extended into the boardrooms of financial institutions.
“Boards need to ensure that effective risk management is truly part of their business culture,” Mr. Price said. “Businesses that take the lead in improving their risk management systems will be better prepared for the next phase in the cycle, when those around them are acting out of fear.”
OSFI officials on Monday declined to elaborate on Mr. Price’s comments.
Banking analysts said it is difficult to envision what specific regulatory interventions could be put in place to control the behaviour Mr. Price highlights.
“As Mr. Price suggests, the vicissitudes of risk appetite are very difficult to contain - being tied, as they are, to human nature,” said Peter Routledge, who tracks Canada’s banks at National Bank Financial. Among the challenges for regulators, he said, will be to pinpoint the primary sources of the increased risk appetite.
“Given the much intensified scrutiny of, and restrictions on, regulated financial institutions, one might be more likely to find excessive risk appetites outside of regulated financial institutions,” Mr. Routledge said. “That is not to say regulators should decrease their scrutiny of the regulated sector, but that they may have to increase their scrutiny of sectors or players not presently under the regulatory umbrella.”
A term as emblematic of the heady pre-financial crisis days as “covenant-light” is not something one expects to hear these days from a high-ranking official at Canada’s top financial watchdog.
But that’s exactly the term used on Sunday by Ted Price, assistant superintendent at the Office of the Superintendent of Financial Institutions, to justify a push for more action by regulators even as a recovery appears in flight.
Covenant-light, which refers to lending with few strings attached and therefore more risk, is one that has been mumbled darkly in recent private gatherings of business heavyweights. In these circumstances, executives will acknowledge that less than three years after the worst financial meltdown since the Great Depression, risk has been repriced yet again — and back to the levels before the crisis set in.
In some cases, they say, the strategy is being employed to push off the inevitable — a non-payment of debt — while ensuring that minimum monthly payments continue to trickle in for as long as possible.
Peter Nerby, a senior vice-president at Moody’s who is responsible for the ratings of Canadian financial institutions, said he is worried about the apparent relaxation of loan agreements and the appearance of increased risk-taking at some North American financial institutions.
“It absolutely is making a comeback,” said Mr. Nerby, who is based in New York, adding it is “appropriate” for the regulator to draw attention to such behaviour.
While Mr. Nerby said it would be an “extreme case” where covenants are so light that a default is virtually impossible to be triggered, even anecdotes of such cases are a chilling reminder of an infamous pre-crisis statement by Citigroup chief executive Chuck Prince. In 2007, just before the liquidity dried up and forced markets around the world into turmoil, Mr. Price said his job as head of one of the world’s biggest financial institutions was to continue to dance as long as the music continued to play.
In a speech delivered Sunday at the Latin America Economic Forum in Calgary, OSFI’s Mr. Price likened the phenomenon of increasing competition, diminishing returns and increased risk appetite to a replay of a bad movie. And he urged more regulatory intervention because, he said, the unhappy ending will not miraculously change without some purposeful editing.
The repeating cycle has brought back other pre-crisis instruments such as structured derivatives, this time based on volatile commodities, he said.
“If we want a better outcome, supervisors and business leaders had better do something different this time around,” Mr. Price warned.
He did not restrict his warnings to the behaviour of bankers and their regulatory supervisors. Indeed, his comments extended into the boardrooms of financial institutions.
“Boards need to ensure that effective risk management is truly part of their business culture,” Mr. Price said. “Businesses that take the lead in improving their risk management systems will be better prepared for the next phase in the cycle, when those around them are acting out of fear.”
OSFI officials on Monday declined to elaborate on Mr. Price’s comments.
Banking analysts said it is difficult to envision what specific regulatory interventions could be put in place to control the behaviour Mr. Price highlights.
“As Mr. Price suggests, the vicissitudes of risk appetite are very difficult to contain - being tied, as they are, to human nature,” said Peter Routledge, who tracks Canada’s banks at National Bank Financial. Among the challenges for regulators, he said, will be to pinpoint the primary sources of the increased risk appetite.
“Given the much intensified scrutiny of, and restrictions on, regulated financial institutions, one might be more likely to find excessive risk appetites outside of regulated financial institutions,” Mr. Routledge said. “That is not to say regulators should decrease their scrutiny of the regulated sector, but that they may have to increase their scrutiny of sectors or players not presently under the regulatory umbrella.”
Monday, March 28, 2011
Higher prices, interest rates just around the corner
PATRICIA CROFT
Patti Croft is recently retired as chief economist, RBC Global Asset Management, with 30 years of experience on Bay Street working as an economist and global asset allocation strategist.
I suspect many Canadians reacted with disbelief to last week’s inflation report for the month of February, which showed that our core or underlying rate of inflation fell to a record low of just 0.9 per cent, the lowest since record keeping began in 1985. In addition, the overall rate of inflation dipped slightly to 2.2 per cent.
When filling up the car or going to the grocery store, it’s hard to believe inflation in Canada is that benign.
Indeed, Canada is totally out of step with emerging market economies such as China, India and Brazil, all struggling to rein in soaring inflation largely related to food prices. China has stated that curbing inflation is its top priority in 2011.
Globally, food prices have come under significant pressure over the past year. The United Nation’s food price index is up 40 per cent since June, 2010 ,and stands at a record high (the index started in 1990). Food price inflation is a major issue for emerging market economies where a significant proportion of the cost of living is attributable to the cost of food – in China and India, the weight of food in the basket of consumer goods and services that is used to calculate the level of inflation is 35 per cent or higher.
In contrast in Canada, the weight of food in the CPI is 17 per cent - no small potatoes. In February, food prices in Canada climbed just 2.1 per cent from year-ago levels, despite droughts in China and floods in Australia and instances of global hoarding.
So far Canada has been insulated from rising food prices by strong competition and the strength of the Canadian dollar. But with a lag, food price inflation is coming to Canada as well. Recently, George Weston announced a 5 per cent hike in prices, effective April 1, and Starbucks instituted a 12 per cent increase in packaged coffee. Retailers are beginning to feel the pressure of higher prices and are passing this along to consumers.
The lag between soaring oil prices and the impact at the gas pump or the airport appears to be shorter. Canadians are already feeling the pinch of soaring gas prices and transportation costs are rising as higher energy costs are passed along. Indeed, in February, Canadian energy prices rose almost 11 per cent year over year with gas prices up almost 16 per cent.
The outlook for inflation is critically linked to the outlook for interest rates. Two-year bond yields give an idea of where the market thinks interest rates are headed. Two year government of Canada bond yields have tumbled from 1.9 per cent in February to just 1.6 per cent last week. The market is currently pricing in just 35 basis points of tightening from the Bank of Canada by the end of this year, with no change in rates until October.
The drop in the core rate of inflation in February was more a reflection of the drop from the index of the spike in Olympic related hotel costs from a year ago (to be reversed in March) rather than the lack of inflationary pressures in Canada. While we will remain out of step with emerging markets regarding the immediacy of the need to strongly deal with inflation, Canadians should brace themselves for both a rise in inflation and an increase in interest rates well before October – a summer rate hike seems far more likely.
Patti Croft is recently retired as chief economist, RBC Global Asset Management, with 30 years of experience on Bay Street working as an economist and global asset allocation strategist.
I suspect many Canadians reacted with disbelief to last week’s inflation report for the month of February, which showed that our core or underlying rate of inflation fell to a record low of just 0.9 per cent, the lowest since record keeping began in 1985. In addition, the overall rate of inflation dipped slightly to 2.2 per cent.
When filling up the car or going to the grocery store, it’s hard to believe inflation in Canada is that benign.
Indeed, Canada is totally out of step with emerging market economies such as China, India and Brazil, all struggling to rein in soaring inflation largely related to food prices. China has stated that curbing inflation is its top priority in 2011.
