The recent increase in the US Fed Discount Rate means very little in practical terms. The discount rate is the
interest rate that the Fed charges banks for emergency loans and it is hardly being used. The rate hike
however, signals the first step in a long journey towards removing liquidity from the system.
The move makes sense given that the Fed has closed many of its emergency lending facilities and demand for
funding has slowed substantially. In fact, borrowing from this credit facility has totaled only $20 billion over the
past three months. Given that normally the gap between the discount rate and the fed funds rate is 100 basis
points and today, it is standing at 50 basis points suggests that we might see an additional increase in this rate
in the near future. What counts, however, is the fed funds rate and this rate is unlikely to rise until early 2011.
As for the Bank of Canada, at this point it appears that the Bank is committed to start hiking come June or
July. This is a risky move given that both in 1992 and 2002 the Bank moved independently of the Fed, only to
reverse the decision a few months later. The most likely scenario is that the Bank will move by 50-75 basis
points and then will pause until 2011 and continue to hike alongside the Fed.
The reason for the limited hike in 2010 is that the ongoing recovery in the Canadian economy will not be
linear. The first two quarters of the year will be strong, reflecting fiscal stimulus from both sides of the border,
a rebounding inventory cycle and strong credit growth in Canada. These factors, however, will fade in the
second half of the year, with overall GDP growth expected to average less than 2% vs. more than 3% in the
first half.
As for inflation, the Bank of Canada is projecting core inflation to reach its target rate of 2% by mid-2011. But
the core rate has already reached 1.9% last month. Is the Bank of Canada wrong? The short answer is no. The
1.9% advance in the core rate reflects a very soft base period (rates are calculated on a year-over-year basis
and January of 2009 saw a notable decline in prices). This means that the coming months will see a much
lower inflation rate. The reality is that the underlying inflation rate in Canada is well below 1.5%. So we still
have a lot of time until we reach the Bank’s target.
The recent move by the Ministry of Finance towards more stringent regulation of home loans is targeted to
deal with potential problems down the road without derailing the housing market. The following is our
estimate of the impact of the new rules on overall mortgage originations:
Increase down payment requirement for refinancing: 7%-8%
Increase down payment requirement for non-primary residence: 2%-3%
Increase qualifying rate on variable mortgages: 5%-6%
Benjamin Tal
Senior Economist
Friday, February 26, 2010
Wednesday, February 24, 2010
Bank of Canada urged to hike rates after June
Paul Vieira, Financial Post
OTTAWA -- With Bay Street convinced the Bank of Canada will maintain its pledge to wait until July to begin raising interest rates, the debate now turns to how aggressively the central bank should behave thereafter.
In the view of a paper prepared for the C.D. Howe Institute, the central bank should act with zeal. If it wants to get ahead of the inflation curve, the bank should raise its benchmark rate by 50 basis points at every scheduled rate announcement until the middle of next year, the paper said.
Michael Parkin, an economics professor at the University of Western Ontario and member of the think-tank's monetary policy council, said "steep" increases would be required to make up for keeping the benchmark rate so low for so long.
The paper comes a week before the Bank of Canada's next interest-rate statement, scheduled for March 2 and the same day Mark Carney, the bank governor, held an annual meeting with leading private-sector economists in Ottawa.
The bank cut its benchmark rate last year to a record low 0.25%, and made a pledge -- conditional on inflation -- to keep it there until the end of June in an effort to pump up the economy amid the financial crisis. Analysts say the move has worked. Figures on gross domestic product, to be reported next week, should indicate the economy grew roughly 4% in the fourth quarter, above the central bank's own expectations. And inflation is closer to the bank's 2% target earlier than envisaged, although analysts suggest price increases could lose some steam in the weeks ahead.
The main thrust of Mr. Parkin's argument is the central bank needs to raise rates as aggressively in anticipation of the recovery as cut in response to the financial crisis. This would be in line with the Taylor rule, which dictates by how much a central bank should move its benchmark rate in response to inflation.
Based on the central bank's own economic projections, Mr. Parkin calculated the future path of interest rates. "When the [benchmark] rate starts to rise, it must be on a steep upward path," he wrote. Under the Taylor rule the benchmark rate should in fact, be higher than present levels. As a result, a target rate "somewhat higher" than what otherwise would be required might be necessary for the latter half of this year and all of next, he said, "to avoid inflation running above target."
Economists indicate the central bank, if possible, will keep its pledge because reversing course now could damage its credibility.
Other analysts also signalled that they shared some of Mr. Parkin's view.
"In order to move from an exceptionally low to low-rate environment, you need to move fast," said Sébastien Lavoie, economist at Laurentian Bank Securities, which last fall indicated in a report Mr. Carney would need to entertain rate increases of up to a percentage point.
Michael Gregory, senior economist at BMO Capital Markets, said that by mid-2011 the benchmark rate would "have to be in proximity of being neutral."
However, he added the central bank would have to take into account the strength of the loonie in determining the appropriate level of interest rates. The currency is likely to climb as the Bank of Canada moves ahead of the U.S. Federal Reserve, and perhaps more aggressively, Mr. Gregory said. http://www.financialpost.com/news-sectors/economy/story.html?id=2602124
OTTAWA -- With Bay Street convinced the Bank of Canada will maintain its pledge to wait until July to begin raising interest rates, the debate now turns to how aggressively the central bank should behave thereafter.
In the view of a paper prepared for the C.D. Howe Institute, the central bank should act with zeal. If it wants to get ahead of the inflation curve, the bank should raise its benchmark rate by 50 basis points at every scheduled rate announcement until the middle of next year, the paper said.
Michael Parkin, an economics professor at the University of Western Ontario and member of the think-tank's monetary policy council, said "steep" increases would be required to make up for keeping the benchmark rate so low for so long.
