Sunny Freeman, The Canadian Press TORONTO - Rising mortgage rates announced Monday signal the end of historically low home borrowing costs and present Canadian consumers with a dilemma: either stay flexible, hope for the best and ride out the next several months or lock in to long-term loans.
Three big banks raised their mortgage rates by more than half a point, effective Tuesday, and most industry watchers expect that's just the beginning of future small jumps that will hike the the cost of home ownership the rest of this year.
For consumers nervous about the changes, the security of five-year, or longer, fixed loans may be the best option, says one mortgage expert.
'If that (rising rates) causes you discomfort then perhaps a fixed rate's where you want to be and if a fixed rate is where you want to be," said Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.
"If you're closing in the next six months, I suggest people do that quickly."
The changes affect closed mortgages with terms of three, four and five years at RBC Royal Bank (TSX: RY.TO), Laurentian Bank (TSX: LB.TO), and TD Canada Trust (TSX: TD.TO). Rates for mid-term mortgages like these tend to reflect the banks' borrowing costs on bond markets, where mortgage loans are financed.
Other banks are expected to follow suit.
The biggest increase announced Monday affects five-year mortgages. All three banks are hiking their posted rate by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.
That means a homeowner taking on a mortgage of $250,000 at the new posted rate of 5.85 per cent over a 25-year amortization period would pay $1,577 per month. Prior to Tuesday's hike, that mortgage would have cost $1489 a month, or $88 less.
Many people with decent credit history who are applying for mortgages can negotiate better than posted rates.
The Bank of Canada is expected to begin raising lending rates this summer as it moves to fight growing inflationary pressures in the economy. The bank has kept its key overnight rate at a historic low of 0.25 per cent for more than a year to help stimulate the economy.
The latest increases reflect real-time market interest rates, which usually signal future central bank rate jumps months in advance.
Looking ahead, potential homebuyers entering the market also must consider rising rates when they decide to bid on a house. Is it better to wait until rising rates have cleared out some potential bidders or will a flurry of buyers and sellers spooked by the prospect of higher mortgage costs affect the supply-demand balance?
Historically, staying short-term and flexible has been the best strategy over the long term. But banks advise that locking in at still-attractive longer-term rates of five years and more is always a good bet for many consumers who want to ease their risk and sleep at night.
If the current bank prime rate of 2.25 per cent rises by 2.5 percentage points - an average increase during a rate-rising cycle - a homeowner with a variable mortgage should expect to pay about 30 per cent more on the monthly mortgage, says McLister.
Generally, long-term fixed rates rise by about half of the variable rate, he said.
While the fixed versus variable decision is specific to each individual, McLister said if prime rates spike by more than 2.5 percentage point, odds are good homeowners will save money in a five-year fixed rate mortgage.
Potential homebuyers should get their pre-approval applications in fast and expect delays in pre-approvals due to increased application volumes, he said. And homeowners with mortgages up for renewal would also be wise to lock in rates as far in advance as possible.
McLister said it's difficult to tell if bank prime rates will rise by 2.5 points, but he added the banks have begun a cycle of rate increases and rates in the near and medium term will continue to rise before falling again.
'They came down in the most recent rate cutting cycle by 4.25 (percentage points), so going up about half of that is definitely achievable," he said.
McLister added that most economists expect a half to one point increase in banks' prime rates by the end of this year.
But using recent history as a guide, its not likely rates will rise much higher than 2.5 points.
'When the rates go up three (percentage points) or so they don't stay there and go in a flat line. They go up and they go down."
CIBC (TSX: CM.TO) chief economist Avery Shenfeld also said mortgage rates hikes are a trend consumers should expect to continue.
'Once the Bank of Canada starts pushing up short-term interests rates, and even in anticipation of that, it tends to spill out across the rest of the curve."
He predicts the Bank of Canada will gradually raise key lending rates this summer, resulting in an increase of 0.75 per cent to one per cent by the end of September.
That would raise the average prime rate at the banks from 2.25 per cent to three per cent, which could tack on three-quarters of a per cent to the rates of homeowners with floating mortgage rates, Shenfeld said.
'Consumers are forewarned that when they look at borrowing today they have to factor in potentially higher costs," he said.
'Consumers have to be aware in taking on debt at historically low interest rates that down the road they will be higher and have to leave room for their ability to pay those higher rates."
When the Bank of Canada lifts rates, part of its intention is to take the fire out of the most interest sensitive segments of the economy, including the housing market, which has seen a particularly strong recovery, Shenfeld said.
The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.
Shenfeld said the rate increase could help dampen the house price inflation seen over the past several months.
Gregory Klump, chief economist at the Canadian Real Estate Association, said even though mortgage rates are rising, they are still comparatively low.
'Even with interest rates expected to rise over the second half of this year, it's going to be a while before mortgage rates are basically neutral. Even with interest rates rising they're still going to be stimulative, just not as much."
'We're coming off emergency level rates, and clearly the emergency has passed."
Tuesday, March 30, 2010
Thursday, March 25, 2010
Higher interest rates could be coming sooner, says Bank of Canada governor
By Julian Beltrame, The Canadian Press
OTTAWA - Canadians could be facing higher interest rates sooner than previously thought as a result of stubborn inflation and stronger economic growth, Bank of Canada Mark Carney said Wednesday.
Carney did not declare higher rates were on the way, but issued his clearest signal to date that his year-old commitment to keep the policy rate at the record 0.25 per cent until July was "expressly conditional" on inflation remaining tame.
In a speech to a business audience, the bank governor noted that both underlying core inflation and economic growth have grown slightly stronger, although broadly proceeding as expected.
The tip-off to economists was that he changed his language on his conditional commitment on interest rates, which has led to historically low rates for both consumers and businesses in Canada and helped the country recover from recession.
"This commitment is expressly conditional on the outlook for inflation," he told the Ottawa Economic Association.
It was the first time Carney has undercut the commitment in such pointed language.
Later, Carney downplayed the significance, joking with reporters that he needed to used different words to keep the media's attention.
But economists said the distinction was significant.
"They still have considerable latitude, but the changes that would be required to their forecast are consistent with hiking rates sooner than markets are anticipating," said Derek Holt, Scotiabank's vice-president of economics. He said Carney may move as early as June 1.
But Holt stressed that Carney's overall message to Canadians is that rates will remain low by historical standards for some time.
"No matter what, we emerge from this with lower rates at the end point of the hiking campaign than in past cycles. He's saying the outlook is clouded with risks and there's a number of reasons to expect growth to be lower than past cycles."
