29 Jul

Moody maintains Canada triple-A credit rating, citing resilient economy


Posted by: Mike Hattim

By The Canadian Press

TORONTO – Moody’s Investor Services is renewing Canada’s debt rating at triple-A, the highest possible.

The firm said the AAA rating was warranted due to the country’s high degree of economic resiliency, efforts by Ottawa and the provinces to deal with their debt ratios over the coming years and other factors.

Moody’s says the state of Canada’s housing market and Quebec’s sovereignty issues do pose some risk, but the risks are low.

The housing market also poses some risk because many mortgages are insured by a federal Crown corporation.

But Moody’s says it considers a major downturn of the housing market as unlikely and, even in an extreme case, Ottawa’s extra costs would be relatively small.

Similarly, Quebec’s sovereignty movement doesn’t seem to pose a significant risk since the issue doesn’t appear high on the political agenda.

28 Jul

Canadian home prices surge to new high


Posted by: Mike Hattim

  Jul 27, 2011 – 3:04 PM ET

OTTAWA— Home prices measured by a major national index surged for a sixth straight month to new highs in May but are expected to ease in the months ahead.

The Teranet-National Bank Composite House Price Index, which measures price changes for repeat sales of single-family homes in six metropolitan areas, rose 1.3% in the month, the second consecutive month in which it gained more than one per cent and the largest gain since July 2010.

The month-over-month gains were spread across all six cities covered, with all but Halifax reporting gains of 0.5% or more.

May gains were led by the Vancouver and Toronto markets, ahead 1.6% and 1.7%, respectively, and followed by Montreal (0.7%), Calgary (0.6%), Ottawa (0.5%) and Halifax (0.1%).

“The well-above-one-per-cent monthly rises of the composite index in April and May were fuelled by the Vancouver market,” said the report’s author, senior economist Marc Pinsonneault.

“Given the time lags between home sales and their entry in public land registries, it is possible that the large April and May rises of the composite index were due to front-loading of sales to beat the March effective date of an announced shortening of the maximum amortization period for insured mortgages.”

“This spike in activity is now behind us. Therefore, the recent large monthly rises in home prices in Canada should not be a lasting trend.”

On an annual basis, prices rose 4.4% in May, the same pace of advance as in May.


Composite House Price Index for May

Metropolitan area / Index level /m/m change / y/y change
Calgary / 153.72 / 0.6 % / -4.1 %
Halifax / 134.26 / 0.1 % / 4.8 %
Montreal / 141.36 / 0.7 % / 6.3 %
Ottawa / 133.30 / 0.5 % / 5.6 %
Toronto / 128.72 / 1.7 % / 4.6 %
Vancouver / 164.92 / 1.6 % / 6.2 %
National Composite / 142.27 / 1.3 % / 4.4 %

Source: Teranet-National Bank

27 Jul

Beyond debt ceiling, U.S. needs own GST


Posted by: Mike Hattim

By Glen Hodgson and Kip Beckman

For drama, it might seem difficult to top the past couple of weeks on Capitol Hill, but the debt ceiling debate in the United States is really only the opening act of a long-running production. The Obama administration and Congress will eventually have to agree to some watered-down measures that will enable an increase to the debt ceiling, to ensure that the country’s creditors continue to be paid on time. However, the necessary deal between the White House and House Republicans will be a political deal. It will only put off the tough economic and policy decisions to another act of this drama.

The fundamental problem facing the U.S. federal government is bringing taxes and spending into balance over the long run. Even if sustained growth is fully restored, Washington will be taking in the equivalent of 15% of gross domestic product as revenue, but spending 20% of GDP. If the budget is ever to be rebalanced, the U.S. federal government will have to tackle structural factors.