The paper comes a week before the Bank of Canada's next interest-rate statement, scheduled for March 2 and the same day Mark Carney, the bank governor, held an annual meeting with leading private-sector economists in Ottawa.
The bank cut its benchmark rate last year to a record low 0.25%, and made a pledge -- conditional on inflation -- to keep it there until the end of June in an effort to pump up the economy amid the financial crisis. Analysts say the move has worked. Figures on gross domestic product, to be reported next week, should indicate the economy grew roughly 4% in the fourth quarter, above the central bank's own expectations. And inflation is closer to the bank's 2% target earlier than envisaged, although analysts suggest price increases could lose some steam in the weeks ahead.
The main thrust of Mr. Parkin's argument is the central bank needs to raise rates as aggressively in anticipation of the recovery as cut in response to the financial crisis. This would be in line with the Taylor rule, which dictates by how much a central bank should move its benchmark rate in response to inflation.
Based on the central bank's own economic projections, Mr. Parkin calculated the future path of interest rates. "When the [benchmark] rate starts to rise, it must be on a steep upward path," he wrote. Under the Taylor rule the benchmark rate should in fact, be higher than present levels. As a result, a target rate "somewhat higher" than what otherwise would be required might be necessary for the latter half of this year and all of next, he said, "to avoid inflation running above target."
Economists indicate the central bank, if possible, will keep its pledge because reversing course now could damage its credibility.
Other analysts also signalled that they shared some of Mr. Parkin's view.
"In order to move from an exceptionally low to low-rate environment, you need to move fast," said Sébastien Lavoie, economist at Laurentian Bank Securities, which last fall indicated in a report Mr. Carney would need to entertain rate increases of up to a percentage point.
Michael Gregory, senior economist at BMO Capital Markets, said that by mid-2011 the benchmark rate would "have to be in proximity of being neutral."
However, he added the central bank would have to take into account the strength of the loonie in determining the appropriate level of interest rates. The currency is likely to climb as the Bank of Canada moves ahead of the U.S. Federal Reserve, and perhaps more aggressively, Mr. Gregory said. http://www.financialpost.com/news-sectors/economy/story.html?id=2602124
Tuesday, February 23, 2010
Consumer debt could be drag on banks
John Greenwood, Financial Post
Last year Canadian banks emerged as global heroes after they made it through the financial crisis almost unscathed.
But if the financial meltdown was the defining challenge for 2009, analysts worry that ballooning debt levels may end up being the comparable trial for 2010 as consumers struggle to meet their obligations amid an uncertain economy and rising interest rates.
We'll find out what the big banks think as Canadian Imperial Bank of Commerce and National Bank of Canada kick off the bank earnings season on Thursday.
According to a recent report by Moody's Canada, Canadian household debt climbed to a record 145% of income, from around 95% 20 years ago, and could exceed U.S. levels in the next three years.
Meanwhile, a task force on financial literacy sponsored by the federal government found that more than a third of Canadians are struggling to keep track of their finances and make responsible decisions.
Analysts are watching closely because most of that debt, including nearly $446-billion of mortgages and $336-billion of credit cards and other loans, is held by the banks.
The good news for investors is that the riskiest mortgage debt is insured through the Canada Mortgage and Housing Corp.
Mario Mendonca, an analyst at Genuity Capital Markets, said he's not "overly concerned" by the high level of consumer debt, pointing out that Canadians tend to be conservative with their finances and try to meet their obligations even if they get into trouble.
With most economists predicting healthier economic growth in 2010 and 2011, unemployment should not prove a major headwind meaning that the banks' consumer loans are safe despite the high level of indebtedness, according to Mr. Mendonca.
He's calling for a provisions for credit losses to start to decline noticeably in the second half of the year as revenue from underwriting and advisory services pick up amid a strengthening economy.
"We view the next few quarters as a transition period," he said in a research note last week,
Barclays Capital analyst John Aiken is also optimistic on the debt front, pointing out in a recent note that "all signs point to improving credit quality and lower provisions."
Given recent positive signs in credit markets in Canada and the United States, Mr. Aiken said "it is quite possible" that the domestic banks will set aside less than they did last quarter to cover delinquencies.
Mr. Aiken's main area of concern is revenues from trading operations. A source of eye-popping profits last year as banks took advantage of wider spreads and the dislocation in credit markets, trading revenue at all the banks is expected to shrink in 2010 as financial markets continue to normalize.
"We believe that a significant decline in trading revenues could be the story of the quarter and reset earnings levels for 2010," he said in a note to clients.
Still, much depends on the economy which remains fragile as Ottawa looks for ways to withdraw supports put in place in the wake of the financial crisis.
"There is a fair degree of uncertainty," said Lindsay Gordon, chief executive of HSBC Bank Canada, who pointed out that while the Canadian economy appears in good shape relative to other countries, the world is increasingly connected and it was less than a year ago that storm gripping financial markets created almost "a sense of Armageddon."
"All governments including the Canadian government are in a challenging situation," he said in an interview.
Though a small player in this country HSBC has significant exposure to residential mortgages in Vancouver and other urban markets.
"There is no question that over the last year there has been an increase in delinquencies in residential mortgages at all the banks," he said, adding that the increase at HSBC has been slight.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2598833#ixzz0gJZR7Wun
Last year Canadian banks emerged as global heroes after they made it through the financial crisis almost unscathed.
But if the financial meltdown was the defining challenge for 2009, analysts worry that ballooning debt levels may end up being the comparable trial for 2010 as consumers struggle to meet their obligations amid an uncertain economy and rising interest rates.
We'll find out what the big banks think as Canadian Imperial Bank of Commerce and National Bank of Canada kick off the bank earnings season on Thursday.
According to a recent report by Moody's Canada, Canadian household debt climbed to a record 145% of income, from around 95% 20 years ago, and could exceed U.S. levels in the next three years.