Core inflation - which excludes volatile items like energy - has been stubbornly sticky the past few months, with the index rising to 2.1 per cent in February. That's the first time it has been above the central bank's target of two per cent in more than a year.
And Carney pointed out that the economy has performed better than he thought when the bank issued its last forecast in January, predicting growth of 2.9 per cent this year. Since then, several private sector economists have increased their projections and Carney is expected to do the same at the next scheduled forecast date on April 22.
At a news conference following his speech, Carney warned against reading in too much optimism in his assessment.
"It wasn't that rosy a message," he said.
He cautioned that low U.S. demand and the high Canadian dollar, which was trading below 98 cents US on Wednesday but still high by recent standards, were acting as "significant drags" on the economy.
On a longer term basis, Carney's message to Canadians was positively dark, warning that the country needs to address its "abysmal" productivity record and that the world needs to follow through with reforms to address global imbalances, particularly China's undervalued currency.
Carney calculated that unless the country improves its productivity or output per unit of work, Canadians can expect to lose a total of $30,000 in real income over the next decade.
"Canada does underperform," he said. "We are not as productive as we could be. Our potential growth is slowing. Moreover, this is occurring as the very nature of the global economy ... is under threat."
Canada's productivity has advanced a meagre 0.7 per cent annually over the last decade, he noted, less than half the rate in the U.S. and half the rate Canada managed between 1980 and 2000.
He placed the blame on the doorstep of Canadian business, which he said needs to make much bigger investments in equipment and machinery and in information technologies.
Canadian workers have about half the information and communication technology at their disposal as their American counterparts, he said, adding that changes must be make quickly because the landscape of the global economy has shifted and it requires a "big response."
Carney also said a key to future prospects for the Canadian and global economies is adoption of the G20 framework for economic sustainability. That will require addressing global imbalances which, in part, are caused by fixed currencies like China's yuan which are kept artificially low to boost exports and discourage imports.
He produced a chart showing that unless the G20 measures are adopted, global growth will be about one percentage point lower in the next five years than it might otherwise be. The worse case scenario is a prolonged global recession that triggers protectionism, deepening the crisis. The irony, he said, is that China loses out in the long run as well.
Carney is the second Canadian policy-maker in as many days to warn about the devalued yuan. On Tuesday, Finance Minister Jim Flaherty said Canada will push the issue at the upcoming G20 meetings in Toronto in June. A revaluation of the yuan would likely lead to adjustments in other fixed currencies in Asia, economists said.
The U.S. has taken the lead in pressuring China on the yuan, but so far the emerging economic superpower has dismissed such calls and said it would move on its own schedule.
"An adjustment in global exchange rates is part and parcel of global rebalancing," said Carney. "What's at stake here is enormous and the adjustment of those real, effective exchange rates of all major currencies is an important component of rebalancing."
OTTAWA - Canadians could be facing higher interest rates sooner than previously thought as a result of stubborn inflation and stronger economic growth, Bank of Canada Mark Carney said Wednesday.
Carney did not declare higher rates were on the way, but issued his clearest signal to date that his year-old commitment to keep the policy rate at the record 0.25 per cent until July was "expressly conditional" on inflation remaining tame.
In a speech to a business audience, the bank governor noted that both underlying core inflation and economic growth have grown slightly stronger, although broadly proceeding as expected.
The tip-off to economists was that he changed his language on his conditional commitment on interest rates, which has led to historically low rates for both consumers and businesses in Canada and helped the country recover from recession.
"This commitment is expressly conditional on the outlook for inflation," he told the Ottawa Economic Association.
It was the first time Carney has undercut the commitment in such pointed language.
Later, Carney downplayed the significance, joking with reporters that he needed to used different words to keep the media's attention.
But economists said the distinction was significant.
"They still have considerable latitude, but the changes that would be required to their forecast are consistent with hiking rates sooner than markets are anticipating," said Derek Holt, Scotiabank's vice-president of economics. He said Carney may move as early as June 1.
But Holt stressed that Carney's overall message to Canadians is that rates will remain low by historical standards for some time.
"No matter what, we emerge from this with lower rates at the end point of the hiking campaign than in past cycles. He's saying the outlook is clouded with risks and there's a number of reasons to expect growth to be lower than past cycles."
Core inflation - which excludes volatile items like energy - has been stubbornly sticky the past few months, with the index rising to 2.1 per cent in February. That's the first time it has been above the central bank's target of two per cent in more than a year.
And Carney pointed out that the economy has performed better than he thought when the bank issued its last forecast in January, predicting growth of 2.9 per cent this year. Since then, several private sector economists have increased their projections and Carney is expected to do the same at the next scheduled forecast date on April 22.
At a news conference following his speech, Carney warned against reading in too much optimism in his assessment.
"It wasn't that rosy a message," he said.
He cautioned that low U.S. demand and the high Canadian dollar, which was trading below 98 cents US on Wednesday but still high by recent standards, were acting as "significant drags" on the economy.
On a longer term basis, Carney's message to Canadians was positively dark, warning that the country needs to address its "abysmal" productivity record and that the world needs to follow through with reforms to address global imbalances, particularly China's undervalued currency.
Carney calculated that unless the country improves its productivity or output per unit of work, Canadians can expect to lose a total of $30,000 in real income over the next decade.
"Canada does underperform," he said. "We are not as productive as we could be. Our potential growth is slowing. Moreover, this is occurring as the very nature of the global economy ... is under threat."
Canada's productivity has advanced a meagre 0.7 per cent annually over the last decade, he noted, less than half the rate in the U.S. and half the rate Canada managed between 1980 and 2000.
He placed the blame on the doorstep of Canadian business, which he said needs to make much bigger investments in equipment and machinery and in information technologies.
Canadian workers have about half the information and communication technology at their disposal as their American counterparts, he said, adding that changes must be make quickly because the landscape of the global economy has shifted and it requires a "big response."
Carney also said a key to future prospects for the Canadian and global economies is adoption of the G20 framework for economic sustainability. That will require addressing global imbalances which, in part, are caused by fixed currencies like China's yuan which are kept artificially low to boost exports and discourage imports.
He produced a chart showing that unless the G20 measures are adopted, global growth will be about one percentage point lower in the next five years than it might otherwise be. The worse case scenario is a prolonged global recession that triggers protectionism, deepening the crisis. The irony, he said, is that China loses out in the long run as well.