The United States is currently spending about 5% of GDP on defence and homeland security, compared with around 3% before 9/11. Social Security — long the “third rail” of U.S. politics — has a huge unfunded liability, and aging demographics will have a major impact on other social spending entitlements if unchecked. Yet, large cuts to defence and social spending are unlikely to be enough. Increases in taxes, combined with fundamental program redesign and a reduction in benefits, will eventually be required.

The medium-term fiscal plans brought forward by Republicans and by the White House currently fall well short of fiscal sustainability. The Republicans are ready to slash spending but unwilling to consider tax increases, while the Obama plan relies too much on sustained economic growth to reduce future deficits. A third option, from a President-appointed bipartisan panel, proposed a broad mix of spending cuts and revenue measures, but there has been little political takeup so far. Initially, tax hikes will affect wealthy Americans. But there is a limit to how much tax revenue can be raised by hammering rich people. At some point, tax reform will have to hit the broad swath of Americans. Some of the targets could include the elimination of popular but costly incentives such as deductibility of mortgage interest payments. Even these measures, however, will probably still fall short. Eventually, we expect the United States will have to do what Canada and other rich countries have done — implement a value-added sales tax.

Republicans, and even some Democrats, may well threaten to fight to the last breath before ever agreeing to it, but the merits of a sales tax are unmistakeable: It provides stable revenues, it affects almost all of the population, and it has the least impact on business investment. And as Canada found out in the 1990s, a value-added tax is a prolific generator of revenue, which the United States desperately needs.

The United States may already be in the midst of a “lost decade” due to the 2008 financial crisis, and the debt ceiling debate — suspenseful though it is — could be but a prelude to something much more dramatic. If international and domestic bondholders ever decide to stop buying new U.S. government bonds to fund the chronic fiscal deficits, the politicians won’t have much choice. The hard laws of economics will eventually force even the United States to face fiscal reality.

Canadians have a lot riding on the outcome of the current debate, due to our deeply integrated economies. As the U.S. goes through a difficult period fiscally and economically, Canadian businesses must re-double their efforts to adapt, innovate, diversify their sales, and internationalize their business model if they are to remain globally competitive. But Canada must also remain fiscally responsible to help offset the potential shocks ahead, so that a lost decade for the United States does not become a lost decade for Canada as well.

Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada. Kip Beckman is principal economist at the Conference Board of Canada.

26 Jul

New real estate companies challenge old guard


Posted by: Mike Hattim

Al Kula wants to sell his home. Not now, mind you, but in another two years.

He’s hoping to sell privately and would rather not pay real estate commission fees. So he listed his north Toronto home with forfuturesale.com, a website launched in May that allows vendors to place their properties up for future sale.

“I plan to retire in another couple of years and I thought it was a great idea,” said Kula, 66, a pharmacist. “I like to plan ahead.”

In the wake of a move by the Competition Bureau to open up the real estate market to more competition, a wave of new, innovative companies have launched. The entrants can be as esoteric as forfuturesale.com, as cutting edge as a company that matches consumers to agents for lower fees, to more traditional flat fee services where consumers can list on the MLS for a cheaper price.

Most are small start ups going head-to-head with organized real estate in the battle for consumers.

“I think people have been sitting on the sidelines waiting for the market to open up and they have seen the writing on the wall,” said John Andrew, director of the executive seminars on corporate and investment real estate at Queen’s University. “This kind of competition is ultimately good for the industry and good for consumers. This is exactly what the Competition Bureau wanted.”

The Competition Bureau has launched actions against the Canadian Real Estate Association and more recently against the Toronto Real Estate Board in an effort to open up the industry to more competition.

While real estate commissions are negotiable, traditional realtors have charged about 5 per cent to sell a home. That could work out to $20,000 in fees on a $400,000 property.

While many of the start ups are launched by entrepreneurs with no previous experience in the business, some are led by established realtors who say fees are too high.

Realtor Mia Prime said she launched her flat fee service last week because “commission fees are out of whack.”

After 30 years in the business selling homes, Prime said technology has allowed agents to be much more efficient and the workload is less.