Globally, food prices have come under significant pressure over the past year. The United Nation’s food price index is up 40 per cent since June, 2010 ,and stands at a record high (the index started in 1990). Food price inflation is a major issue for emerging market economies where a significant proportion of the cost of living is attributable to the cost of food – in China and India, the weight of food in the basket of consumer goods and services that is used to calculate the level of inflation is 35 per cent or higher.
In contrast in Canada, the weight of food in the CPI is 17 per cent - no small potatoes. In February, food prices in Canada climbed just 2.1 per cent from year-ago levels, despite droughts in China and floods in Australia and instances of global hoarding.
So far Canada has been insulated from rising food prices by strong competition and the strength of the Canadian dollar. But with a lag, food price inflation is coming to Canada as well. Recently, George Weston announced a 5 per cent hike in prices, effective April 1, and Starbucks instituted a 12 per cent increase in packaged coffee. Retailers are beginning to feel the pressure of higher prices and are passing this along to consumers.
The lag between soaring oil prices and the impact at the gas pump or the airport appears to be shorter. Canadians are already feeling the pinch of soaring gas prices and transportation costs are rising as higher energy costs are passed along. Indeed, in February, Canadian energy prices rose almost 11 per cent year over year with gas prices up almost 16 per cent.
The outlook for inflation is critically linked to the outlook for interest rates. Two-year bond yields give an idea of where the market thinks interest rates are headed. Two year government of Canada bond yields have tumbled from 1.9 per cent in February to just 1.6 per cent last week. The market is currently pricing in just 35 basis points of tightening from the Bank of Canada by the end of this year, with no change in rates until October.
The drop in the core rate of inflation in February was more a reflection of the drop from the index of the spike in Olympic related hotel costs from a year ago (to be reversed in March) rather than the lack of inflationary pressures in Canada. While we will remain out of step with emerging markets regarding the immediacy of the need to strongly deal with inflation, Canadians should brace themselves for both a rise in inflation and an increase in interest rates well before October – a summer rate hike seems far more likely.
Thursday, March 24, 2011
Lower inflation in February likely to keep interest rates low
Canada’s annual inflation rate fell slightly in February, giving the Bank of Canada room to keep interest rates low over the next few months, economists say.
Statistics Canada said Friday its consumer price index edged down one-tenth of a point to 2.2 per cent in February, with rising energy and gas prices keeping inflation just above the Bank of Canada’s ideal two per cent target.
The core inflation rate, which excludes volatile items such as gas and food, fell to 0.9 per cent — its lowest level since the government started keeping records in 1984. Economists had predicted an annual core rate of 1.1 per cent and annual inflation to remain at the January level of 2.3 per cent.
It all means the country’s central bank might take its time when it comes to raising interest rates, said CIBC World Markets economist Emanuella Enenajor.
“These (inflation) numbers certainly make it less likely that a May rate hike could happen, we do have to admit,” she said.
“Such a soft core number suggests there’s less pressure for the Bank of Canada to really start hiking rates aggressively so it gives it a little more leeway.”
She said CIBC is for now sticking with its prediction that Canadians will see rates go above the current one per cent in May and that they will end up at two per cent by the end of the year.
Canada’s economic growth surpassed expectations in the last half of 2010 and the Bank of Canada may want to get ahead of any resulting spike in prices by raising interest rates and cooling lending conditions, she said.
Doug Porter, deputy chief economist at BMO Capital Markets said he believes the central bank is likely to stick with lower rates for the short term.
“Both headline and core inflation have eased since the start of the year, at least partly thanks to the lofty loonie,” he wrote in a note to investors, pointing out that Canada’s core inflation rate is lower than that of the U.S. and rest of the world.
“This is set to reverse next month, as Canada gets with the global program, but the low starting point is very favourable. Suffice it to say that this keeps the pressure well off the Bank of Canada to get back in tightening mode any time soon.”
Enenajor said the March inflation rate will likely depend on oil price movement during the rest of the month.
“However, expect both the annual headline and core rate to move higher in March on a year-on-year basis,” she said.
Prices were higher in February in six of the eight major categories tracked by the agency, but items like women’s clothing, footwear and travel tours cost less than a year earlier.
On a month-to-month basis, consumer goods were 0.3 per cent more expensive last month than in January, mostly due to higher energy and gasoline prices. Canadians paid 10.6 per cent more for energy during the year leading up to February, after posting a nine per cent increase in January.
Gas prices soared 15.7 per cent last month, on top of the already recorded 13 per cent increase in the 12 months leading up to January.
On a regional basis, Nova Scotia remained the province with the highest inflation rate at 3.4 per cent. Many people in that province use oil and other fuel to heat their homes.
Alberta continued to enjoy the most stable prices, with an inflation rate of 1.2 per cent.
Drivers in every province except Manitoba faced double-digit price increases for gasoline on a year-over-year basis. The price at the pumps was up 15.7 per cent from a year earlier.
Statistics Canada said Friday its consumer price index edged down one-tenth of a point to 2.2 per cent in February, with rising energy and gas prices keeping inflation just above the Bank of Canada’s ideal two per cent target.
The core inflation rate, which excludes volatile items such as gas and food, fell to 0.9 per cent — its lowest level since the government started keeping records in 1984. Economists had predicted an annual core rate of 1.1 per cent and annual inflation to remain at the January level of 2.3 per cent.
It all means the country’s central bank might take its time when it comes to raising interest rates, said CIBC World Markets economist Emanuella Enenajor.
“These (inflation) numbers certainly make it less likely that a May rate hike could happen, we do have to admit,” she said.
“Such a soft core number suggests there’s less pressure for the Bank of Canada to really start hiking rates aggressively so it gives it a little more leeway.”
She said CIBC is for now sticking with its prediction that Canadians will see rates go above the current one per cent in May and that they will end up at two per cent by the end of the year.
Canada’s economic growth surpassed expectations in the last half of 2010 and the Bank of Canada may want to get ahead of any resulting spike in prices by raising interest rates and cooling lending conditions, she said.
Doug Porter, deputy chief economist at BMO Capital Markets said he believes the central bank is likely to stick with lower rates for the short term.
“Both headline and core inflation have eased since the start of the year, at least partly thanks to the lofty loonie,” he wrote in a note to investors, pointing out that Canada’s core inflation rate is lower than that of the U.S. and rest of the world.
“This is set to reverse next month, as Canada gets with the global program, but the low starting point is very favourable. Suffice it to say that this keeps the pressure well off the Bank of Canada to get back in tightening mode any time soon.”
Enenajor said the March inflation rate will likely depend on oil price movement during the rest of the month.
“However, expect both the annual headline and core rate to move higher in March on a year-on-year basis,” she said.
Prices were higher in February in six of the eight major categories tracked by the agency, but items like women’s clothing, footwear and travel tours cost less than a year earlier.
On a month-to-month basis, consumer goods were 0.3 per cent more expensive last month than in January, mostly due to higher energy and gasoline prices. Canadians paid 10.6 per cent more for energy during the year leading up to February, after posting a nine per cent increase in January.
Gas prices soared 15.7 per cent last month, on top of the already recorded 13 per cent increase in the 12 months leading up to January.
On a regional basis, Nova Scotia remained the province with the highest inflation rate at 3.4 per cent. Many people in that province use oil and other fuel to heat their homes.
Alberta continued to enjoy the most stable prices, with an inflation rate of 1.2 per cent.
Drivers in every province except Manitoba faced double-digit price increases for gasoline on a year-over-year basis. The price at the pumps was up 15.7 per cent from a year earlier.