Carney is the second Canadian policy-maker in as many days to warn about the devalued yuan. On Tuesday, Finance Minister Jim Flaherty said Canada will push the issue at the upcoming G20 meetings in Toronto in June. A revaluation of the yuan would likely lead to adjustments in other fixed currencies in Asia, economists said.
The U.S. has taken the lead in pressuring China on the yuan, but so far the emerging economic superpower has dismissed such calls and said it would move on its own schedule.
"An adjustment in global exchange rates is part and parcel of global rebalancing," said Carney. "What's at stake here is enormous and the adjustment of those real, effective exchange rates of all major currencies is an important component of rebalancing."
Wednesday, March 24, 2010
Canada's housing boom continues to outpace recovery in developed countries
By Sunny Freeman, The Canadian Press
TORONTO - Canada's housing boom will continue this spring as exceptionally low mortgage rates - and the expectation that borrowing costs will soon be headed higher - add a sense of urgency to consumer buying.
A Scotiabank global real estate trends report released Tuesday predicts most Canadian regions will remain sellers' markets for the first half of the year, as strong demand and rising prices continue.
"I think you're going to have a very active spring market, probably some cooling off in the second half of the year," Adrienne Warren, the Scotiabank economist who wrote the report said in a presentation Tuesday.
"We're looking at once in a lifetime interest rates that people are taking advantage of...but certainly confidence is coming back, the job markets are stabilizing," she said.
Scotiabank expects about 510,000 home sales this year, up ten per cent from 2009, but just shy of the 2007 record. Average prices are forecast to increase about eight per cent to a record $345,000, while housing starts are expected to reach 190,000, up from 149,000 last year.
The economic recovery from last year's painful recession has improved consumer confidence, although a bounceback in the jobs market is taking more time. Just over a third of the 417,000 jobs lost in the 2008-2009 recession have been replaced and the jobless rate is still at 8.2 per cent, only half a point below its high last August.
Most experts predict the rise in consumer confidence about the economy, and low interest rates, are behind the continued strength in the housing market.
Warren said the spring rush will be driven by an influx of buyers hoping to preempt tighter lending rules for mortgages and the introduction of the harmonized sales tax in Ontario and B.C. But a steady increase in the number of listings and a rise in construction are helping to restore a more balanced market.
"We're starting to see better balance, we're seeing more listings. There was a real lack of listings for the better part of last year...we're moving back into a better balanced situation," Warren said.
Warren said the hot spring market should give way to more subdued activity in the second half of the year, as higher interest rates and higher home prices erode affordability.
Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning in late spring or early summer to fight inflationary pressures in the economy.
With many Canadians taking on larger and larger mortgage debt in expensive markets across the country, higher rates could create financial problems for some homeowners.
Warren added that the incentive for builders to add new houses to the market should also fade as supply increases and prices cool.
The front-loaded activity in the first half of the year will also contribute to lower sales, prices and construction in 2011, she said.
Canada's recovery continues to outpace developed countries around the world with housing prices in the fourth quarter up 19 per cent year over year. The strong performance has carried through into 2010, with sales in the first two months just slightly behind the near-record levels seen in late 2009.
Warren said that year-ago comparisons are amplified by the sharp drop in sales and prices at the end of 2008, but still represent a remarkable turnaround in a short time.
"We're not seeing a lot of evidence of speculative activity, I think you're just looking at a tight market, more buyers than sellers and people have to pay a premium in that environment,"she said.
She added that milder that usual temperatures across the country may have also put a bit of spring into a typically slow winter sales season.
Meanwhile, housing prices in countries including the U.K., Japan and the U.S. were still below year-earlier levels in the final quarter of 2009.
TORONTO - Canada's housing boom will continue this spring as exceptionally low mortgage rates - and the expectation that borrowing costs will soon be headed higher - add a sense of urgency to consumer buying.
A Scotiabank global real estate trends report released Tuesday predicts most Canadian regions will remain sellers' markets for the first half of the year, as strong demand and rising prices continue.
"I think you're going to have a very active spring market, probably some cooling off in the second half of the year," Adrienne Warren, the Scotiabank economist who wrote the report said in a presentation Tuesday.
"We're looking at once in a lifetime interest rates that people are taking advantage of...but certainly confidence is coming back, the job markets are stabilizing," she said.
Scotiabank expects about 510,000 home sales this year, up ten per cent from 2009, but just shy of the 2007 record. Average prices are forecast to increase about eight per cent to a record $345,000, while housing starts are expected to reach 190,000, up from 149,000 last year.
The economic recovery from last year's painful recession has improved consumer confidence, although a bounceback in the jobs market is taking more time. Just over a third of the 417,000 jobs lost in the 2008-2009 recession have been replaced and the jobless rate is still at 8.2 per cent, only half a point below its high last August.
Most experts predict the rise in consumer confidence about the economy, and low interest rates, are behind the continued strength in the housing market.
Warren said the spring rush will be driven by an influx of buyers hoping to preempt tighter lending rules for mortgages and the introduction of the harmonized sales tax in Ontario and B.C. But a steady increase in the number of listings and a rise in construction are helping to restore a more balanced market.
"We're starting to see better balance, we're seeing more listings. There was a real lack of listings for the better part of last year...we're moving back into a better balanced situation," Warren said.
Warren said the hot spring market should give way to more subdued activity in the second half of the year, as higher interest rates and higher home prices erode affordability.
Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning in late spring or early summer to fight inflationary pressures in the economy.
With many Canadians taking on larger and larger mortgage debt in expensive markets across the country, higher rates could create financial problems for some homeowners.
Warren added that the incentive for builders to add new houses to the market should also fade as supply increases and prices cool.
The front-loaded activity in the first half of the year will also contribute to lower sales, prices and construction in 2011, she said.
Canada's recovery continues to outpace developed countries around the world with housing prices in the fourth quarter up 19 per cent year over year. The strong performance has carried through into 2010, with sales in the first two months just slightly behind the near-record levels seen in late 2009.
Warren said that year-ago comparisons are amplified by the sharp drop in sales and prices at the end of 2008, but still represent a remarkable turnaround in a short time.
"We're not seeing a lot of evidence of speculative activity, I think you're just looking at a tight market, more buyers than sellers and people have to pay a premium in that environment,"she said.
She added that milder that usual temperatures across the country may have also put a bit of spring into a typically slow winter sales season.
Meanwhile, housing prices in countries including the U.K., Japan and the U.S. were still below year-earlier levels in the final quarter of 2009.