“I can do deals today sitting at home in my underwear. I couldn’t do that 30 years ago. I didn’t have a cellular phone, I didn’t have email. We worked for our money and that was when the average price of a house was a lot cheaper.”

Since then home prices have exploded, commission rates have stayed about the same, and technology has allowed agents to be more efficient, says the realtor.

“I don’t believe in gouging people,” said Prime. “Selling your home can be hard work, but it’s not magic.”

Prime’s Great Canadian Realty lists properties on the Multiple Listing Service for $995 including giving vendors a market analysis of their home. If the vendor requires more help, such as an agent to show the home, they can add that on for an additional fee.

“I think there is a prevailing notion that sometimes agents get paid too much,” said Andrew Brest, who along with realtor partner Lee Redwoood formed Sundaybell.com, a site which matches realtors with consumers. “Consumers really want to be in the driver’s seat.”

Taking a cue from dating sites such as Match.com and Lavalife, the site allows buyers or sellers to connect anonymously with agents and negotiate commission rates and services before meeting face to face.

“Consumers are shy in asking agents for a break in commission, so this prevents that red-faced moment,” said Redwood.

While the site is free to consumers, agents pay a $499.95 annual membership and a $50 per contact charge.

Iwantthathome.ca, meanwhile, is more along the lines of forfuturesale.com, but coming from a buyer’s perspective.

“This is the digital equivalent of putting a note under someone’s door and saying ‘I love your home, do you want to sell it?’ ” said founder Natalie Armata.

The website, which went live last week, aims to connect buyers to neighbourhoods, streets, or even certain homes that they really want to own. It also integrates mapping software allowing users to pinpoint areas they want to search, including statistical information on the neighbourhood.

“Most people only have a few neighbourhoods or even streets that they really love,” said Armata. “Some people are very specific in their tastes and profile and sometimes there just isn’t the home they want currently for sale.”

If a buyer sees a home that they want, they place a post on the website, and for a small additional fee, a postcard is also sent to the home to notify the homeowner.

Queen’s University professor Andrew says the gush of entrepreneurship is reminiscent of the early technology boom in Silicon Valley.

“Some are IT start ups who are still trying to figure out how to make money. And the reality is a lot of these guys won’t make it,” said Andrew. “But that’s the nature of the beast, that’s what competition is about.”

Mike Roelofsen hopes he’ll still be around. He believes his site, forfuturesale.com, has global potential.

Like many ideas, this one came about by accident.

While he was in the driveway of his St. Thomas condo washing his car, a few years back, a couple drove by and asked if any of the units were for sale.

“I said no, because there was very little turnover at the place,” said Roelofsen. “But then I figured I should have taken his number down because I was thinking of selling down the road. I could have sold privately and avoided the real estate fees.”

Roelfson is allowing the first 1,000 vendors to list for free to get traffic on his site, and is then charging a fee of $79.

So far the new entrants have provided very little challenge to the established order of branded realtors who control the vast majority of the market. If history is a guide, many of the start ups will go under, while others will have to consolidate and bulk up to take on the big players.

“Like other very large transactions that are seldom done, consumers tend to look to professionals who do it every day,” said Phil Soper, president and CEO of Royal LePage, which represents more than 14,000 licensed realtors in Canada.

In the United States, where new start ups have been around longer, organized real estate still controls the lion’s share of the market over the newer entrants. In Canada, Soper says market share by organized realtors have remained stable.

“Part of the reason is that it is difficult to reach a critical mass to get major market share because Canada is a relatively small market with huge geography,” said Soper. “There has always been an intrepid group willing to do it themselves, but the question is how much market share will that ultimately result in?”

In a down or flat market, which most analysts are forecasting for the next couple years, consumers tend to stick with professionals, said Soper.

“If the market goes down it becomes more challenging for the do it yourselfers and they tend to need the help of a professional,” said Soper.