Tuesday, March 22, 2011
More banks lower fixed mortgage rates
Two more of Canada’s big bank say they will lower some of their fixed rate mortgages as nervous investors move to bonds, causing a drop in long-term interest rates.
TD Bank (TSX: TD) and National Bank (TSX: NA) say their fixed five-year closed rates will drop 0.1 of a point to 5.34 per cent, effective Thursday.
The move follows similar announcements from Royal Bank of Canada (TSX: RY) and Bank of Montreal (TSX: BMO) Tuesday.
Four-year rates will fall 0.15 percentage points to 4.99 per cent at all four.
Seven-year rates will move 0.2 percentage points lower to 6.14 at TD, but will be unchanged at National, whose 10-year closed rate will fall 25 basis points to 6.4 per cent.
Fixed mortgage rates, which are closely tied to bond markets, tend to fall when traders shift investment activity from riskier equity assets toward bonds, which are considered safer.
Investors have been jittery over fears that a potential nuclear disaster in Japan could severely derail the global economic recovery.
In February, many of Canada’s big banks moved to raise their fixed mortgage rates as investors grew more confident about investing in equity markets and the global economy appeared stronger.
Check out our rates! http://www.tmdc.ca/index.php/rates
TD Bank (TSX: TD) and National Bank (TSX: NA) say their fixed five-year closed rates will drop 0.1 of a point to 5.34 per cent, effective Thursday.
The move follows similar announcements from Royal Bank of Canada (TSX: RY) and Bank of Montreal (TSX: BMO) Tuesday.
Four-year rates will fall 0.15 percentage points to 4.99 per cent at all four.
Seven-year rates will move 0.2 percentage points lower to 6.14 at TD, but will be unchanged at National, whose 10-year closed rate will fall 25 basis points to 6.4 per cent.
Fixed mortgage rates, which are closely tied to bond markets, tend to fall when traders shift investment activity from riskier equity assets toward bonds, which are considered safer.
Investors have been jittery over fears that a potential nuclear disaster in Japan could severely derail the global economic recovery.
In February, many of Canada’s big banks moved to raise their fixed mortgage rates as investors grew more confident about investing in equity markets and the global economy appeared stronger.
Check out our rates! http://www.tmdc.ca/index.php/rates
Monday, March 21, 2011
Spending decisions: If only there was an app for that!
ANGELA SELF
Dan Ariely is trying to develop an iPhone App to make spending decisions easier. The behavioural economics professor and author of Predictably Irrational says it’s hard to think about what we are giving up, or gaining, when making spending decisions, because money is so abstract. An App that simplifies the trade-offs would help us make decisions more in line with our likes and our goals.
Let’s say your goal is to go to Hawaii, get a new digital camera, and take scuba diving lessons. When tempted to spend on something else, the App informs you that the purchase you’re about to make is equal to one day on the beach and two scuba lessons. Would you think more about your purchase? I would.
Until the App arrives, however, we’ll need to adopt other strategies to help us determine our trade-offs when spending. My less-technical approach is using the “rather factor.” It’s an idea born from a girlfriend’s story of how she spent $100 on a birthday dinner for a friend of a friend. She sighed and said she’d rather have put that money toward a trip to Paris. We then jotted down the list of material and non-material items we’d rather spend our money on - our priorities - and have been referencing the list (for the most part) when making purchases.
The common story I hear when it comes to the rather factor is couples who say they don’t want a large wedding because they would rather put the money toward a down payment. Thinking about how the money we spend (or hold off on spending) affects the bigger picture helps us make concrete decisions. In a recent interview with BigThink.com, Mr. Ariely explains that we shouldn’t be focusing on seeing the money we spend in the context of similar purchases, but instead think about what the money means to us in the bigger picture.
For example, let’s say you’re redecorating and looking for a new couch, and you’re not sure how much you should be spending. Instead of setting a budget based on what’s out there, comparing couches and thinking that spending more means a better piece of furniture, think about the purchase in terms of all of the other things you could do with that money. That’s how you should determine your price point and whether the purchase is worth the money.
If we haven’t met all of our savings goals, we have to make choices and trade-offs, so thinking about what you could do with the money you’re spending extends to the smaller price points as well. If you were having lunch after furniture shopping and there was a difference between two entrees, $8 and $13, you likely wouldn’t consider all of the things you could do with the extra $5. But, if you’re being rational, according to Mr. Ariely, that’s exactly what we should do.
You should consider what you could buy with that $5, today and weeks from now, and decide to buy the more expensive entree only if the difference between the two entrees is more valuable than the other possibilities, which in this case would be your afternoon latte.
Of course, if we did this at every meal, we’d be annoying our dinner dates and ourselves. It’s time consuming and complicated to run all of the possible scenarios. Of course, if we had Mr. Ariely’s App we wouldn’t have to wonder.
Angela Self is one of the founders of the Smart Cookies money group.
Dan Ariely is trying to develop an iPhone App to make spending decisions easier. The behavioural economics professor and author of Predictably Irrational says it’s hard to think about what we are giving up, or gaining, when making spending decisions, because money is so abstract. An App that simplifies the trade-offs would help us make decisions more in line with our likes and our goals.
Let’s say your goal is to go to Hawaii, get a new digital camera, and take scuba diving lessons. When tempted to spend on something else, the App informs you that the purchase you’re about to make is equal to one day on the beach and two scuba lessons. Would you think more about your purchase? I would.
Until the App arrives, however, we’ll need to adopt other strategies to help us determine our trade-offs when spending. My less-technical approach is using the “rather factor.” It’s an idea born from a girlfriend’s story of how she spent $100 on a birthday dinner for a friend of a friend. She sighed and said she’d rather have put that money toward a trip to Paris. We then jotted down the list of material and non-material items we’d rather spend our money on - our priorities - and have been referencing the list (for the most part) when making purchases.
The common story I hear when it comes to the rather factor is couples who say they don’t want a large wedding because they would rather put the money toward a down payment. Thinking about how the money we spend (or hold off on spending) affects the bigger picture helps us make concrete decisions. In a recent interview with BigThink.com, Mr. Ariely explains that we shouldn’t be focusing on seeing the money we spend in the context of similar purchases, but instead think about what the money means to us in the bigger picture.
For example, let’s say you’re redecorating and looking for a new couch, and you’re not sure how much you should be spending. Instead of setting a budget based on what’s out there, comparing couches and thinking that spending more means a better piece of furniture, think about the purchase in terms of all of the other things you could do with that money. That’s how you should determine your price point and whether the purchase is worth the money.
If we haven’t met all of our savings goals, we have to make choices and trade-offs, so thinking about what you could do with the money you’re spending extends to the smaller price points as well. If you were having lunch after furniture shopping and there was a difference between two entrees, $8 and $13, you likely wouldn’t consider all of the things you could do with the extra $5. But, if you’re being rational, according to Mr. Ariely, that’s exactly what we should do.
You should consider what you could buy with that $5, today and weeks from now, and decide to buy the more expensive entree only if the difference between the two entrees is more valuable than the other possibilities, which in this case would be your afternoon latte.
Of course, if we did this at every meal, we’d be annoying our dinner dates and ourselves. It’s time consuming and complicated to run all of the possible scenarios. Of course, if we had Mr. Ariely’s App we wouldn’t have to wonder.
Angela Self is one of the founders of the Smart Cookies money group.
Wednesday, March 16, 2011
Household debt continues to rise
Canadian household debt continued to grow at a faster rate than assets in the fourth quarter of 2010, Statistics Canada reported Monday.
The average debt-to-personal disposable income ratio edged down to 146.8 per cent in quarter, but only because a 1.8 per cent gain in average personal disposable income outpaced a gain in credit market debt.
The ratio of household debt to assets remained high, by historical standards, and homeowner's equity, or market value minus debt, continued a three year slide, reaching the slowest level since 2001.