Tuesday, March 23, 2010
CREA approves new MLS rules
Move aims to block Competition Bureau challenge; consumer will now be able to pay an agent a flat fee to list on the MLS
Steve Ladurantaye
Globe and Mail Update Published on Monday, Mar. 22, 2010 2:36PM EDT Last updated on Monday, Mar. 22, 2010 7:18PM EDT
The Canadian Real Estate Association approved changes Monday that will give those who buy or sell their homes on its listing service more power to handle portions of the transaction on their own, but it was not enough to satisfy the Competition Commissioner.
In a move to cut off a challenge by the Competition Bureau, which feels the current system is too restrictive because anyone listing on the Multiple Listing Service must employ an agent through the entire process, the association's members voted at its annual general meeting in Ottawa to loosen its own rules.
Now, a consumer will be able to pay an agent a flat fee – zero is not an option – to list on the MLS, where about 90 per cent of all home sales are done. Agents must now pass along a seller's home phone number, if the seller chooses, directly to an interested buyer if asked.
“Through the proactive clarifications of the existing rules, CREA believes the concerns raised by the Competition Bureau are fully addressed,” the organization said in a news release. “At the same time, these amendments ensure the continued integrity of MLS systems and the accuracy of information on board MLS systems that Canadians have come to trust.”
The bureau disagreed, saying the change didn't go far enough because CREA could still change the rules at any point and place more restrictions on anyone who tried to offer innovative services.
CREA wouldn't provide further comment, with its legal counsel stating it would rather wait for the case to go before the Competition Tribunal. The association's president, Dale Ripplinger, said the changes “wouldn't make sense to anyone who wasn't a real estate agent,” before abruptly calling off a news conference.
The vote was seen as a way for Canada's real estate sales industry to satisfy concerns raised by the Competition Bureau, which has filed charges with the Competition Tribunal alleging the real estate association makes it impossible for any of its members to offer consumers fee-based services for particular portions of a transaction, such as listing on the MLS or negotiating a sale price.
This leads to higher prices for consumers, the Bureau says.
The proposed changes were a key pillar in the real estate organization's defence before the Tribunal. The association must submit its response to the charges by March 25 and the organization hoped a strong vote from its members on the key issues troubling the Competition Bureau would be enough to have the charges set aside.
The MLS has operated for more than 50 years and only registered agents are allowed to list homes on the service. The MLS trademark is owned by CREA, and each real estate board operates the service in its region. While anyone can sell their home on their own, having a listing on the service is seen as an integral part of achieving the best sales price.
A CREA spokesperson said the changes would be implemented “as soon as it is reasonable at each local board.”
Steve Ladurantaye
Globe and Mail Update Published on Monday, Mar. 22, 2010 2:36PM EDT Last updated on Monday, Mar. 22, 2010 7:18PM EDT
The Canadian Real Estate Association approved changes Monday that will give those who buy or sell their homes on its listing service more power to handle portions of the transaction on their own, but it was not enough to satisfy the Competition Commissioner.
In a move to cut off a challenge by the Competition Bureau, which feels the current system is too restrictive because anyone listing on the Multiple Listing Service must employ an agent through the entire process, the association's members voted at its annual general meeting in Ottawa to loosen its own rules.
Now, a consumer will be able to pay an agent a flat fee – zero is not an option – to list on the MLS, where about 90 per cent of all home sales are done. Agents must now pass along a seller's home phone number, if the seller chooses, directly to an interested buyer if asked.
“Through the proactive clarifications of the existing rules, CREA believes the concerns raised by the Competition Bureau are fully addressed,” the organization said in a news release. “At the same time, these amendments ensure the continued integrity of MLS systems and the accuracy of information on board MLS systems that Canadians have come to trust.”
The bureau disagreed, saying the change didn't go far enough because CREA could still change the rules at any point and place more restrictions on anyone who tried to offer innovative services.
CREA wouldn't provide further comment, with its legal counsel stating it would rather wait for the case to go before the Competition Tribunal. The association's president, Dale Ripplinger, said the changes “wouldn't make sense to anyone who wasn't a real estate agent,” before abruptly calling off a news conference.
The vote was seen as a way for Canada's real estate sales industry to satisfy concerns raised by the Competition Bureau, which has filed charges with the Competition Tribunal alleging the real estate association makes it impossible for any of its members to offer consumers fee-based services for particular portions of a transaction, such as listing on the MLS or negotiating a sale price.
This leads to higher prices for consumers, the Bureau says.
The proposed changes were a key pillar in the real estate organization's defence before the Tribunal. The association must submit its response to the charges by March 25 and the organization hoped a strong vote from its members on the key issues troubling the Competition Bureau would be enough to have the charges set aside.
The MLS has operated for more than 50 years and only registered agents are allowed to list homes on the service. The MLS trademark is owned by CREA, and each real estate board operates the service in its region. While anyone can sell their home on their own, having a listing on the service is seen as an integral part of achieving the best sales price.
A CREA spokesperson said the changes would be implemented “as soon as it is reasonable at each local board.”
Monday, March 22, 2010
When you start to earn, you should start to save
By Luisa D’Amato
CAMBRIDGE — Young people who are just starting their careers have a lot to think about in terms of finances, says Irene Vassalo, a financial consultant with Investors Group in Cambridge.
Anyone who is self-employed, or doesn’t get benefits, should be thinking about covering themselves with a benefits plan that includes financial protection if they’re hit with a disease like cancer, a stroke, a heart attack or disability from a car accident.
It may be hard for someone in his or her 20s to imagine being disabled, but it can happen to anyone. “They definitely need to look at protection,” said Vassalo.
People in their 20s are often getting married, buying their first home and having their first child — although not necessarily in that order
Vassalo believes in putting money away for a registered retirement savings plan — even if it’s only $25 a month — as soon as you start earning.
Maybe you can’t imagine yourself retiring, but you can keep that money away from government taxes. You can use it as a down payment on your first home, and you can use it as a long-term savings plan.
Also, you need a special fund — of at least two to three months’ income — for “emergencies and opportunities,” she says.
An emergency would be losing your job, becoming ill, your car breaking down, or your roof or furnace needing replacement. An opportunity is the happier prospect of buying a new car or piece of furniture, or going on a trip.
If you’re getting married, “watch the wedding expenses,” she says. “It doesn’t have to be a $50,000 wedding.”
In an ideal world, you should save 10 per cent of your income by putting it into registered retirement savings, put another 20 per cent into the emergency fund, and spend the remaining 70 per cent on your bills and daily needs.