Roelfson, meanwhile, says he’s not looking to dominate the market. But a slice of market share could result in a profitable run.

He says about 85 people have listed on his site in the last couple months.

“Like anything else, this will take time to see if consumers will respond,” said Roelfson. “Not everything will work. But you only need one Facebook in the market to change the game.”

25 Jul

How to divide a family home


Posted by: Mike Hattim

Helen Morris, National Post

Inheriting the family home is a privilege, but unless you are an only child, estate planning is required to avoid misunderstandings during this already stressful time.

“Before this even becomes a discussion amongst siblings, now is the time to have that talk with the whole family [when the parents are still alive],” says Andrew Sherbin, financial advisor with Edward Jones in Toronto. “If one of the siblings wants to move into the family home, then the discussion needs to begin in advance. How is that sibling going to fund the move?”

Mr. Sherbin says the wishes of the parents and each child can be very different. Thus, it is important to seek legal advice and have an up-to-date will that clearly states your wishes for the property.

Once the question of who gets what has been settled, the financing for the sibling who wishes to purchase the family home need not be complicated.

In such an instance, “I work with the client and the lawyer and treat it like any purchase,” says David Gibson, a mortgage planner with Mortgage Intelligence in Sudbury. “When you’re purchasing a home from the estate or from the parents, the first step is to discuss the downpayment,” he says. “If a house is worth $300,000 and there are three siblings, for the sibling who is going to purchase it, the downpayment is $100,000. The source of the downpayment is the estate or a gift from the living parents.”

As with any inheritance probate and other costs will need to be factored into the estate planning. If the property being inherited was the principal residence, then there will not be a capital gain to pay. However, if the property is a cottage or other second residence there will need to be a financial plan to pay for the capital gain.

“One solution is to buy life insurance that will cover off the potential capital gains taxes due,” Mr. Sherbin says. “That way that money comes on the death of the second spouse. It’s tax free, [the siblings] use the money to pay off the tax due on the death of the second spouse.”

If the siblings decide to hold on to the former principal residence after the death of their parents, any gain in value from the time of death of the second parent until the siblings sell will attract a capital gain unless it becomes the siblings’ principal residence.

Mr. Sherbin says the financial plan should specify what is to happen if the parents need to sell the family home before death and perhaps move into assisted living.

“There should be some sort of power of attorney for property or finances or a living will also in place,” Mr. Sherbin says. “If the parents sell the home and it is now in cash or investible assets, there could be future capital gains due because they have sold their primary residence and perhaps are now renting or in a care facility.”

Mr. Gibson says in order to be able to plan their finances and to avoid any nasty surprises at the time of inheritance, the siblings need to be fully aware of any mortgages or other loans their parents may have on the property.

21 Jul

Bank of Canada pegs economic growth at 1.5 per cent in second quarter


Posted by: Mike Hattim

OTTAWA – The Canadian economy grew at a slower-than-expected pace of 1.5 per cent in the second quarter, the Bank of Canada estimated Wednesday as it slashed an earlier forecast that looked for growth of two per cent.

However, the central bank said it expected the domestic economy will grow slightly faster in the second half of the year than thought earlier, logging overall annual growth of 2.8 per cent for 2011, down slightly from an earlier estimate of 2.9 per cent.

The latest outlook comes amid a growing credit crisis in Europe that the central bank identified as a growing risk.

“Although the global outlook remains broadly unchanged, global risks have intensified, most notably in Europe,” the Bank of Canada said in its July monetary policy report.

The bank warned the sovereign debt troubles in Europe could spark a credit crisis around the world.

The slower than expected growth in the April-to-June quarter was due in part to the end of government stimulus spending, as well as higher food and energy prices that crimped consumer spending in Canada and the U.S. Added to that was the global economic fallout from the earthquake and tsunami in Japan that disrupted manufacturing supply chains.