But the rate at which Canadians piled on debt slowed, with nonmortgage credit, such as credit cards, slowing the most, at 5.8 per cent from a year ago. That was its slowest growth rate since the mid-1990s.
Overall household liabilities grew by 6.5 per cent from the same period a year ago levels. That was its slowest annual growth rate since the fourth quarter of 2002.
The value of financial assets, including investments in stocks and bonds, grew by six per cent from the same period a year earlier. Real estate assets rose 6.2 per cent from a year ago levels.
Household net worth, or assets minus debt, grew by 2.2 per cent in the last three months of the year, following a three per cent rise in the previous quarter. Household net worth per capita increased from $178,200 in the third quarter to $181,700 in the fourth quarter.
A key measure of families' abilities to cope with their debt, the ratio of how much disposable income went towards paying just the interest on debt, was unchanged at 7.3 per cent in the quarter.
The rate of growth in net worth, after rebounding from the recession, has stayed in a range of between five and six per cent. That compares with a pace of between nine to 10 per cent in the five years leading up to the recession.
"The debt-service ratio remains muted only because interest rates are still ultra low," TD economist Diana Petramala warned in a commentary.
"Once interest rates start to rise over the latter half of 2011, the debt-service ratio is expected to climb substantially."
"As households are expected to continue to accumulate debt at a faster pace than asset and income growth, the key measure of indebtedness will continue to deteriorate," Petramala said.
"As such, the level of household debt is expected to act as a headwind on economic growth through the second half of 2011, and 2012, as rising interest rates encourage households to rein in their borrowing and increase savings."
The StatsCan report also showed the net debt of the federal, provincial and territorial governments increased by $19 billion in the fourth quarter and the ratio of net debt to gross domestic product stood at 45.1 per cent.
That continued an upward trend since the third quarter of 2008 when it stood at 35.4 per cent.
Measuring all debt — government, business and family — national net worth edged up 0.3 per cent to $6.3 trillion in the fourth quarter, the slowest quarterly growth of the year.
On a per capita basis, national net worth grew to $184,200 in the fourth quarter, up from $183,900 in the previous quarter.
The average debt-to-personal disposable income ratio edged down to 146.8 per cent in quarter, but only because a 1.8 per cent gain in average personal disposable income outpaced a gain in credit market debt.
The ratio of household debt to assets remained high, by historical standards, and homeowner's equity, or market value minus debt, continued a three year slide, reaching the slowest level since 2001.
But the rate at which Canadians piled on debt slowed, with nonmortgage credit, such as credit cards, slowing the most, at 5.8 per cent from a year ago. That was its slowest growth rate since the mid-1990s.
Overall household liabilities grew by 6.5 per cent from the same period a year ago levels. That was its slowest annual growth rate since the fourth quarter of 2002.
The value of financial assets, including investments in stocks and bonds, grew by six per cent from the same period a year earlier. Real estate assets rose 6.2 per cent from a year ago levels.
Household net worth, or assets minus debt, grew by 2.2 per cent in the last three months of the year, following a three per cent rise in the previous quarter. Household net worth per capita increased from $178,200 in the third quarter to $181,700 in the fourth quarter.
A key measure of families' abilities to cope with their debt, the ratio of how much disposable income went towards paying just the interest on debt, was unchanged at 7.3 per cent in the quarter.
The rate of growth in net worth, after rebounding from the recession, has stayed in a range of between five and six per cent. That compares with a pace of between nine to 10 per cent in the five years leading up to the recession.
"The debt-service ratio remains muted only because interest rates are still ultra low," TD economist Diana Petramala warned in a commentary.
"Once interest rates start to rise over the latter half of 2011, the debt-service ratio is expected to climb substantially."
"As households are expected to continue to accumulate debt at a faster pace than asset and income growth, the key measure of indebtedness will continue to deteriorate," Petramala said.
"As such, the level of household debt is expected to act as a headwind on economic growth through the second half of 2011, and 2012, as rising interest rates encourage households to rein in their borrowing and increase savings."
The StatsCan report also showed the net debt of the federal, provincial and territorial governments increased by $19 billion in the fourth quarter and the ratio of net debt to gross domestic product stood at 45.1 per cent.
That continued an upward trend since the third quarter of 2008 when it stood at 35.4 per cent.
Measuring all debt — government, business and family — national net worth edged up 0.3 per cent to $6.3 trillion in the fourth quarter, the slowest quarterly growth of the year.
On a per capita basis, national net worth grew to $184,200 in the fourth quarter, up from $183,900 in the previous quarter.
Tuesday, March 15, 2011
Central bank may still hike rates before summer
Andrew Pyle, Ontario,
The Bank of Canada has now kept its official interest unchanged at 1 per cent for the fourth meeting.
Those with floating-rate debts will no doubt be relieved; however, economists were looking for a signal from Mr. Carney and crew that improving economic conditions were paving the way for a return to rate hikes sometime soon.
Had this week's policy meeting taken place a few weeks ago, it's likely we would have received that signal. Indeed, most indicators have pointed to stronger-than-expected activity in Canada and the U.S., while emerging economies have maintained a torrid pace of growth.
That would have been before the recent developments in Egypt, Tunisia, Yemen and now Libya. The grassroots uprising against incumbent regimes might be welcome from a democratic ideal perspective, but it has created a rift in energy markets.
Crude awakening
After dipping briefly below $85/barrel in February, the price of crude oil has now broken above $100 for the first time since October 2008, testing $103.40 last week — the 61.8 per cent retracement mark from the July-December 2008 collapse.
A close above this level will increase the odds of a move to $120 (recall that $147.27 was the intraday high from July 2008). And if you thought the recent spike in pump prices was unnerving, gasoline futures have already crossed above the 61.8 per cent retracement level and are trading above three bucks (US) a gallon.
In July 2008, futures broke above $3.70/gallon. Even if prices simply hold near current levels, average pump prices in Canada could easily gravitate towards $1.30/litre. That's not good news for those planning to drive to their March break vacation spots, or for those returning snowbirds.
One might suspect the Bank of Canada would see the boost to inflation, that will come from commodities like oil and gasoline, as something that needs to be worked against through tighter monetary policy, but that's old school.
These commodities, like food (which is also seeing some inflation strain), are essentials and represent a significant share of our non-discretionary spending. Unless incomes rise by the same amount as the cost of these essentials, everything else being different, there will be less to spend on discretionary goods and services. In other words, real consumption growth in Canada could slow.
Not so fast
How much of a slowdown we experience in consumer spending (and let's throw in housing expenditures too), depends greatly on that above-mentioned phrase "all other things being equal."
If employment grows at a decent clip and wages go with it, then the affect on spending will be less pronounced. As of the end of 2010, average weekly earnings in Canada were up 4.5 per cent over the same period a year ago, which was the fourth-best growth rate in earnings since records started in the early 1990s.
To put this in perspective, when crude oil was climbing towards $150 back in the summer of 2008, weekly earnings growth was heading in the opposite direction.
There were other headwinds facing Canada back in 2008, including the cost of borrowing. When oil reached its peak, the 5-year conventional mortgage rate in Canada was above 7 per cent. Today, it sits near 5.5 per cent. The 1-year rate was also close to 7 per cent (yes, we had a very flat yield curve before the walls came tumbling in), compared to 3.5 per cent today.
Now, I'm not suggesting that we're going to stay in interest rate limbo forever, but the Canadian consumer is in better shape to handle higher pump prices today than back two years ago.
How long can they sit on the fence?
What the Bank of Canada has to be careful of here is the oil price shocks emanating from across the pond turn out to be temporary and there is no slowdown in consumption growth. Bank economists are already looking towards 2012 as the likely period where excess capacity in Canada's economy disappears and inflation returns to target (using the core inflation measure).