When you get to buying your first home, you can lend yourself the money you put away into retirement savings plans for that down payment. You’ll have to pay yourself back over time.
It’s best to get your mortgage pre-approved before you find your dream home. Banks will look at how much income you have and how much debt.
Should you go for a larger mortgage because interest rates are low? What if they start to go up?
For that question, Vassalo recommends this strategy: Assume interest rates are double what they now are, then see if you can still afford the home.
Also, consider other costs: The biggest expenses in a home apart from the mortgage are property taxes, heat and utilities.
If you are considering renting out the home, or part of it, check the situation and be realistic. How is the vacancy rate in your community? How handy are you? How will you feel about being called in the middle of the night to fix the toilet or get rid of a mouse? What will happen if your tenant is badly behaved and doesn’t pay the rent?
“You have to be prepared for all circumstances,” says Vassalo.
If you’re starting a family, start a registered education savings plan immediately. The government matches 20 per cent of your contribution to a maximum of $400 a year. And you can use it to pay for all sorts of educational institutions, even a performing arts conservatory or correspondence courses.
Help your children become financially smart by training them to save part of their allowance or birthday money. Some should be saved for their education, and some should be saved for a short-term goal like buying a bicycle or video game system.
CAMBRIDGE — Young people who are just starting their careers have a lot to think about in terms of finances, says Irene Vassalo, a financial consultant with Investors Group in Cambridge.
Anyone who is self-employed, or doesn’t get benefits, should be thinking about covering themselves with a benefits plan that includes financial protection if they’re hit with a disease like cancer, a stroke, a heart attack or disability from a car accident.
It may be hard for someone in his or her 20s to imagine being disabled, but it can happen to anyone. “They definitely need to look at protection,” said Vassalo.
People in their 20s are often getting married, buying their first home and having their first child — although not necessarily in that order
Vassalo believes in putting money away for a registered retirement savings plan — even if it’s only $25 a month — as soon as you start earning.
Maybe you can’t imagine yourself retiring, but you can keep that money away from government taxes. You can use it as a down payment on your first home, and you can use it as a long-term savings plan.
Also, you need a special fund — of at least two to three months’ income — for “emergencies and opportunities,” she says.
An emergency would be losing your job, becoming ill, your car breaking down, or your roof or furnace needing replacement. An opportunity is the happier prospect of buying a new car or piece of furniture, or going on a trip.
If you’re getting married, “watch the wedding expenses,” she says. “It doesn’t have to be a $50,000 wedding.”
In an ideal world, you should save 10 per cent of your income by putting it into registered retirement savings, put another 20 per cent into the emergency fund, and spend the remaining 70 per cent on your bills and daily needs.
When you get to buying your first home, you can lend yourself the money you put away into retirement savings plans for that down payment. You’ll have to pay yourself back over time.
It’s best to get your mortgage pre-approved before you find your dream home. Banks will look at how much income you have and how much debt.
Should you go for a larger mortgage because interest rates are low? What if they start to go up?
For that question, Vassalo recommends this strategy: Assume interest rates are double what they now are, then see if you can still afford the home.
Also, consider other costs: The biggest expenses in a home apart from the mortgage are property taxes, heat and utilities.
If you are considering renting out the home, or part of it, check the situation and be realistic. How is the vacancy rate in your community? How handy are you? How will you feel about being called in the middle of the night to fix the toilet or get rid of a mouse? What will happen if your tenant is badly behaved and doesn’t pay the rent?
“You have to be prepared for all circumstances,” says Vassalo.
If you’re starting a family, start a registered education savings plan immediately. The government matches 20 per cent of your contribution to a maximum of $400 a year. And you can use it to pay for all sorts of educational institutions, even a performing arts conservatory or correspondence courses.
Help your children become financially smart by training them to save part of their allowance or birthday money. Some should be saved for their education, and some should be saved for a short-term goal like buying a bicycle or video game system.
Sunday, March 21, 2010
When it comes to mortgage details, most people just 'zone out'
contact Neil at neil@mortgageman.ca
James Pasternak, Financial Post
It is a legal document that stretches about 30 pages and runs about 10,000 words. Its execution takes no more than a couple minutes and when the ink dries on the signature lines, more times than not it is never read and gets slipped into a file folder, largely forgotten.
But despite its casual handling, the residential mortgage agreement governs the largest debt of over 5 million Canadians and within its fine print are the provisions that can make or break a household's financial future. There's a lot at stake. At the beginning of 2004, Canadians held $517.7-billion in mortgages.
"I think most of the major bank representatives do a good job of explaining these provisions to their clients but I think most people zone out and don't really listen. All they think about is getting a mortgage at 3.8% and ‘I want to get this done'," says Len Rodness, Partner, of Toronto-based law firm Torkin Manes (www.torkinmanes.com)
But beyond the interest rate there are a wide range of options and clauses in the mortgage agreement that deserve scrutiny. In a competitive lending environment, shopping for the right mortgage can bring significant savings and peace of mind through the amortization period.
Take the case of Hamilton, Ont., couple Kathy Funke and Dan Perryman. When they were shopping for a home in 2003, the interest rate was the top priority. They also wanted flexible prepayment options and accelerated weekly mortgage payments. To leverage the competitive interest rate they received, they went with a variable rate mortgage. They paid off a $230,000 mortgage in 5 ½ years.
"The power in these things comes from people who know how to manage [the] various privileges. It has a huge [savings] effect on amortization....The ideal thing is to understand what your privileges are and then combine them to your advantage -- to what you can afford to do; to fit your lifestyle and ability to pay," says Jeff Atlin of Thornhill, Ont. based Abacus Mortgages Inc.
And privileges there are. You just have to shop for them.
Accelerated Payment Options: Getting the loan paid earlier
It just seemed like yesteryear when everyone was paying their mortgage on the 1st of every month. Now, in addition to the first of the month option, some of the more common options are accelerated weekly and biweekly or semi-monthly options.
These frequency options result in long term savings. For example if one selects the accelerated biweekly option one is making 26 payments in a year, the equivalent of two prepayments per year over the monthly option. When a $150,000 mortgage amortized over 25 years is paid under an accelerated bi-weekly option, the debt is retired in 21 years and the interest savings are around $18,000.
Toronto resident and electrician Karl Klos, 26, selected "weekly rapid" payments on a mortgage amortized over 35 years. The mortgage payments are made each week but he added the "rapid" option by increasing the amount paid. Mr. Klos says that the payment frequency will pay off his mortgage in 25 years instead of 35 years.