“The bank now estimates that these supply disruptions will subtract roughly three-quarters of a percentage point from GDP growth in Canada in the second quarter, a slightly larger impact than projected in the April report,” the Bank of Canada said.

The outlook by the Bank of Canada followed its decision Tuesday to keep the overnight rate target at one per cent. However, the central bank hinted that as the Canadian economy continues to grow, it will look to raise the rate, which affects prime lending rates at Canada’s big banks and in turn variable-rate mortgages, lines of credit and other loans.

Economists have speculated that the bank’s next rate hike will come in October at the earliest and almost certainly before the end of the year.

The bank noted that its projections Wednesday included “a gradual reduction in monetary stimulus over the projection horizon.”

Economic growth in Canada is expected to be driven by business investment and to a lesser extent consumer spending, while export growth will continue to be challenged by the persistent strength of the Canadian dollar, the bank said.

“The expected recovery in Canadian exports over the medium term is now projected to be even more muted than in the April report, reflecting negative revisions to the projected pace of U.S. demand growth,” the bank said.

The bank downgraded its expectations for the U.S. economy — Canada’s largest export market — to 2.4 per cent growth for this year compared with an earlier estimate of three per cent in April.

Meanwhile, inflation is expected come off its recent highs of more than three per cent — due in part to energy prices and the effects of the introduction of the HST in Ontario and B.C. last summer — to around two per cent by the middle of 2012, the central bank predicted.

The bank noted in its report that core inflation, which excludes some volatile items, is expected to rise slightly above two per cent for a short time, but remain around two per cent over its projection horizon.

Canada’s annual inflation rate in May reached its highest level in eight years, hitting 3.7 per cent on the back of big increases in gasoline prices. However, core inflation rose only moderately to 1.8 per cent.

Statistics Canada is expected to report June inflation data on Friday.

In identifying the risks to its outlook in addition to Europe, the bank warned that the strong Canadian dollar could create even greater headwinds for the economy and high household debt could weaken consumer spending.

But as Europe and the United States continue to put up warning signs, the Canadian economy has appeared to be on track with three consecutive months of job growth and signs of inflation.

The bank noted that commodity prices and global inflation could rise faster than expected to push domestic prices even higher, and household spending could also top expectations.

The Canadian Press

21 Jul

Bank of Canada signals no rush to normalize rates


Posted by: Mike Hattim

OTTAWA (Reuters) – A day after raising expectations it would increase interest rates soon, the Bank of Canada said it might keep rates below their normal long-run levels even after the Canadian economy is back to full capacity, and future rate hikes would likely be gradual.

In a report on Wednesday, and in remarks by Governor Mark Carney, the central bank took pains to say that, as the economy approaches full capacity in mid-2012 and inflation converges on its 2 percent target, markets should not assume interest rates will necessarily rise as quickly to more traditional levels above inflation by then.

“You cannot mechanically assume that because the output gap on our projection — the output gap is closed in the middle of 2012 — that the bank’s target interest rate will be back at neutral, however you define neutral,” Carney said in a news conference.

“And in fact, I said further and I’ll reiterate it today, that if it were, then the output gap wouldn’t close over that horizon and inflation would not be back at target. And why is that? Well, there are considerable headwinds in the Canadian economy.”

The strong Canadian dollar, weak U.S. recovery and the European sovereign debt crisis are the major risks to Canada, he said.

The bank held its key interest rate steady at 1.0 percent on Tuesday, as expected, and appeared to clear the path for rate increases in a statement that dropped the term “eventually” for when it would move.

But in another signal the bank will not hike rates aggressively, Carney emphasized that the statement also refers to only “some” of the considerable monetary policy being removed.

Some market players have speculated that in order to reach what is considered a neutral rate — which would have to be well above the inflation rate — the bank would have to raise rates rapidly ahead of mid-2012.

Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International, estimates the neutral rate at around 4 percent and said the bank’s guidance meant rates could be 2 percent or 3 percent by mid-2012.