It is easy, however, to accelerate that trip back to zero excess and just as easy to push the economy into a situation of excess demand.
Coming back to the Bank's decision this week, it may have been surprising to see it lean against speculation of near-term tightening. But, it would be a mistake to assume the Bank can't and won't pull the trigger on rates before the summer.
There are two policy meetings left this half (April and May), so if Mr. Carney and crew wake up and realize there is too much potential inflation risk in leaving rates unchanged, they will need the April meeting to deliver the guidance towards a May rate hike — something economists thought was going to happen this week.
And if energy price shocks don't intensify and the Bank fails to deliver such guidance, don't be surprised if the bond market creates the guidance for them.
The Bank of Canada has now kept its official interest unchanged at 1 per cent for the fourth meeting.
Those with floating-rate debts will no doubt be relieved; however, economists were looking for a signal from Mr. Carney and crew that improving economic conditions were paving the way for a return to rate hikes sometime soon.
Had this week's policy meeting taken place a few weeks ago, it's likely we would have received that signal. Indeed, most indicators have pointed to stronger-than-expected activity in Canada and the U.S., while emerging economies have maintained a torrid pace of growth.
That would have been before the recent developments in Egypt, Tunisia, Yemen and now Libya. The grassroots uprising against incumbent regimes might be welcome from a democratic ideal perspective, but it has created a rift in energy markets.
Crude awakening
After dipping briefly below $85/barrel in February, the price of crude oil has now broken above $100 for the first time since October 2008, testing $103.40 last week — the 61.8 per cent retracement mark from the July-December 2008 collapse.
A close above this level will increase the odds of a move to $120 (recall that $147.27 was the intraday high from July 2008). And if you thought the recent spike in pump prices was unnerving, gasoline futures have already crossed above the 61.8 per cent retracement level and are trading above three bucks (US) a gallon.
In July 2008, futures broke above $3.70/gallon. Even if prices simply hold near current levels, average pump prices in Canada could easily gravitate towards $1.30/litre. That's not good news for those planning to drive to their March break vacation spots, or for those returning snowbirds.
One might suspect the Bank of Canada would see the boost to inflation, that will come from commodities like oil and gasoline, as something that needs to be worked against through tighter monetary policy, but that's old school.
These commodities, like food (which is also seeing some inflation strain), are essentials and represent a significant share of our non-discretionary spending. Unless incomes rise by the same amount as the cost of these essentials, everything else being different, there will be less to spend on discretionary goods and services. In other words, real consumption growth in Canada could slow.
Not so fast
How much of a slowdown we experience in consumer spending (and let's throw in housing expenditures too), depends greatly on that above-mentioned phrase "all other things being equal."
If employment grows at a decent clip and wages go with it, then the affect on spending will be less pronounced. As of the end of 2010, average weekly earnings in Canada were up 4.5 per cent over the same period a year ago, which was the fourth-best growth rate in earnings since records started in the early 1990s.
To put this in perspective, when crude oil was climbing towards $150 back in the summer of 2008, weekly earnings growth was heading in the opposite direction.
There were other headwinds facing Canada back in 2008, including the cost of borrowing. When oil reached its peak, the 5-year conventional mortgage rate in Canada was above 7 per cent. Today, it sits near 5.5 per cent. The 1-year rate was also close to 7 per cent (yes, we had a very flat yield curve before the walls came tumbling in), compared to 3.5 per cent today.
Now, I'm not suggesting that we're going to stay in interest rate limbo forever, but the Canadian consumer is in better shape to handle higher pump prices today than back two years ago.
How long can they sit on the fence?
What the Bank of Canada has to be careful of here is the oil price shocks emanating from across the pond turn out to be temporary and there is no slowdown in consumption growth. Bank economists are already looking towards 2012 as the likely period where excess capacity in Canada's economy disappears and inflation returns to target (using the core inflation measure).
It is easy, however, to accelerate that trip back to zero excess and just as easy to push the economy into a situation of excess demand.
Coming back to the Bank's decision this week, it may have been surprising to see it lean against speculation of near-term tightening. But, it would be a mistake to assume the Bank can't and won't pull the trigger on rates before the summer.
There are two policy meetings left this half (April and May), so if Mr. Carney and crew wake up and realize there is too much potential inflation risk in leaving rates unchanged, they will need the April meeting to deliver the guidance towards a May rate hike — something economists thought was going to happen this week.
And if energy price shocks don't intensify and the Bank fails to deliver such guidance, don't be surprised if the bond market creates the guidance for them.
Monday, March 14, 2011
Tougher mortgage rules take effect Friday
By Sunny Freeman, moneyville.ca, Sun Mar 13 2011
Stephanie Bilbija, a university student and single mom, will have to save for a few more years before she's a home owner, thanks to new mortgage rules that may force some Canadians to think twice about whether they're ready to jump into the market.
The new rules as of Friday will make the maximum payback period 30 years — resulting in somewhat higher regular payments than with the 35-year amortization that has been the choice of about 30 per cent of home buyers.
Bilbija, 25, says she wants to own a home with enough space for her daughter to play, but she also needs to have money for other expenses.
“I would rather have the option of having a longer time to pay, if it meant I could get a house and still have cash flow as a single parent,” says the York University student, who has a part-time job and part of a down payment saved.
Some first-time buyers like Bilbija will have to make sacrifices to achieve their dream of home ownership now that the option of a 35-year repayment period is being eliminated.
Bilbija says she'll save up more for a down payment and wait a few years to buy in an area just outside the pricey Greater Toronto Area.
The rule changes will increase the monthly payment on a $300,000 mortgage at four per cent interest by $105 — but will also reduce total interest paid by $42,288 over the life of a mortgage because it's repaid five years sooner.
Dropping the amortization to 30 years will cut buyers' maximum possible purchase price by six to seven per cent. That means someone who qualifies for a $300,000 mortgage could afford a home that's about $18,000 $21,000 less expensive.
“When you reduce amortization, it increases your mortgage payment for the same purchase price, so if you have people near the edge of affordability, forcing them into a shorter amortization means they won't qualify for as much house,” says Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.
“It means that you'll have to find a cheaper house or you'll have to move a little further out of the city.”
McLister says first-time owners should re-examine their monthly cash flow before deciding whether now is the time to enter the market.
“You don't want to get in a situation where you have no breathing room.”
Mortgage holders' total debt service ratio should be under 40 per cent of income and if they can't comfortably buy a house and keep their debt ratios under that number, it's probably wise to wait and save up more, he says.
McLister warns that the new rules won't necessarily keep everyone out of trouble, so first-time buyers should avoid the tendency to buy the most expensive house their mortgage allows.
He adds that renting could be a better option for potential first-time buyers in some of the most expensive markets because much of the initial mortgage payments end up paying for interest rather than debt reduction.
But if buyers are absolutely set on securing a 35-year amortization period, McLister advises them to see a mortgage planner immediately so a mortgage approval goes through before March 17.
Pre-approval won't do either; you have to have a firm purchase agreement, or the new rules will apply.
On a positive note, he adds that the new rules could save first-time buyers even more money because they put limits on some on those willing to max their mortgages out to secure a home and drive prices up in the process.
“If you start putting limits on those people now, those people at the edge, it's going to put pressure on prices,” he says.
“Home prices are driven by affordability, they're driven a lot by first time buyers and these limits will rein in some of those people.”
Vancouver-area real estate agent Richard Morrison, says “irrational exuberance” in advance of the changes has driven an increase in sales, but adds that usually clients asking for a 35-year plan are in the minority.
He welcomes the long-term effects of the changes, despite a potential short-term lull in business, but says they could help to further stabilize the market.