Meanwhile, a task force on financial literacy sponsored by the federal government found that more than a third of Canadians are struggling to keep track of their finances and make responsible decisions.
Analysts are watching closely because most of that debt, including nearly $446-billion of mortgages and $336-billion of credit cards and other loans, is held by the banks.
The good news for investors is that the riskiest mortgage debt is insured through the Canada Mortgage and Housing Corp.
Mario Mendonca, an analyst at Genuity Capital Markets, said he's not "overly concerned" by the high level of consumer debt, pointing out that Canadians tend to be conservative with their finances and try to meet their obligations even if they get into trouble.
With most economists predicting healthier economic growth in 2010 and 2011, unemployment should not prove a major headwind meaning that the banks' consumer loans are safe despite the high level of indebtedness, according to Mr. Mendonca.
He's calling for a provisions for credit losses to start to decline noticeably in the second half of the year as revenue from underwriting and advisory services pick up amid a strengthening economy.
"We view the next few quarters as a transition period," he said in a research note last week,
Barclays Capital analyst John Aiken is also optimistic on the debt front, pointing out in a recent note that "all signs point to improving credit quality and lower provisions."
Given recent positive signs in credit markets in Canada and the United States, Mr. Aiken said "it is quite possible" that the domestic banks will set aside less than they did last quarter to cover delinquencies.
Mr. Aiken's main area of concern is revenues from trading operations. A source of eye-popping profits last year as banks took advantage of wider spreads and the dislocation in credit markets, trading revenue at all the banks is expected to shrink in 2010 as financial markets continue to normalize.
"We believe that a significant decline in trading revenues could be the story of the quarter and reset earnings levels for 2010," he said in a note to clients.
Still, much depends on the economy which remains fragile as Ottawa looks for ways to withdraw supports put in place in the wake of the financial crisis.
"There is a fair degree of uncertainty," said Lindsay Gordon, chief executive of HSBC Bank Canada, who pointed out that while the Canadian economy appears in good shape relative to other countries, the world is increasingly connected and it was less than a year ago that storm gripping financial markets created almost "a sense of Armageddon."
"All governments including the Canadian government are in a challenging situation," he said in an interview.
Though a small player in this country HSBC has significant exposure to residential mortgages in Vancouver and other urban markets.
"There is no question that over the last year there has been an increase in delinquencies in residential mortgages at all the banks," he said, adding that the increase at HSBC has been slight.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2598833#ixzz0gJZR7Wun
Thursday, February 18, 2010
Housing market will cool down, real estate industry says
Housing market will cool down, real estate industry says
The Canadian Press
OTTAWA — House price increases will moderate as the resale market becomes more balanced, says the president of the Canadian Real Estate Association.
“The resale housing market is becoming more balanced in a number of provinces,” Dale Ripplinger said Wednesday after the association released January sales statistics that revealed another big year-over-year price increase.
“A more balanced market is likely to result in smaller price increases going forward, with buyers in less of a rush due to an increase in supply.”
While Canadian home resale volumes slipped in January compared with December, they came in far higher than in January 2009, when sales fell to the lowest levels in a decade as the country suffered through the global credit crunch and recession.
The association said 25,671 homes were sold across the country in January, up 58 per cent from the same month a year earlier when consumer confidence hit an ebb, drying up buying and lending activity.
The national average price for homes listed on the association’s Multiple Listing Service was $328,537, up 19.6 per cent from a year ago.
The Kitchener-Waterloo Real Estate Board recorded 416 sales in January, 64 per cent more than a year ago. The Real Estate Board of Cambridge registered 140 sales, an increase of 32 per cent.
The average price in Kitchener rose 12.3 per cent to $278,825 on a year-over-year basis. In Cambridge, the average price jumped 16.3 per cent to $278,527.
The association’s report was issued a day after Finance Minister Jim Flaherty announced that tighter rules for mortgage borrowers will be introduced in April. He described it as a measure to prevent a bubble in the housing market.
Under the new rules, effective April 19, borrowers will have to meet the standards for a five-year fixed-rate mortgage even if the interest they will pay initially is lower.
Compared month-over-month, seasonally adjusted home sales were down 2.8 per cent from the strong levels reported in December, giving a sign that the housing market could be already starting to cool in some regions.
Nearly half of the drop was linked to a slowdown in housing sales in Ontario.
“One car doesn’t make a parade, so a few more months of results showing a cooling trend will be required before talk of a Canadian housing bubble begins to fade,” said association chief economist Gregory Klump.
Klump suggested that Flaherty’s new plan and the harmonized sales tax, which replaces provincial sales taxes in Ontario and British Columbia on July 1, could encourage more Canadians to enter the market in the first half of the year.
“It could take until the second half of the year before a cooling trend becomes evident,” he said.
Resale homes were still drawing a stronger demand for January, with 170,199 listed homes on the Multiple Listing Service in Canada, a decline of 18 per cent over the same time last year, the report said. http://news.therecord.com/Business/article/672304
The Canadian Press
OTTAWA — House price increases will moderate as the resale market becomes more balanced, says the president of the Canadian Real Estate Association.
“The resale housing market is becoming more balanced in a number of provinces,” Dale Ripplinger said Wednesday after the association released January sales statistics that revealed another big year-over-year price increase.
“A more balanced market is likely to result in smaller price increases going forward, with buyers in less of a rush due to an increase in supply.”
While Canadian home resale volumes slipped in January compared with December, they came in far higher than in January 2009, when sales fell to the lowest levels in a decade as the country suffered through the global credit crunch and recession.
The association said 25,671 homes were sold across the country in January, up 58 per cent from the same month a year earlier when consumer confidence hit an ebb, drying up buying and lending activity.
The national average price for homes listed on the association’s Multiple Listing Service was $328,537, up 19.6 per cent from a year ago.