“It doesn’t mean it will stay at 1 percent until then and that’s one of the mistakes the market has been doing lately, and I think they’re gradually understanding that,” he said.

The bank does not say what it considers to be the normal long-run rate, although Carney called the current level “exceptionally stimulative.”

Following the comments, market players saw slightly decreased chances of a rate hike later this year, according to overnight index swaps, which trade based on expectations for the key central bank policy rate.

The Canadian dollar rose to as high as C$0.9457 to the U.S. dollar, or $1.0574, just after the MPR was released from C$0.9485 earlier. It later slipped slightly but held near 2-1/2 month highs.


In its new projections, the bank cut its second-quarter growth forecast to an annualized 1.5 percent, from 2.0 percent, and said core inflation would rise to 2 percent two quarters earlier than previously anticipated, by the end of this year.

But it kept the medium-term outlook largely unchanged, saying the second-quarter slump in growth will be offset by growing faster than expected in the following three quarters.

On external factors, Carney sounded far more worried about potential contagion from the European sovereign debt crisis than he did about the political wrangling in the United States over the debt ceiling.

The European crisis along with continued strength in the Canadian dollar are keeping Carney cautious.

“We are in an environment here in Canada where there are substantial external headwinds,” he said. “In that environment, the bank has to make a judgment in terms of the appropriate path for our monetary policy rate.”

The bank assumes the United States will not default on its debt and that the European debt problem will be “contained” but not necessarily fully resolved, saying Canada is “doing what we can, both bilaterally and through the IMF and other channels, to assist.”

(Additional reporting by Solarina Ho, Ka Yan Ng, Claire Sibonney and Trish Nixon in Toronto; writing by Louise Egan; Editing by Jeffrey Hodgson and Rob Wilson)

20 Jul

Bank of Canada hints that rate hikes are coming sooner rather than later


Posted by: Mike Hattim

OTTAWA – The Bank of Canada signalled Tuesday that it will look for an opportunity to raise interest rates sooner rather than later to keep inflation in check as the Canadian economy continues to grow.

The central bank kept its overnight rate target at one per cent but noted that the U.S. economy has grown at a slower pace than expected and Europe faces a growing credit crisis — both potential drags on the domestic economy.

Despite those threats, the bank said it believes Canada’s economy remains on track to grow this year, which observers said likely means a rate hike as early as October .

CIBC World Markets chief economist Avery Shenfeld said the bank’s decision to drop the word “eventually” in reference to the timing of its next rate hike suggests it will move before the end of the year.

“The underlying message is that rate hikes will be coming sooner than eventually,” Shenfeld said.

“The surprise is really for those who thought that the Bank of Canada would be waiting until 2012 to begin hiking rates, because I think here the message is directed at those dovish observers and indicating that we will probably be moving sooner than that.”

The suggestion that rates in Canada will rise in the near term helped push the loonie up 0.87 of a cent to 105.16 cents U.S.

Canadian economic growth slowed in the second quarter, but the central bank said it expects to see an acceleration in the second half of the year.

Overall, the Bank of Canada expects the economy will expand by 2.8 per cent in 2011, compared with its call in April for 2.9 per cent growth. The outlook for 2012 and 2013 was unchanged at 2.6 per cent and 2.1 per cent respectively.

Shenfeld said the central bank will likely wait to see if its economic outlook is on track before moving to raise rates.

“The key is the Bank of Canada has to see evidence that its projection for a re-accelleration in economic growth is actually taking place,” said Shenfeld, who currently expects the central bank to hold rates in September and move in October.

BMO Capital Markets senior economist Michael Gregory said the case of a rate hike was building, noting that household spending in Canada remains solid.

“We are sticking to our call for October and December rate hikes this year,” Gregory wrote in a note to clients.

However TD Bank economist Sonya Gulati said she continued to expect the Bank of Canada to keep rates on hold until its first meeting in 2012.