“If we had kept it with five per cent down and 35-year amortization, you're taking buyers from the future into the present and could have disastrous effects,” Morrison says.
Stephanie Bilbija, a university student and single mom, will have to save for a few more years before she's a home owner, thanks to new mortgage rules that may force some Canadians to think twice about whether they're ready to jump into the market.
The new rules as of Friday will make the maximum payback period 30 years — resulting in somewhat higher regular payments than with the 35-year amortization that has been the choice of about 30 per cent of home buyers.
Bilbija, 25, says she wants to own a home with enough space for her daughter to play, but she also needs to have money for other expenses.
“I would rather have the option of having a longer time to pay, if it meant I could get a house and still have cash flow as a single parent,” says the York University student, who has a part-time job and part of a down payment saved.
Some first-time buyers like Bilbija will have to make sacrifices to achieve their dream of home ownership now that the option of a 35-year repayment period is being eliminated.
Bilbija says she'll save up more for a down payment and wait a few years to buy in an area just outside the pricey Greater Toronto Area.
The rule changes will increase the monthly payment on a $300,000 mortgage at four per cent interest by $105 — but will also reduce total interest paid by $42,288 over the life of a mortgage because it's repaid five years sooner.
Dropping the amortization to 30 years will cut buyers' maximum possible purchase price by six to seven per cent. That means someone who qualifies for a $300,000 mortgage could afford a home that's about $18,000 $21,000 less expensive.
“When you reduce amortization, it increases your mortgage payment for the same purchase price, so if you have people near the edge of affordability, forcing them into a shorter amortization means they won't qualify for as much house,” says Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.
“It means that you'll have to find a cheaper house or you'll have to move a little further out of the city.”
McLister says first-time owners should re-examine their monthly cash flow before deciding whether now is the time to enter the market.
“You don't want to get in a situation where you have no breathing room.”
Mortgage holders' total debt service ratio should be under 40 per cent of income and if they can't comfortably buy a house and keep their debt ratios under that number, it's probably wise to wait and save up more, he says.
McLister warns that the new rules won't necessarily keep everyone out of trouble, so first-time buyers should avoid the tendency to buy the most expensive house their mortgage allows.
He adds that renting could be a better option for potential first-time buyers in some of the most expensive markets because much of the initial mortgage payments end up paying for interest rather than debt reduction.
But if buyers are absolutely set on securing a 35-year amortization period, McLister advises them to see a mortgage planner immediately so a mortgage approval goes through before March 17.
Pre-approval won't do either; you have to have a firm purchase agreement, or the new rules will apply.
On a positive note, he adds that the new rules could save first-time buyers even more money because they put limits on some on those willing to max their mortgages out to secure a home and drive prices up in the process.
“If you start putting limits on those people now, those people at the edge, it's going to put pressure on prices,” he says.
“Home prices are driven by affordability, they're driven a lot by first time buyers and these limits will rein in some of those people.”
Vancouver-area real estate agent Richard Morrison, says “irrational exuberance” in advance of the changes has driven an increase in sales, but adds that usually clients asking for a 35-year plan are in the minority.
He welcomes the long-term effects of the changes, despite a potential short-term lull in business, but says they could help to further stabilize the market.
“If we had kept it with five per cent down and 35-year amortization, you're taking buyers from the future into the present and could have disastrous effects,” Morrison says.
Friday, March 11, 2011
Central bank may still hike rates before summer
The Bank of Canada has now kept its official interest unchanged at 1 per cent for the fourth meeting.
Those with floating-rate debts will no doubt be relieved; however, economists were looking for a signal from Mr. Carney and crew that improving economic conditions were paving the way for a return to rate hikes sometime soon.
Had this week's policy meeting taken place a few weeks ago, it's likely we would have received that signal. Indeed, most indicators have pointed to stronger-than-expected activity in Canada and the U.S., while emerging economies have maintained a torrid pace of growth.
That would have been before the recent developments in Egypt, Tunisia, Yemen and now Libya. The grassroots uprising against incumbent regimes might be welcome from a democratic ideal perspective, but it has created a rift in energy markets.
Crude awakening
After dipping briefly below $85/barrel in February, the price of crude oil has now broken above $100 for the first time since October 2008, testing $103.40 last week — the 61.8 per cent retracement mark from the July-December 2008 collapse.
A close above this level will increase the odds of a move to $120 (recall that $147.27 was the intraday high from July 2008). And if you thought the recent spike in pump prices was unnerving, gasoline futures have already crossed above the 61.8 per cent retracement level and are trading above three bucks (US) a gallon.
In July 2008, futures broke above $3.70/gallon. Even if prices simply hold near current levels, average pump prices in Canada could easily gravitate towards $1.30/litre. That's not good news for those planning to drive to their March break vacation spots, or for those returning snowbirds.
One might suspect the Bank of Canada would see the boost to inflation, that will come from commodities like oil and gasoline, as something that needs to be worked against through tighter monetary policy, but that's old school.
These commodities, like food (which is also seeing some inflation strain), are essentials and represent a significant share of our non-discretionary spending. Unless incomes rise by the same amount as the cost of these essentials, everything else being different, there will be less to spend on discretionary goods and services. In other words, real consumption growth in Canada could slow.
Not so fast
How much of a slowdown we experience in consumer spending (and let's throw in housing expenditures too), depends greatly on that above-mentioned phrase "all other things being equal."
If employment grows at a decent clip and wages go with it, then the affect on spending will be less pronounced. As of the end of 2010, average weekly earnings in Canada were up 4.5 per cent over the same period a year ago, which was the fourth-best growth rate in earnings since records started in the early 1990s.
To put this in perspective, when crude oil was climbing towards $150 back in the summer of 2008, weekly earnings growth was heading in the opposite direction.
There were other headwinds facing Canada back in 2008, including the cost of borrowing. When oil reached its peak, the 5-year conventional mortgage rate in Canada was above 7 per cent. Today, it sits near 5.5 per cent. The 1-year rate was also close to 7 per cent (yes, we had a very flat yield curve before the walls came tumbling in), compared to 3.5 per cent today.
Now, I'm not suggesting that we're going to stay in interest rate limbo forever, but the Canadian consumer is in better shape to handle higher pump prices today than back two years ago.
How long can they sit on the fence?
What the Bank of Canada has to be careful of here is the oil price shocks emanating from across the pond turn out to be temporary and there is no slowdown in consumption growth. Bank economists are already looking towards 2012 as the likely period where excess capacity in Canada's economy disappears and inflation returns to target (using the core inflation measure).
It is easy, however, to accelerate that trip back to zero excess and just as easy to push the economy into a situation of excess demand.
Coming back to the Bank's decision this week, it may have been surprising to see it lean against speculation of near-term tightening. But, it would be a mistake to assume the Bank can't and won't pull the trigger on rates before the summer.
There are two policy meetings left this half (April and May), so if Mr. Carney and crew wake up and realize there is too much potential inflation risk in leaving rates unchanged, they will need the April meeting to deliver the guidance towards a May rate hike — something economists thought was going to happen this week.
And if energy price shocks don't intensify and the Bank fails to deliver such guidance, don't be surprised if the bond market creates the guidance for them.
Those with floating-rate debts will no doubt be relieved; however, economists were looking for a signal from Mr. Carney and crew that improving economic conditions were paving the way for a return to rate hikes sometime soon.
Had this week's policy meeting taken place a few weeks ago, it's likely we would have received that signal. Indeed, most indicators have pointed to stronger-than-expected activity in Canada and the U.S., while emerging economies have maintained a torrid pace of growth.
That would have been before the recent developments in Egypt, Tunisia, Yemen and now Libya. The grassroots uprising against incumbent regimes might be welcome from a democratic ideal perspective, but it has created a rift in energy markets.