"I can't understand why anybody would do monthly payments anymore now that the banks offer the ability to have weekly payments. It may be a cash flow situation. If you do a weekly mortgage payment it could save you a significant amount of money," says real estate lawyer Len Rodness.
Restating mortgage agreement vows
It doesn't take long after one signs a mortgage agreement to hear from a neighbour or friend that they received a better rate. So when you dig out the mortgage agreement see if there's a clause that allows borrowers to renegotiate their agreement before the end of the term. The bank might use a model called "blend and extend." For example, if one has a $100,000 mortgage at 6% mortgage with two years to go they might blend it with the current five year rate of 3.79%. So according to mortgage broker Atlin when they average out 2/5 of the mortgage at 6% and 3/5 are at 3.79%, the customer will get a new reduced rate of about 4.6%. But the borrower is tied to the bank for another 5 years.
Putting spare cash against the mortgage with no penalty
Almost all mortgage agreements have options for mortgage prepayment without penalty. Klos's mortgage agreement allows prepayments of up to 15% of the annual balance. Most financial institutions provide prepayment options in the 10-20% range. Some lenders allow borrowers to make the prepayment any time during the year while other agreements restrict the prepayment to the anniversary date.
Also, some financial institutions allow customers to make multiple smaller prepayments during the year as long as they don't exceed the annual limit. Funke and Perryman were able to retire their $230,000 mortgage in 5 ½ years primarily because of the prepayment provisions in their mortgage.
Coming up with more money for each payment
Some lenders will allow borrowers to increase the payments without penalty. Depending on the wording of the mortgage agreement the increased payments can range from around 15% to 100% of the current payment. So if one is paying $1,000 per month under the 15% rule, a borrower can raise it to $1,150 per month. Klos's weekly rapid payment plan was based on him raising the weekly payments by 5%.
"Payment and amortization are a function of each other. Any time you raise the payments you shorten the amortization; any time you shorten the amortization you raise the payment," says Mr. Atlin.
The mortgage prenuptial: Penalties for getting out of your mortgage
"A mortgage is a contract first and foremost. It is a contract between a borrower and the lender," Atlin says. And if someone hasn't felt that cold business approach during the course of their mortgage, they certainly will if they try to leave early. Most borrowers pay out their mortgages when they sell their house, win a lottery or are offered a better interest rate by another company. Until recent years, the standard penalty for breaking a mortgage agreement was three months of interest. Paying out a $200,000 mortgage could amount to a $2,500 penalty.
In many current mortgage agreements, the penalty for an early exit (and not extending) is either three months of interest or an interest differential, whichever is greatest.
The mortgage differential penalty can be quite expensive. If a mortgage is at 5% interest rate and you have three years left in your term, the bank will use the difference between the agreement rate and the current market rate to calculate the penalty. Using the 5% case above, let's say the current 3-year mortgage is available at 3.5%. The bank will charge the difference between 5% and 3.5% for the balance of your term.
Bank customers who have an open mortgage with a variable rate can usually pay them out with little or no penalty. Some mortgages are closed for the first few years and then revert to an open option. The penalties, if there are any, would be much lower once the mortgage converts to an open one. If one can, it would be best to wait until the mortgage kicks into open status.
When paying out the mortgage try to have some of it calculated as your annual no-penalty prepayment option. Therefore, if you are paying out a $200,000 mortgage and you also have a 20% per annum prepayment option you might be able to save penalties on $40,000. If the mortgage prepayments can only be done on the anniversary date, make sure that is the day you select to pay out the mortgage.
Mortgage Lifelines
Mortgages are often signed and sealed with the borrower having every intention to pay. However, the world is paved with best intentions and recessions are everyone else's problem until the boss comes into your office with the bad news.
"That is something that nobody turns their attention to at the time. The original document is done. The legal issues are in that original document. For a practical point of view given the state of the economy these [clauses] might be something beneficial," said Len Rodness of Torkin Manes.
Some mortgages include a Rainy Day option. This option allows the borrower to skip one principal and interest payment each mortgage year. The interest portion of the skipped payment or payments will be added to the outstanding principal balance.
James Pasternak, Financial Post
It is a legal document that stretches about 30 pages and runs about 10,000 words. Its execution takes no more than a couple minutes and when the ink dries on the signature lines, more times than not it is never read and gets slipped into a file folder, largely forgotten.
But despite its casual handling, the residential mortgage agreement governs the largest debt of over 5 million Canadians and within its fine print are the provisions that can make or break a household's financial future. There's a lot at stake. At the beginning of 2004, Canadians held $517.7-billion in mortgages.
"I think most of the major bank representatives do a good job of explaining these provisions to their clients but I think most people zone out and don't really listen. All they think about is getting a mortgage at 3.8% and ‘I want to get this done'," says Len Rodness, Partner, of Toronto-based law firm Torkin Manes (www.torkinmanes.com)
But beyond the interest rate there are a wide range of options and clauses in the mortgage agreement that deserve scrutiny. In a competitive lending environment, shopping for the right mortgage can bring significant savings and peace of mind through the amortization period.
Take the case of Hamilton, Ont., couple Kathy Funke and Dan Perryman. When they were shopping for a home in 2003, the interest rate was the top priority. They also wanted flexible prepayment options and accelerated weekly mortgage payments. To leverage the competitive interest rate they received, they went with a variable rate mortgage. They paid off a $230,000 mortgage in 5 ½ years.
"The power in these things comes from people who know how to manage [the] various privileges. It has a huge [savings] effect on amortization....The ideal thing is to understand what your privileges are and then combine them to your advantage -- to what you can afford to do; to fit your lifestyle and ability to pay," says Jeff Atlin of Thornhill, Ont. based Abacus Mortgages Inc.
And privileges there are. You just have to shop for them.
Accelerated Payment Options: Getting the loan paid earlier
It just seemed like yesteryear when everyone was paying their mortgage on the 1st of every month. Now, in addition to the first of the month option, some of the more common options are accelerated weekly and biweekly or semi-monthly options.
These frequency options result in long term savings. For example if one selects the accelerated biweekly option one is making 26 payments in a year, the equivalent of two prepayments per year over the monthly option. When a $150,000 mortgage amortized over 25 years is paid under an accelerated bi-weekly option, the debt is retired in 21 years and the interest savings are around $18,000.