The Kitchener-Waterloo Real Estate Board recorded 416 sales in January, 64 per cent more than a year ago. The Real Estate Board of Cambridge registered 140 sales, an increase of 32 per cent.
The average price in Kitchener rose 12.3 per cent to $278,825 on a year-over-year basis. In Cambridge, the average price jumped 16.3 per cent to $278,527.
The association’s report was issued a day after Finance Minister Jim Flaherty announced that tighter rules for mortgage borrowers will be introduced in April. He described it as a measure to prevent a bubble in the housing market.
Under the new rules, effective April 19, borrowers will have to meet the standards for a five-year fixed-rate mortgage even if the interest they will pay initially is lower.
Compared month-over-month, seasonally adjusted home sales were down 2.8 per cent from the strong levels reported in December, giving a sign that the housing market could be already starting to cool in some regions.
Nearly half of the drop was linked to a slowdown in housing sales in Ontario.
“One car doesn’t make a parade, so a few more months of results showing a cooling trend will be required before talk of a Canadian housing bubble begins to fade,” said association chief economist Gregory Klump.
Klump suggested that Flaherty’s new plan and the harmonized sales tax, which replaces provincial sales taxes in Ontario and British Columbia on July 1, could encourage more Canadians to enter the market in the first half of the year.
“It could take until the second half of the year before a cooling trend becomes evident,” he said.
Resale homes were still drawing a stronger demand for January, with 170,199 listed homes on the Multiple Listing Service in Canada, a decline of 18 per cent over the same time last year, the report said. http://news.therecord.com/Business/article/672304
Tuesday, February 16, 2010
Jim Flaherty moves against housing speculators!
Ottawa and Toronto — Globe and Mail Update Published on Tuesday, Feb. 16, 2010 8:17AM EST Last updated on Tuesday, Feb. 16, 2010 9:03AM EST
Finance Minister Jim Flaherty Tuesday announced tighter lending standards for mortgages, saying that while the housing market is “healthy” the moves are needed to “help prevent negative trends from developing.”
Under the new rules, all borrowers will need to meet standards for 5-year fixed-rate mortgages regardless of whether they're seeking a loan with a lower rate and shorter term.
Also, the government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent, and requiring a 20 per cent down payment for government-backed mortgage insurance on “speculative” investment properties.
“There are no definitive signs of a housing bubble,” Mr. Flaherty said. “We think we're being pro-active in the three steps we're taking today.”
Frank Techar, the President of Personal and Commercial Banking for BMO Bank of Montreal, welcomed the announcement.
“While we do not believe that Canada faces a housing bubble, we fully support the minister's actions,” Mr. Techar said in a statement. “Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent. Currently, we require high ratio mortgages to be able to qualify using the 5 year rate.”
In a release, the finance department indicated that the three new changes to the mortgage insurance guarantee rules are intended to take effect April 19, 2010.
In reference to the tightening of re-financing rules, Mr. Flaherty said this will encourage Canadians to build equity in their homes instead of tapping that equity as a source of cash.
“This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up. We are encouraging people to build equity over time, using home ownership as an effective way to save, rather than as a vehicle for quick cash,” he said.
In his comments on the third measure, Mr. Flaherty said the hike in minimum down payments for such properties will help keep prices from climbing too high.
“We will require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation. This will discourage the kind of reckless real estate speculation that can drive prices to unsustainable levels which does not serve Canadian home buyers,” he said.
“We're not aiming here at investment properties,” Mr. Flaherty added. “What we're getting at is the speculation in multiple-condo markets, in particular.”
CIBC economist Avery Shenfeld said “these look to be very well targeted at the one area of concern that we have, which is that low rates are making larger variable rate mortgages look more affordable than they really are on a long term basis.”
The moves send an appropriate message to borrowers about debt, he said. While the rules don't take effect yet, Mr. Shenfeld suggested that the banks might begin adopting them earlier. And they could take a little bit of steam out of the market, he said.
“It may be part of a cooling that we'll see in house price appreciation,” he said. “We were pushing into house prices that were running a bit ahead of rental rates and income fundamentals – not to the point that we feared a huge house price crash, but to the point that it might be time to head-off such risks.”
Finance Minister Jim Flaherty Tuesday announced tighter lending standards for mortgages, saying that while the housing market is “healthy” the moves are needed to “help prevent negative trends from developing.”
Under the new rules, all borrowers will need to meet standards for 5-year fixed-rate mortgages regardless of whether they're seeking a loan with a lower rate and shorter term.
Also, the government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent, and requiring a 20 per cent down payment for government-backed mortgage insurance on “speculative” investment properties.
“There are no definitive signs of a housing bubble,” Mr. Flaherty said. “We think we're being pro-active in the three steps we're taking today.”
Frank Techar, the President of Personal and Commercial Banking for BMO Bank of Montreal, welcomed the announcement.
“While we do not believe that Canada faces a housing bubble, we fully support the minister's actions,” Mr. Techar said in a statement. “Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent. Currently, we require high ratio mortgages to be able to qualify using the 5 year rate.”
In a release, the finance department indicated that the three new changes to the mortgage insurance guarantee rules are intended to take effect April 19, 2010.
In reference to the tightening of re-financing rules, Mr. Flaherty said this will encourage Canadians to build equity in their homes instead of tapping that equity as a source of cash.
“This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up. We are encouraging people to build equity over time, using home ownership as an effective way to save, rather than as a vehicle for quick cash,” he said.
In his comments on the third measure, Mr. Flaherty said the hike in minimum down payments for such properties will help keep prices from climbing too high.
“We will require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation. This will discourage the kind of reckless real estate speculation that can drive prices to unsustainable levels which does not serve Canadian home buyers,” he said.