“We think that they are going to time it more to when the (U.S.) Fed is going to start to increase it, which we think is going to be March of next year,” she said.

“In previous communications, the governor has indicated that the rate spreads between the two countries is something he’s keeping a close eye on and that there has to be a working gap between the two for the countries to go forward, given how high the Canadian dollar is.”

Gulati said TD expects the Bank of Canada will increase its overnight rate target in one-quarter percentage point intervals starting in January to two per cent before pausing to assess the situation and then increasing the key rate again to three per cent by the end of 2012.

A full update on the central bank’s outlook for the economy and inflation is expected when the Bank of Canada publishes its monetary policy report on Wednesday.

The central bank said in its statement Tuesday that the U.S. economy continues to be restrained by the consolidation of household balance sheets and slow growth in employment while fiscal austerity measures in Europe also restrain growth.

“Widespread concerns over sovereign debt have increased risk aversion and volatility in financial markets,” the central bank said in its statement.

The central bank also said its outlook assumes that European authorities will be able to contain the sovereign debt crisis, “although there are clear risks around this outcome.”

However as Europe and the United States continue to put up warning signs, the Canadian economy has appeared to be on track with three consecutive months of job growth and signs of inflation.

Statistics Canada said Tuesday that its composite leading index rose 0.2 per cent in June compared with a 0.8 per cent gain made in May.

The agency said a downturn in the auto sector due to disruptions following the earthquake and tsunami in Japan temporarily slowed assembly work in Canada, while the housing index increased 0.3 per cent as home starts in June hit a high for the year to date.

The Bank of Canada’s latest business outlook survey last week found corporate Canada in a generally upbeat mood and looking to hire with 57 per cent of the firms surveyed expected to hire new workers over the next year compared with just four per cent of firms that expected to have fewer employees over the next 12 months.

Statistics Canada also reported a net gain of 28,000 jobs for June, a stark contrast to a disappointing report of only 18,000 jobs added in the United States.

The bank’s overnight target rate affects the prime lending rate at Canada’s big banks and in turn the rates for variable rate mortgages and lines of credit.

The Bank of Canada’s next scheduled rate announcement is set for Sept. 7.

20 Jul

Why Canadian mortgage rates are on a roller coaster


Posted by: Mike Hattim

If there’s one question being kicked around the barbecue more than any other this summer, it’s probably this: should I lock in my variable rate mortgage?

But with interest rates bouncing around, to the point where they make a mortgage-rate chart look more like the diagram of a rollercoaster, homeowners can be forgiven if they are hesitant.

After all, every time mortgage rates rise, they seem to come back down again. Recently, Royal Bank tried to raise mortgage rates, increasing the cost of its five-year fixed mortgage by 0.15 per cent, only to quietly lower them a few weeks later.

What gives?

On the variable side, rates have been stable, holding at 2.1 per cent for so long it seems like the new normal. They are priced based on the Bank of Canada rate. And with the U.S. economy slowing (Alberta created more jobs than the U.S. did in the last quarter), it’s little wonder that Bank of Canada governor Mark Carney decided not to raise interest rates this week – and it’s doubtful he will anytime soon.

While the variable rate has held steady for months, fixed-rate mortgages are far more difficult to predict. Fixed mortgages are primarily priced off of the five-year bond, and as a result are subject to volatility in the bond market, which is being whipsawed by the European sovereign debt crisis.

As more European countries edge toward default, interest rates have risen on their bonds, in some cases to more than 10 per cent. Many investors, however, fearing widespread defaults, have fled to the safe haven of the U.S. bond market. In the process, that has kept U.S. rates in the 2.3 per cent range, and helped keep mortgages rates low in this country, with a five-year fixed term mortgage going as low as 3.29 per cent.