Toronto resident and electrician Karl Klos, 26, selected "weekly rapid" payments on a mortgage amortized over 35 years. The mortgage payments are made each week but he added the "rapid" option by increasing the amount paid. Mr. Klos says that the payment frequency will pay off his mortgage in 25 years instead of 35 years.
"I can't understand why anybody would do monthly payments anymore now that the banks offer the ability to have weekly payments. It may be a cash flow situation. If you do a weekly mortgage payment it could save you a significant amount of money," says real estate lawyer Len Rodness.
Restating mortgage agreement vows
It doesn't take long after one signs a mortgage agreement to hear from a neighbour or friend that they received a better rate. So when you dig out the mortgage agreement see if there's a clause that allows borrowers to renegotiate their agreement before the end of the term. The bank might use a model called "blend and extend." For example, if one has a $100,000 mortgage at 6% mortgage with two years to go they might blend it with the current five year rate of 3.79%. So according to mortgage broker Atlin when they average out 2/5 of the mortgage at 6% and 3/5 are at 3.79%, the customer will get a new reduced rate of about 4.6%. But the borrower is tied to the bank for another 5 years.
Putting spare cash against the mortgage with no penalty
Almost all mortgage agreements have options for mortgage prepayment without penalty. Klos's mortgage agreement allows prepayments of up to 15% of the annual balance. Most financial institutions provide prepayment options in the 10-20% range. Some lenders allow borrowers to make the prepayment any time during the year while other agreements restrict the prepayment to the anniversary date.
Also, some financial institutions allow customers to make multiple smaller prepayments during the year as long as they don't exceed the annual limit. Funke and Perryman were able to retire their $230,000 mortgage in 5 ½ years primarily because of the prepayment provisions in their mortgage.
Coming up with more money for each payment
Some lenders will allow borrowers to increase the payments without penalty. Depending on the wording of the mortgage agreement the increased payments can range from around 15% to 100% of the current payment. So if one is paying $1,000 per month under the 15% rule, a borrower can raise it to $1,150 per month. Klos's weekly rapid payment plan was based on him raising the weekly payments by 5%.
"Payment and amortization are a function of each other. Any time you raise the payments you shorten the amortization; any time you shorten the amortization you raise the payment," says Mr. Atlin.
The mortgage prenuptial: Penalties for getting out of your mortgage
"A mortgage is a contract first and foremost. It is a contract between a borrower and the lender," Atlin says. And if someone hasn't felt that cold business approach during the course of their mortgage, they certainly will if they try to leave early. Most borrowers pay out their mortgages when they sell their house, win a lottery or are offered a better interest rate by another company. Until recent years, the standard penalty for breaking a mortgage agreement was three months of interest. Paying out a $200,000 mortgage could amount to a $2,500 penalty.
In many current mortgage agreements, the penalty for an early exit (and not extending) is either three months of interest or an interest differential, whichever is greatest.
The mortgage differential penalty can be quite expensive. If a mortgage is at 5% interest rate and you have three years left in your term, the bank will use the difference between the agreement rate and the current market rate to calculate the penalty. Using the 5% case above, let's say the current 3-year mortgage is available at 3.5%. The bank will charge the difference between 5% and 3.5% for the balance of your term.
Bank customers who have an open mortgage with a variable rate can usually pay them out with little or no penalty. Some mortgages are closed for the first few years and then revert to an open option. The penalties, if there are any, would be much lower once the mortgage converts to an open one. If one can, it would be best to wait until the mortgage kicks into open status.
When paying out the mortgage try to have some of it calculated as your annual no-penalty prepayment option. Therefore, if you are paying out a $200,000 mortgage and you also have a 20% per annum prepayment option you might be able to save penalties on $40,000. If the mortgage prepayments can only be done on the anniversary date, make sure that is the day you select to pay out the mortgage.
Mortgage Lifelines
Mortgages are often signed and sealed with the borrower having every intention to pay. However, the world is paved with best intentions and recessions are everyone else's problem until the boss comes into your office with the bad news.
"That is something that nobody turns their attention to at the time. The original document is done. The legal issues are in that original document. For a practical point of view given the state of the economy these [clauses] might be something beneficial," said Len Rodness of Torkin Manes.
Some mortgages include a Rainy Day option. This option allows the borrower to skip one principal and interest payment each mortgage year. The interest portion of the skipped payment or payments will be added to the outstanding principal balance.
Wednesday, March 17, 2010
Flaherty not flinching as loonie nears parity
Nicolas Van Praet, Financial Post Montreal -- The era of fearing Canada's high-flying loonie might finally be passed.
Trading near US98.6¢, the dollar is now the closest it's been to one-on-one status with the U.S. greenback since July 2008. And Jim Flaherty, Canada's finance minister isn't flinching.
"We see where it's at now and it's competitive," Mr. Flaherty said of the currency's impact on the Canada's economy in an interview on Bloomberg Television. The economy could be at risk if the loonie rose to an uncompetitive level but that is not expected to happen, the minister said.
There was a time not so long ago when a loonie edging closer to parity with the U.S. dollar would trigger hoots of outrage from business leaders and federal opposition ranks alike, demanding the Canadian government do something to tame the bird or face ballooning welfare rolls and corporate bankruptcies. Just last summer, Mr. Flaherty himself expressed worry about the loonie's quick rise.
But the country has now lived with a Canadian currency that's stayed above US90¢ for much of the past year after hitting a high of US$1.10 in 2007. And today, that indignation may be over amid a raft of data suggesting Canada's economy is surging back to life.
The S&P/TSX Composite Index on Tuesday rose to its highest level has since September 2008. Oil prices firmed up past US$81 a barrel. New government data showed labour productivity improvements blasted past expectations to 1.4% in the fourth quarter -- the fastest rate in almost 12 years.
The governing Conservatives are also taking heart in this past Friday's labour force survey, which showed Canadian employers hired more people than expected. Employment has been on an upward trend since July 2009 as 159,000 jobs have been added over the past eight months. The economy grew at an annual rate of 5% in the fourth quarter.
But another key element is what's happening with manufacturers, who typically get hit when the Canadian dollar rises because the goods they sell outside the country become more expensive.
Fresh manufacturing figures Tuesday added to the evidence that Canadian companies are adjusting better than in the past to currency swings, as long as those swings aren't gigantic. January manufacturing sales rose 2.4% to $44.6-billion, a fifth straight month of growth for a sector hit hard by weak demand during the recession.