“We're not aiming here at investment properties,” Mr. Flaherty added. “What we're getting at is the speculation in multiple-condo markets, in particular.”
CIBC economist Avery Shenfeld said “these look to be very well targeted at the one area of concern that we have, which is that low rates are making larger variable rate mortgages look more affordable than they really are on a long term basis.”
The moves send an appropriate message to borrowers about debt, he said. While the rules don't take effect yet, Mr. Shenfeld suggested that the banks might begin adopting them earlier. And they could take a little bit of steam out of the market, he said.
“It may be part of a cooling that we'll see in house price appreciation,” he said. “We were pushing into house prices that were running a bit ahead of rental rates and income fundamentals – not to the point that we feared a huge house price crash, but to the point that it might be time to head-off such risks.”
Thursday, February 11, 2010
ING president speaks out against tighter mortgage rules
After providing several comments on the potential housing bubble in Canada, ING Direct Canada president Peter Aceto told the Globe and Mail that Ottawa shouldn't tighten mortgage rules.
"High level, one-stroke fixes are too simple, and can have a very large impact," Aceto told the newspaper. "I worry about government-based tightening of the mortgage rules creating a much worse reaction - too fast of a cooling, which is not really good for anyone."
Aceto went on to say that banks can tighten rules themselves and do not need Finance Minister Jim Flaherty to "make the decision for them."
The comments come alongside a warning from Scotia Capital economists Derek Holt and Karen Cordes, who predicted a housing bubble forming in a report released late last year.
"You can't go from 100 km/h to zero in a nanosecond without suffering harsh consequences," they wrote, according to the Globe. "Newton's third law is the best caution that can be served up with respect to abruptly altering Canadian mortgage rules as per some of the whisper talk leading up to the March 4 federal budget after the currently government sharply liberalized the mortgage market in early 2007."
"High level, one-stroke fixes are too simple, and can have a very large impact," Aceto told the newspaper. "I worry about government-based tightening of the mortgage rules creating a much worse reaction - too fast of a cooling, which is not really good for anyone."
Aceto went on to say that banks can tighten rules themselves and do not need Finance Minister Jim Flaherty to "make the decision for them."
The comments come alongside a warning from Scotia Capital economists Derek Holt and Karen Cordes, who predicted a housing bubble forming in a report released late last year.
"You can't go from 100 km/h to zero in a nanosecond without suffering harsh consequences," they wrote, according to the Globe. "Newton's third law is the best caution that can be served up with respect to abruptly altering Canadian mortgage rules as per some of the whisper talk leading up to the March 4 federal budget after the currently government sharply liberalized the mortgage market in early 2007."
Ottawa advised to tighten mortgage rules!
February 10, 2010
By Julian Beltrame
OTTAWA — The federal government should avoid major surgery and make only minor adjustments to deal with fears of overheating in Canada’s housing market, a number of leading economists said Wednesday.
Federal Finance Minister Jim Flaherty and the Bank of Canada have expressed concern that Canadians may be assuming too much debt in home purchases, debt that could rebound on them when interest rates rise.
But some solutions being floated in advance of Flaherty’s March 4 budget — doubling the minimum down payment to 10 per cent, or reducing the maximum amortization period from 35 to 30 years — could do more harm than good, the economists said.
“We want some sort of micro-surgery, not (taking) a pickaxe to the problem,” said Avery Shenfeld, chief economist with CIBC World Markets.
Bank of Nova Scotia economist Derek Holt said such radical surgery could cause home prices to crash and shake confidence in the consumer sector, a key driver of the fragile economic recovery.
Interviews with economists at four of Canada’s big banks showed some disparity of views as to the size of the problem, but general agreement that there is good reason for concern.
Most see home prices in Canada as being 10 to 15 per cent too high, largely because construction of new homes ground to a halt during the recession, decreasing available supply, and because of record-low interest rates, which are luring many new entrants into the market.
The Canadian Real Estate Association said this week it expects home prices to gain another five per cent to a record average of $337,500 this year. Sales will also hit record levels this year before tailing off next year, the association said.
It is unclear whether Flaherty is contemplating measures to cool prices and activity. Last weekend, the minister told reporters he was closely watching prices, but did not believe Canada had a housing bubble as yet.
But if one were to develop it could have wider repercussions on the economic recovery, as occurred in the United States, the economists said.
The best approach now is to take baby steps that would help moderate prices and activity and create a so-called soft landing.
One measure, according to TD Bank deputy chief economist Craig Alexander, would be to tighten the “income test” banks use to assess whether a prospective homeowner can meet monthly mortgage payments.
Already, banks build in a cushion in handing out floating mortgages by judging credit worthiness based on the borrower’s ability to make payments on the three-year rate, not the variable rate — about a two percentage point difference. Alexander said that could be increased to the still higher five-year posted rate.
A variation would be for banks to judge ability to meet payments not just on the mortgage but on all outstanding debts of a prospective homebuyer.
Yet another idea would be to deny government-backed insurance on mortgages for investment properties, thereby dampening speculation.
Economists believe such measures could help deflate any housing bubble without bursting it.
“It’s not in the interest of either buyers or lenders to have boom-bust cycles,” said the TD’s Alexander.
“That’s the lesson from the U.S. experience. If you have the wrong incentives and you don’t have regulations, you end up in a place you don’t want to be.”
Bank of Montreal economist Douglas Porter said if Ottawa chooses to raise the down payment requirement, it should do so modestly, perhaps to six or seven per cent.
Porter said, however, that he didn’t think reducing the amortization period to 30 years would be dramatic enough to cause a major disruption in the market.
Economists point out that home affordability is expected to tighten this summer even if Flaherty does not change the rules.
The introduction of the harmonized sales tax starting July 1 in Ontario and British Columbia — two of the hottest home markets — is expected to add a couple of thousand dollars to home purchases in those provinces.