Crude awakening
After dipping briefly below $85/barrel in February, the price of crude oil has now broken above $100 for the first time since October 2008, testing $103.40 last week — the 61.8 per cent retracement mark from the July-December 2008 collapse.
A close above this level will increase the odds of a move to $120 (recall that $147.27 was the intraday high from July 2008). And if you thought the recent spike in pump prices was unnerving, gasoline futures have already crossed above the 61.8 per cent retracement level and are trading above three bucks (US) a gallon.
In July 2008, futures broke above $3.70/gallon. Even if prices simply hold near current levels, average pump prices in Canada could easily gravitate towards $1.30/litre. That's not good news for those planning to drive to their March break vacation spots, or for those returning snowbirds.
One might suspect the Bank of Canada would see the boost to inflation, that will come from commodities like oil and gasoline, as something that needs to be worked against through tighter monetary policy, but that's old school.
These commodities, like food (which is also seeing some inflation strain), are essentials and represent a significant share of our non-discretionary spending. Unless incomes rise by the same amount as the cost of these essentials, everything else being different, there will be less to spend on discretionary goods and services. In other words, real consumption growth in Canada could slow.
Not so fast
How much of a slowdown we experience in consumer spending (and let's throw in housing expenditures too), depends greatly on that above-mentioned phrase "all other things being equal."
If employment grows at a decent clip and wages go with it, then the affect on spending will be less pronounced. As of the end of 2010, average weekly earnings in Canada were up 4.5 per cent over the same period a year ago, which was the fourth-best growth rate in earnings since records started in the early 1990s.
To put this in perspective, when crude oil was climbing towards $150 back in the summer of 2008, weekly earnings growth was heading in the opposite direction.
There were other headwinds facing Canada back in 2008, including the cost of borrowing. When oil reached its peak, the 5-year conventional mortgage rate in Canada was above 7 per cent. Today, it sits near 5.5 per cent. The 1-year rate was also close to 7 per cent (yes, we had a very flat yield curve before the walls came tumbling in), compared to 3.5 per cent today.
Now, I'm not suggesting that we're going to stay in interest rate limbo forever, but the Canadian consumer is in better shape to handle higher pump prices today than back two years ago.
How long can they sit on the fence?
What the Bank of Canada has to be careful of here is the oil price shocks emanating from across the pond turn out to be temporary and there is no slowdown in consumption growth. Bank economists are already looking towards 2012 as the likely period where excess capacity in Canada's economy disappears and inflation returns to target (using the core inflation measure).
It is easy, however, to accelerate that trip back to zero excess and just as easy to push the economy into a situation of excess demand.
Coming back to the Bank's decision this week, it may have been surprising to see it lean against speculation of near-term tightening. But, it would be a mistake to assume the Bank can't and won't pull the trigger on rates before the summer.
There are two policy meetings left this half (April and May), so if Mr. Carney and crew wake up and realize there is too much potential inflation risk in leaving rates unchanged, they will need the April meeting to deliver the guidance towards a May rate hike — something economists thought was going to happen this week.
And if energy price shocks don't intensify and the Bank fails to deliver such guidance, don't be surprised if the bond market creates the guidance for them.
Thursday, March 10, 2011
Homeowners confident about ability to pay mortgages despite record debt levels
Sunny Freeman, The Canadian Press
TORONTO - Canadian homeowners are much more confident than government officials and economists about their ability to pay off mortgages, even if the market takes a turn for the worse, according to a survey released Wednesday.
The Royal Bank's annual outlook suggests 85 per cent of respondents think they are doing a good job paying off their loan obligations, and 73 per cent think they are well positioned even if the housing market were to drop.
"The reason that stood out to me is because of all the commentary we've all been hearing about Canadians being overextended, all of those various concerns bubbling around," said Marcia Moffat, RBC head of home equity financing.
The findings contrast with a slew of statistics and warnings from top economists — including Bank of Canada governor Mark Carney — that Canadians are getting in over their heads and may find themselves in difficulty when interest rates rise.
Statistics Canada's most recent report showed that the debt-to-disposable income ratio of Canadians hit a record 148 per cent in the third quarter, even beating out Americans for indebtedness. Put another way, the figure means Canadians owe $1.48 for every dollar they earn.
But the Royal Bank survey, conducted in January, could also be a sign that Canadians are taking heed after more than a year of warnings issued by the Bank of Canada and the federal government about debt exposure.
"There has been a lot in the media around ... (those) concerns for at least the last year and maybe Canadians have been listening, seeking out advice, and ensuring that they're in a strong financial position," Moffat said.
"If you've got a concern about something transpiring, you may try to get ahead of it to put yourself in a better financial position."
Canadians' growing optimism about their debt situations could stem largely from increased job stability and rising incomes, which are providing a better backdrop to pay down debt, Moffat added.
But the government is less assured.
Its third round of tightening mortgage rules in as many years is set to take effect later this month.
New measures introduced by Finance Minister Jim Flaherty to rein in borrowing will take effect March 18. The changes include reducing the amortization period on government-insured mortgages from 35 to 30 years, limiting the size of home-equity loans and removing government insurance on lines of credit secured on homes.
Interest rates are widely expected to rise in the second half of this year, driving up the borrowing costs for variable mortgages and other loans linked to bank's prime borrowing rates.
Still, 90 per cent of respondents in the Royal Bank survey said they were confident about real estate as an investment and a large majority still thought it was a good time to buy.
Interest in purchasing a new home over the next two years has fallen, but only slightly. At 29 per cent, the number is considered strong and is still better higher than it was 2006.
However, fewer respondents than in last year's survey said it was better to buy now rather than wait, suggesting that buyers aren't feeling the same sense of urgency to get into the market.
Buyers rushed into the market in the opening months of last year to beat a combination of rising interest rates, new mortgage rules and the HST in two provinces.
"Last year's survey showed that people were looking to buy ahead of rising costs," said Moffat.
"This year marks a return to more normal levels of purchase intentions and recent housing data reflects this move to a more balanced market."
Nearly 70 per cent of homeowners said the value of their homes has increased in the last two years.
Meanwhile, a Statistics Canada report also released Wednesday suggested that prices for new houses continued to rise at the beginning of this year along with resale home prices.
The federal agency's new home price index rose 0.2 per cent in January from the level in December.
TORONTO - Canadian homeowners are much more confident than government officials and economists about their ability to pay off mortgages, even if the market takes a turn for the worse, according to a survey released Wednesday.
The Royal Bank's annual outlook suggests 85 per cent of respondents think they are doing a good job paying off their loan obligations, and 73 per cent think they are well positioned even if the housing market were to drop.
"The reason that stood out to me is because of all the commentary we've all been hearing about Canadians being overextended, all of those various concerns bubbling around," said Marcia Moffat, RBC head of home equity financing.
The findings contrast with a slew of statistics and warnings from top economists — including Bank of Canada governor Mark Carney — that Canadians are getting in over their heads and may find themselves in difficulty when interest rates rise.
Statistics Canada's most recent report showed that the debt-to-disposable income ratio of Canadians hit a record 148 per cent in the third quarter, even beating out Americans for indebtedness. Put another way, the figure means Canadians owe $1.48 for every dollar they earn.
But the Royal Bank survey, conducted in January, could also be a sign that Canadians are taking heed after more than a year of warnings issued by the Bank of Canada and the federal government about debt exposure.
"There has been a lot in the media around ... (those) concerns for at least the last year and maybe Canadians have been listening, seeking out advice, and ensuring that they're in a strong financial position," Moffat said.
"If you've got a concern about something transpiring, you may try to get ahead of it to put yourself in a better financial position."