But these bedrock-low rates could rise quickly if the U.S. does not solve its own debt crisis. President Obama has asked Congress to lift the country’s debt ceiling — the amount the country can borrow to meet its obligations. The Republican-controlled House of Representatives is refusing to grant the increase until Obama makes deep cuts to government expenditures.

They have until Aug. 2 to solve the impasse and if nothing is done, the U.S. will default on the latest round of payments it has to make on its debts. Bond rating agencies have already said they will downgrade U.S. bonds if a default occurs. If that happens, it will drive up interest rates in the U.S. and push rates up on Canadian mortgages in the process.

“If Europe gets into trouble and the U.S. gets into trouble, money will be looking elsewhere,” says Kelvin Mangaroo, founder and president of RateSupermarket.ca. “Interest rates have been bouncing around and we might continue to see that until the U.S. credit situation gets sorted out.”

Could the uncertainty in Europe actually drive interest rates lower in Canada?

If Obama and Congressional Republicans come to an agreement, there could be a sudden flight to quality as investors buy U.S. bonds. That could drive down interest rates on the U.S. five-year bond, and reduce rates on Canadian fixed mortgages.

“There is always the possibility that they could drop a bit still,” said Mangaroo. “They’ve been lower before, so there is no reason that they can’t go back.”

With so much volatility in the market, should you lock in your mortgage? It’s hard to say, but studies have concluded you are better off holding a variable mortgage. Then again, those studies also include periods of extremely high interest rates, but with rates now at historic lows they would only go marginally lower.

In fact, you can purchase a 10-year mortgage for just 4.84 per cent and a 25-year at 8.35 per cent. In effect, you could lock your mortgage costs in at today’s historic lows and that would pay dividends long after the crisis in Europe and the U.S. has passed and rates are rising again.

Whether to lock in or not is the most common question Mangaroo gets at RateSupermarket.ca. About one-third of Canadian mortgages are variable, but Mangaroo says, “It all comes down to risk profile. And interest rates will be going up, so if you’re uncomfortable with that, you should look at a fixed five-year term which is at 3.5 per cent.”

But one thing is certain. If you hold a variable mortgage, you can breathe a little easier knowing Carney won’t be raising rates anytime soon. Ian Lee, director of the MBA Program at Carleton University, says this is because of the ongoing failure by the European leadership to address, let alone resolve, the growing Eurozone debt crisis and the ongoing inability of the U.S. political leadership to seriously address their annual $1.5 trillion deficit and $14 trillion debt.

“This clearly suggests,” says Lee, “that Governor Carney will think many times before raising interest rates now or in the fall.”

19 Jul

BoC rate to double by end of first quarter 2012


Posted by: Mike Hattim

  Jul 18, 2011

A relatively strong Canadian economy will force the Bank of Canada to double its key lending rate by the end of the first quarter in 2012, says a new report from Citigroup Capital Markets.

The country’s central bank will stand pat when it announces its latest rate decision on Tuesday but come October it will begin a tightening campaign that will see rates jump 100 basis points in about six months, said Todd Elmer, a foreign exchange analyst at Citi.

Mr. Elmer said the Street’s presently downbeat rate expectations stem mostly from external factors – presumably the European sovereign crisis and waning U.S. recovery –  and poorly reflect Canadian data that has consistently exceeded expectations.

“This means that there is still some time before the BoC may need to explicitly signal a hike, but with limited spare capacity in the economy, we doubt there is sufficient breathing room for the Bank to adopt a more dovish stance.”

Some worry that a rate hike in Canada at a time when U.S. monetary policy is turning more dovish could drive the loonie higher to the detriment of growth.

But Mr. Elmer said the market has tended to overestimate the drag from the currency on both the real economy and price.

Despite persistent Canadian dollar strength, he noted that Citi’s economic surprise index for Canada has moved sharply higher recently as has the bank’s inflation surprise index.

“This skews risks in favor of a more hawkish statement from the BoC and Monetary Policy Review this week and a potential rise in interest rate expectations,” he said.