And Bank of Canada governor Mark Carney is widely expected to start raising interest rates as early as July.
The Canadian Press http://news.therecord.com/Business/article/668809
By Julian Beltrame
OTTAWA — The federal government should avoid major surgery and make only minor adjustments to deal with fears of overheating in Canada’s housing market, a number of leading economists said Wednesday.
Federal Finance Minister Jim Flaherty and the Bank of Canada have expressed concern that Canadians may be assuming too much debt in home purchases, debt that could rebound on them when interest rates rise.
But some solutions being floated in advance of Flaherty’s March 4 budget — doubling the minimum down payment to 10 per cent, or reducing the maximum amortization period from 35 to 30 years — could do more harm than good, the economists said.
“We want some sort of micro-surgery, not (taking) a pickaxe to the problem,” said Avery Shenfeld, chief economist with CIBC World Markets.
Bank of Nova Scotia economist Derek Holt said such radical surgery could cause home prices to crash and shake confidence in the consumer sector, a key driver of the fragile economic recovery.
Interviews with economists at four of Canada’s big banks showed some disparity of views as to the size of the problem, but general agreement that there is good reason for concern.
Most see home prices in Canada as being 10 to 15 per cent too high, largely because construction of new homes ground to a halt during the recession, decreasing available supply, and because of record-low interest rates, which are luring many new entrants into the market.
The Canadian Real Estate Association said this week it expects home prices to gain another five per cent to a record average of $337,500 this year. Sales will also hit record levels this year before tailing off next year, the association said.
It is unclear whether Flaherty is contemplating measures to cool prices and activity. Last weekend, the minister told reporters he was closely watching prices, but did not believe Canada had a housing bubble as yet.
But if one were to develop it could have wider repercussions on the economic recovery, as occurred in the United States, the economists said.
The best approach now is to take baby steps that would help moderate prices and activity and create a so-called soft landing.
One measure, according to TD Bank deputy chief economist Craig Alexander, would be to tighten the “income test” banks use to assess whether a prospective homeowner can meet monthly mortgage payments.
Already, banks build in a cushion in handing out floating mortgages by judging credit worthiness based on the borrower’s ability to make payments on the three-year rate, not the variable rate — about a two percentage point difference. Alexander said that could be increased to the still higher five-year posted rate.
A variation would be for banks to judge ability to meet payments not just on the mortgage but on all outstanding debts of a prospective homebuyer.
Yet another idea would be to deny government-backed insurance on mortgages for investment properties, thereby dampening speculation.
Economists believe such measures could help deflate any housing bubble without bursting it.
“It’s not in the interest of either buyers or lenders to have boom-bust cycles,” said the TD’s Alexander.
“That’s the lesson from the U.S. experience. If you have the wrong incentives and you don’t have regulations, you end up in a place you don’t want to be.”
Bank of Montreal economist Douglas Porter said if Ottawa chooses to raise the down payment requirement, it should do so modestly, perhaps to six or seven per cent.
Porter said, however, that he didn’t think reducing the amortization period to 30 years would be dramatic enough to cause a major disruption in the market.
Economists point out that home affordability is expected to tighten this summer even if Flaherty does not change the rules.
The introduction of the harmonized sales tax starting July 1 in Ontario and British Columbia — two of the hottest home markets — is expected to add a couple of thousand dollars to home purchases in those provinces.
And Bank of Canada governor Mark Carney is widely expected to start raising interest rates as early as July.
The Canadian Press http://news.therecord.com/Business/article/668809
Monday, February 8, 2010
Pillar to Post Information Series
The Pillar To Post Information Series is a valuable resource to help buyers and sellers to learn about how their home works and how to keep it functioning properly. From safety tips to energy conservation ideas, the series is educational for both real estate professionals and homeowners. Here are just some of the topics covered:
High Humidity in the Home
High amounts of humidity in a residence can cause and accelerate mold growth, a musty odor, and can potentially cause health problems and property damage. This section in the Pillar To Post Information Series reviews causes, effects, and solutions.
Central Air Conditioning
Central air conditioning systems are a luxury in some areas of North America and a basic necessity in others. Whatever the purpose, it is in a homeowner's best interest to understand how to choose the right system for their home, and how to maintain it for optimal use.
Garage Door Safety
The garage vehicle door is often the largest moving object in a home and can weigh up to 400 pounds. The Information Series offers tips on how to ensure garage door safety, including checking the weight and pulley system, as well as the operability of the springs and the balance of the door itself.
Zero-Clearance Fireplaces
Adding a wood burning fireplace to an existing home is appealing to many homeowners; however, it can be an expensive proposition as it usually involves foundation construction and a masonry chimney. This article details the merits of a zero-clearance wood burning fireplace, which can be installed in almost any home, using existing floor structures and a prefabricated chimney.
Insulating the Basement
The basement is usually the last place people think to insulate, yet it can account for up to 1/3 of heat loss in a home. Adding or upgrading basement insulation can significantly cut down on energy use. A finished basement also creates a comfortable space, which is especially appealing to people looking to affordably extend their recreation and living areas.
High Humidity in the Home
High amounts of humidity in a residence can cause and accelerate mold growth, a musty odor, and can potentially cause health problems and property damage. This section in the Pillar To Post Information Series reviews causes, effects, and solutions.
Central Air Conditioning
Central air conditioning systems are a luxury in some areas of North America and a basic necessity in others. Whatever the purpose, it is in a homeowner's best interest to understand how to choose the right system for their home, and how to maintain it for optimal use.
Garage Door Safety
The garage vehicle door is often the largest moving object in a home and can weigh up to 400 pounds. The Information Series offers tips on how to ensure garage door safety, including checking the weight and pulley system, as well as the operability of the springs and the balance of the door itself.