Canadians' growing optimism about their debt situations could stem largely from increased job stability and rising incomes, which are providing a better backdrop to pay down debt, Moffat added.
But the government is less assured.
Its third round of tightening mortgage rules in as many years is set to take effect later this month.
New measures introduced by Finance Minister Jim Flaherty to rein in borrowing will take effect March 18. The changes include reducing the amortization period on government-insured mortgages from 35 to 30 years, limiting the size of home-equity loans and removing government insurance on lines of credit secured on homes.
Interest rates are widely expected to rise in the second half of this year, driving up the borrowing costs for variable mortgages and other loans linked to bank's prime borrowing rates.
Still, 90 per cent of respondents in the Royal Bank survey said they were confident about real estate as an investment and a large majority still thought it was a good time to buy.
Interest in purchasing a new home over the next two years has fallen, but only slightly. At 29 per cent, the number is considered strong and is still better higher than it was 2006.
However, fewer respondents than in last year's survey said it was better to buy now rather than wait, suggesting that buyers aren't feeling the same sense of urgency to get into the market.
Buyers rushed into the market in the opening months of last year to beat a combination of rising interest rates, new mortgage rules and the HST in two provinces.
"Last year's survey showed that people were looking to buy ahead of rising costs," said Moffat.
"This year marks a return to more normal levels of purchase intentions and recent housing data reflects this move to a more balanced market."
Nearly 70 per cent of homeowners said the value of their homes has increased in the last two years.
Meanwhile, a Statistics Canada report also released Wednesday suggested that prices for new houses continued to rise at the beginning of this year along with resale home prices.
The federal agency's new home price index rose 0.2 per cent in January from the level in December.
Tuesday, March 1, 2011
Economy up, but Canadians not saving enough
CTV.ca News StaffThe Canadian economy posted stronger growth than expected in the last quarter of 2010, Statistics Canada reported Monday. But the news, which bodes well for Canada's job market as it recovers from the recession, was tempered by a CIBC report warning that Canadians' bank accounts are not growing fast enough.
The economy beat Bank of Canada predictions by a full point, growing 3.3 per cent at the end of last year, StatsCan said. Three factors fuelled the growth, according to the agency: a four per cent spike in exports, stronger manufacturing sectors in Ontario and Quebec and a 4.9 per cent uptick in consumer spending.
The agency also revised its results for third quarter growth to 1.8 per cent from one per cent, meaning Canada's overall GDP advanced 3.1 per cent last year. That is in comparison to a 2.5 per cent decline in 2009.
The rosy numbers have economists predicting growth above three per cent for the first quarter of this year, well above the Bank of Canada's projected 2.4 per cent. Bank of Montreal economist Douglas Porter predicts growth to come in at 3.5 per cent, while the Royal Bank and Merrill Lynch predict growth above three per cent.
BNN's Michael Hainsworth said the numbers have left economists divided over when Bank of Canada governor Mark Carney will begin hiking interest rates from their current historic lows. The overnight lending rate has been at one per cent since last year.
No one expects Carney to boost rates when he issues a short economic analysis on Tuesday. But when it happens is anyone's guess, Hainsworth said.
"We really don't expect to see the cost to borrow money in this country to start rising until the kids are let out school for summer vacation," Hainsworth told CTV News Channel.
"Others are saying maybe not until they go back to school at the end of the summer vacation. And then there are others at TD saying forget it, spring 2012 before the Bank of Canada sees the need to start raising the cost of borrowing money.'"
That may be good news to Canadians who have gotten used to cheap credit. But a new CIBC report is warning Canadians need to reconsider their spending habits and start padding their bank accounts now that the savings rate north of the border has hit an all-time low against savings in the United States.
The report says Canadians have spent the past 15 years relying on rising home prices to boost their wealth, and therefore have paid less attention to saving cash.
Canadians are now saving at a rate of 4.2 per cent, 1.6 per cent below the 5.8 per cent savings rate south of the border.
The report, entitled "Back to Old-Fashioned Saving," said Americans are saving more in the wake of the collapse of the U.S. housing market. However, because the Canadian real estate market has remained stable despite the economic downturn, Canadians haven't been scared into holding on to their money.
But with many experts predicting either a flat housing market, or a mild correction, over the short term, Canadians will have to save more, the report says.
"While we do not foresee a major correction, the real estate boom is clearly over and even a flat housing market will strip households of their primary means of passive savings," the report says.
The report comes on the heels of a number of others warning of rising household debt levels in Canada.
Earlier this month, the Vanier Institute of the Family said the average Canadian family is about $100,000 in debt and suggested the debt-to-income ratio is now a record 150 per cent. According to the report, the average Canadian family saved $8,000 in 1990, or 13 per cent, much lower than the current rate of 4.2 per cent, or $2,500.
Experts have predicted trouble for Canadians when Carney does decide to raise interest rates, which will make all manner of debt more difficult to pay off.
The economy beat Bank of Canada predictions by a full point, growing 3.3 per cent at the end of last year, StatsCan said. Three factors fuelled the growth, according to the agency: a four per cent spike in exports, stronger manufacturing sectors in Ontario and Quebec and a 4.9 per cent uptick in consumer spending.
The agency also revised its results for third quarter growth to 1.8 per cent from one per cent, meaning Canada's overall GDP advanced 3.1 per cent last year. That is in comparison to a 2.5 per cent decline in 2009.
The rosy numbers have economists predicting growth above three per cent for the first quarter of this year, well above the Bank of Canada's projected 2.4 per cent. Bank of Montreal economist Douglas Porter predicts growth to come in at 3.5 per cent, while the Royal Bank and Merrill Lynch predict growth above three per cent.
BNN's Michael Hainsworth said the numbers have left economists divided over when Bank of Canada governor Mark Carney will begin hiking interest rates from their current historic lows. The overnight lending rate has been at one per cent since last year.
No one expects Carney to boost rates when he issues a short economic analysis on Tuesday. But when it happens is anyone's guess, Hainsworth said.
"We really don't expect to see the cost to borrow money in this country to start rising until the kids are let out school for summer vacation," Hainsworth told CTV News Channel.
"Others are saying maybe not until they go back to school at the end of the summer vacation. And then there are others at TD saying forget it, spring 2012 before the Bank of Canada sees the need to start raising the cost of borrowing money.'"
That may be good news to Canadians who have gotten used to cheap credit. But a new CIBC report is warning Canadians need to reconsider their spending habits and start padding their bank accounts now that the savings rate north of the border has hit an all-time low against savings in the United States.
The report says Canadians have spent the past 15 years relying on rising home prices to boost their wealth, and therefore have paid less attention to saving cash.
Canadians are now saving at a rate of 4.2 per cent, 1.6 per cent below the 5.8 per cent savings rate south of the border.
The report, entitled "Back to Old-Fashioned Saving," said Americans are saving more in the wake of the collapse of the U.S. housing market. However, because the Canadian real estate market has remained stable despite the economic downturn, Canadians haven't been scared into holding on to their money.
But with many experts predicting either a flat housing market, or a mild correction, over the short term, Canadians will have to save more, the report says.
"While we do not foresee a major correction, the real estate boom is clearly over and even a flat housing market will strip households of their primary means of passive savings," the report says.
The report comes on the heels of a number of others warning of rising household debt levels in Canada.
Earlier this month, the Vanier Institute of the Family said the average Canadian family is about $100,000 in debt and suggested the debt-to-income ratio is now a record 150 per cent. According to the report, the average Canadian family saved $8,000 in 1990, or 13 per cent, much lower than the current rate of 4.2 per cent, or $2,500.
Experts have predicted trouble for Canadians when Carney does decide to raise interest rates, which will make all manner of debt more difficult to pay off.
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