Zero-Clearance Fireplaces
Adding a wood burning fireplace to an existing home is appealing to many homeowners; however, it can be an expensive proposition as it usually involves foundation construction and a masonry chimney. This article details the merits of a zero-clearance wood burning fireplace, which can be installed in almost any home, using existing floor structures and a prefabricated chimney.
Insulating the Basement
The basement is usually the last place people think to insulate, yet it can account for up to 1/3 of heat loss in a home. Adding or upgrading basement insulation can significantly cut down on energy use. A finished basement also creates a comfortable space, which is especially appealing to people looking to affordably extend their recreation and living areas.
Thursday, February 4, 2010
Is a home a good investment?
Is a home a good investment?
If you are renting right now, you may have spent some time thinking about buying a home. There are some very good reasons to invest in a home, but there are also reasons to think with care about taking this step, especially if this is your only investment.
Why would I want to invest in a home?
*
You are investing in something that has value: When you buy a home, you own it (at least the part that you don’t owe the bank through a mortgage).
*
Your home can go up in value: You may be able to sell your home for more money than you paid for it. You can use that money to spend on a new home, save, invest, or do whatever you like.
*
You get to live in your investment: You have to live somewhere. You can’t live in a Guaranteed Investment Certificate (GIC) or mutual fund.
*
The cost may be about the same as rent: In some cases, your monthly mortgage payment to the bank may be about the same as what you would pay in rent.
*
It forces you to save: With each mortgage payment you make, you own a little more of your home. The more you own of your home when you sell it, the more money that goes into your pocket.
What are the dangers of putting all my money in my home?
*
Housing prices can fall: If you buy your home when prices are up, and then have to sell when prices are lower, you could lose money.
*
Bad luck happens: Homes can get damaged by fire, wind, or water. You should have home insurance, but insurance doesn’t always cover everything.
*
Getting your money may not be easy: It can often take months to sell your home and get your money back.
*
There are other costs: There are lots of costs when you own a home, including roof repairs, painting, heat, property taxes, and hydro, to name just a few.
Remember: Don’t put all your savings in one investment.
Buying a home can be an important part of your investment plan. Still, think carefully about your financial situation before you take this major step. You are usually better off if you have a number of different investments. Then, if one does poorly, you can hope the others do better.
If you are renting right now, you may have spent some time thinking about buying a home. There are some very good reasons to invest in a home, but there are also reasons to think with care about taking this step, especially if this is your only investment.
Why would I want to invest in a home?
*
You are investing in something that has value: When you buy a home, you own it (at least the part that you don’t owe the bank through a mortgage).
*
Your home can go up in value: You may be able to sell your home for more money than you paid for it. You can use that money to spend on a new home, save, invest, or do whatever you like.
*
You get to live in your investment: You have to live somewhere. You can’t live in a Guaranteed Investment Certificate (GIC) or mutual fund.
*
The cost may be about the same as rent: In some cases, your monthly mortgage payment to the bank may be about the same as what you would pay in rent.
*
It forces you to save: With each mortgage payment you make, you own a little more of your home. The more you own of your home when you sell it, the more money that goes into your pocket.
What are the dangers of putting all my money in my home?
*
Housing prices can fall: If you buy your home when prices are up, and then have to sell when prices are lower, you could lose money.
*
Bad luck happens: Homes can get damaged by fire, wind, or water. You should have home insurance, but insurance doesn’t always cover everything.
*
Getting your money may not be easy: It can often take months to sell your home and get your money back.
*
There are other costs: There are lots of costs when you own a home, including roof repairs, painting, heat, property taxes, and hydro, to name just a few.
Remember: Don’t put all your savings in one investment.
Buying a home can be an important part of your investment plan. Still, think carefully about your financial situation before you take this major step. You are usually better off if you have a number of different investments. Then, if one does poorly, you can hope the others do better.
Wednesday, February 3, 2010
Pay Your Mortgage Faster!
With interest rates at an all-time low, many Canadians are taking advantage of the savings by refinancing their mortgages to consolidate debt, make home renovations, invest in real estate or other ventures, or moving up the property ladder.
Following are ways to take even further advantage of this excellent rate environment by paying down your mortgage faster.
Tip #1
Prepay early in the mortgage
Make extra payments as early as you can after getting a mortgage because the loans are interest-heavy upfront and the faster you pay down your principal, the more interest savings you will accumulate over the long run. Within the first five to seven years of your mortgage is where the largest portions of interest payments are contained. This not only will save you thousands of dollars in interest payments, but it will also increase the speed at which you are accumulating equity in your property. Many mortgage products allow you to make up to 20% more in payments per year.
Tip #2
Make an annual lump sum payment
Whether you use your tax refund, receive an inheritance or get a Christmas bonus, you should apply as much as possible directly to your principal. Most lenders allow you to pay 20% in lump sum payments per year without penalty. I can help you determine exactly how much you can prepay and what maximum percentage of your principal you are allowed to pay without penalty each year.
Tip #3
If your payments go down, don’t lower the payment amount
If you are on a variable-rate mortgage and the rates go down your payment will also often go down. Instead of making the lower mortgage payments, however, it’s best to call your lender and let them know that you would like to
continue making payments for the original amount. I can help you determine if there is a charge for making the extra payment. Even with the charge, in most cases, it is still worth it and will help you pay down your principal faster.
Tip #4
Round up your payments even if it’s just a little
If your monthly mortgage payment is $776.22 and you were to round up your payment an extra $23.78 a month to $800 – that’s less than a dollar a day – you would effectively reduce your mortgage amortization from 35 years to just over 32 years right away or from 25 years to just over 23 years.
TIP #5
Increase your payments with your pay increases
If your income increases, try not to keep your mortgage payments the same. Although the disposable income is a joy to spend on unnecessary luxuries in the short-term, the long-term benefits of being mortgage free faster and saving those interest payments will far outweigh the short-term joys. Pretend that your income did not increase and maintain the lifestyle that you are currently living.
Tip #6
Increase the frequency of your payments
You can also change the way you make your payments by opting for accelerated bi-weekly mortgage payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage. Basically, with accelerated bi-weekly mortgage payments, you’re making one additional monthly payment per year.
As always, if you have any questions about paying your mortgage down faster, I’m here to help!
Following are ways to take even further advantage of this excellent rate environment by paying down your mortgage faster.
Tip #1
Prepay early in the mortgage
Make extra payments as early as you can after getting a mortgage because the loans are interest-heavy upfront and the faster you pay down your principal, the more interest savings you will accumulate over the long run. Within the first five to seven years of your mortgage is where the largest portions of interest payments are contained. This not only will save you thousands of dollars in interest payments, but it will also increase the speed at which you are accumulating equity in your property. Many mortgage products allow you to make up to 20% more in payments per year.
Tip #2
Make an annual lump sum payment
Whether you use your tax refund, receive an inheritance or get a Christmas bonus, you should apply as much as possible directly to your principal. Most lenders allow you to pay 20% in lump sum payments per year without penalty. I can help you determine exactly how much you can prepay and what maximum percentage of your principal you are allowed to pay without penalty each year.
Tip #3
If your payments go down, don’t lower the payment amount
If you are on a variable-rate mortgage and the rates go down your payment will also often go down. Instead of making the lower mortgage payments, however, it’s best to call your lender and let them know that you would like to
continue making payments for the original amount. I can help you determine if there is a charge for making the extra payment. Even with the charge, in most cases, it is still worth it and will help you pay down your principal faster.
Tip #4
Round up your payments even if it’s just a little
If your monthly mortgage payment is $776.22 and you were to round up your payment an extra $23.78 a month to $800 – that’s less than a dollar a day – you would effectively reduce your mortgage amortization from 35 years to just over 32 years right away or from 25 years to just over 23 years.
TIP #5
Increase your payments with your pay increases
If your income increases, try not to keep your mortgage payments the same. Although the disposable income is a joy to spend on unnecessary luxuries in the short-term, the long-term benefits of being mortgage free faster and saving those interest payments will far outweigh the short-term joys. Pretend that your income did not increase and maintain the lifestyle that you are currently living.
Tip #6
Increase the frequency of your payments
You can also change the way you make your payments by opting for accelerated bi-weekly mortgage payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage. Basically, with accelerated bi-weekly mortgage payments, you’re making one additional monthly payment per year.
As always, if you have any questions about paying your mortgage down faster, I’m here to help!
Tuesday, February 2, 2010
Canadian Facts And Figures!
Canadian facts and figures
• 6 big banks, approximately 73 banking institutions in total
• The big banks are all universal – offering retail, commercial and investment banking services. Some boutique investment and commercial banks exist but they are relatively small
• Banks have minimal off-balance-sheet holdings
• Banks’ return on equity generally 13% to 20%
• Home ownership rate: 68.4% of the population
• Subprime less than 5% of the mortgage market
• Relatively low penetration of derivatives and securitisation
(27% of mortgages repackaged and sold as bonds)
• Mortgage default rate less than 1%
Source: McKinsey
Dates: 2008 & 2009, except Canadian home ownership figures, which come from the 2006 census.
• 6 big banks, approximately 73 banking institutions in total
• The big banks are all universal – offering retail, commercial and investment banking services. Some boutique investment and commercial banks exist but they are relatively small
• Banks have minimal off-balance-sheet holdings
• Banks’ return on equity generally 13% to 20%
• Home ownership rate: 68.4% of the population
• Subprime less than 5% of the mortgage market
• Relatively low penetration of derivatives and securitisation
(27% of mortgages repackaged and sold as bonds)
• Mortgage default rate less than 1%
Source: McKinsey
Dates: 2008 & 2009, except Canadian home ownership figures, which come from the 2006 census.
Monday, February 1, 2010
Your RRSP can help you buy a home!
First-time homebuyers who are Canadian residents can withdraw up to $25,000 from their RRSP TAX FREE. Through Canada’s Home Buyers Plan (HBP) you and your spouse can each withdraw up to $25,000 (as of the 2009 federal budget) to build or buy a qualifying home.
Getting access to your RRSPs through the HBP is fairly easy. Fill out form T1036 at your financial institution for each withdrawal. Then make sure to file an income tax return for the year of the withdrawal and each year thereafter, until the RRSP is fully repaid.
Keep in mind there are a few rules:
• To qualify, you must be a first time home buyer and a resident of Canada at the time of withdrawal.
• You MUST purchase/build the home before October 1st after the year of withdrawal.
• You only need to repay 1/15 of the borrowed amount starting in the second year after the year of withdrawal, or you’ll have to add the amount as income.
• RRSP contributions of up to 90 days before the withdrawal date can be used towards the HBP.
This is one of the only ways to withdraw from your RRSP tax free and a great way to get yourself into the real estate market. For more information about the HBP program go to the CRA website .
(http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html
Getting access to your RRSPs through the HBP is fairly easy. Fill out form T1036 at your financial institution for each withdrawal. Then make sure to file an income tax return for the year of the withdrawal and each year thereafter, until the RRSP is fully repaid.
Keep in mind there are a few rules:
• To qualify, you must be a first time home buyer and a resident of Canada at the time of withdrawal.
• You MUST purchase/build the home before October 1st after the year of withdrawal.
• You only need to repay 1/15 of the borrowed amount starting in the second year after the year of withdrawal, or you’ll have to add the amount as income.
• RRSP contributions of up to 90 days before the withdrawal date can be used towards the HBP.
This is one of the only ways to withdraw from your RRSP tax free and a great way to get yourself into the real estate market. For more information about the HBP program go to the CRA website .
(http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html
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