"For manufacturers, this situation now is really like a bad remake of Groundhog Day. We've seen this before," said Jeff Brownlee, spokesman for the Canadian Manufacturers and Exporters association. "What we've been saying to our members is that the new normal is the dollar at par or beyond. Par is not a ceiling. And if you can compete at par, and if the dollar doesn't go there, you're going to be making money."
Examples abound of Canadian exporters which have reinvented themselves or stepped up their game to stay alive and win in the face of a higher dollar. Kitchener, Ont.-based Christie Digital Systems Canada, Inc. realized the televisions it was making could no longer compete with cheaper-made Korean and Chinese rivals. So it switched its vocation and now makes advanced video projection systems used at concerts around the world.
Others have taken less dramatic steps, protecting themselves with currency option contracts, retooling plants with new machinery, or engineering their operations to ensure U.S. denominated revenue was used to pay U.S. suppliers.
"Exporters to the U.S. have had fair warning and they're tried to adjust to it. So maybe to some extent they've got used to it," said Dale Orr, an independent economist. "They've lost a little bit of steam in terms of getting public sympathy or government sympathy, that's for sure. It isn't there like it was."
Behind the latest numbers and the success stories however lies the stark fact that nothing dramatic has changed in the competitive fundamentals of Canadian companies over the past three years, warned Don Drummond, chief economist at TD Bank Financial group.
To take just one measure, although Canada's private sector productivity soared in the fourth quarter, it was its first uptick in more than a year and it fell during the recession as the United States' output per hour worked rose sharply. Productivity still trails that of our trading partner.
"Canadian businesses have not become more competitive this time around than they were the last time the dollar was reaching parity," Mr. Drummond said. "There's no tangible evidence looking at the productivity and the cost-effectiveness of the business sector to suggest that they're in a better position this time around. In fact if anything, they're worse."
Trading near US98.6¢, the dollar is now the closest it's been to one-on-one status with the U.S. greenback since July 2008. And Jim Flaherty, Canada's finance minister isn't flinching.
"We see where it's at now and it's competitive," Mr. Flaherty said of the currency's impact on the Canada's economy in an interview on Bloomberg Television. The economy could be at risk if the loonie rose to an uncompetitive level but that is not expected to happen, the minister said.
There was a time not so long ago when a loonie edging closer to parity with the U.S. dollar would trigger hoots of outrage from business leaders and federal opposition ranks alike, demanding the Canadian government do something to tame the bird or face ballooning welfare rolls and corporate bankruptcies. Just last summer, Mr. Flaherty himself expressed worry about the loonie's quick rise.
But the country has now lived with a Canadian currency that's stayed above US90¢ for much of the past year after hitting a high of US$1.10 in 2007. And today, that indignation may be over amid a raft of data suggesting Canada's economy is surging back to life.
The S&P/TSX Composite Index on Tuesday rose to its highest level has since September 2008. Oil prices firmed up past US$81 a barrel. New government data showed labour productivity improvements blasted past expectations to 1.4% in the fourth quarter -- the fastest rate in almost 12 years.
The governing Conservatives are also taking heart in this past Friday's labour force survey, which showed Canadian employers hired more people than expected. Employment has been on an upward trend since July 2009 as 159,000 jobs have been added over the past eight months. The economy grew at an annual rate of 5% in the fourth quarter.
But another key element is what's happening with manufacturers, who typically get hit when the Canadian dollar rises because the goods they sell outside the country become more expensive.
Fresh manufacturing figures Tuesday added to the evidence that Canadian companies are adjusting better than in the past to currency swings, as long as those swings aren't gigantic. January manufacturing sales rose 2.4% to $44.6-billion, a fifth straight month of growth for a sector hit hard by weak demand during the recession.
"For manufacturers, this situation now is really like a bad remake of Groundhog Day. We've seen this before," said Jeff Brownlee, spokesman for the Canadian Manufacturers and Exporters association. "What we've been saying to our members is that the new normal is the dollar at par or beyond. Par is not a ceiling. And if you can compete at par, and if the dollar doesn't go there, you're going to be making money."
Examples abound of Canadian exporters which have reinvented themselves or stepped up their game to stay alive and win in the face of a higher dollar. Kitchener, Ont.-based Christie Digital Systems Canada, Inc. realized the televisions it was making could no longer compete with cheaper-made Korean and Chinese rivals. So it switched its vocation and now makes advanced video projection systems used at concerts around the world.
Others have taken less dramatic steps, protecting themselves with currency option contracts, retooling plants with new machinery, or engineering their operations to ensure U.S. denominated revenue was used to pay U.S. suppliers.
"Exporters to the U.S. have had fair warning and they're tried to adjust to it. So maybe to some extent they've got used to it," said Dale Orr, an independent economist. "They've lost a little bit of steam in terms of getting public sympathy or government sympathy, that's for sure. It isn't there like it was."
Behind the latest numbers and the success stories however lies the stark fact that nothing dramatic has changed in the competitive fundamentals of Canadian companies over the past three years, warned Don Drummond, chief economist at TD Bank Financial group.
To take just one measure, although Canada's private sector productivity soared in the fourth quarter, it was its first uptick in more than a year and it fell during the recession as the United States' output per hour worked rose sharply. Productivity still trails that of our trading partner.
"Canadian businesses have not become more competitive this time around than they were the last time the dollar was reaching parity," Mr. Drummond said. "There's no tangible evidence looking at the productivity and the cost-effectiveness of the business sector to suggest that they're in a better position this time around. In fact if anything, they're worse."
Tuesday, March 16, 2010
Cost of owning a home up slightly in late 2009; will continue to rise:
RBC Sunny Freeman , The Canadian Press
TORONTO - Home prices will continue to rise this spring as buyers scramble to close deals ahead of expected higher interest rates, new mortgage rules and new taxes in two key markets.
A report by RBC Economics issued Monday found that the cost of owning a home in Canada increased slightly across all housing segments in the closing months of 2009.
Strong demand, fuelled by exceptionally low mortgage rates, has increased competition for the limited supply of homes for sale, which continues to drive prices up, the report said.
RBC senior economist Robert Hogue said the problem is likely to get worse with an anticipated rise in interest rates in the second half of the year.
The Bank of Canada has pledged to keep its key overnight rate at 0.25 per cent, where it has been since last spring, until the end of the second quarter. But economists anticipate it will begin rising as early as July.
Historically low interest rates have been cited among reasons for the strong housing market, with sales of existing homes moving higher again in February and setting monthly records in both Ontario and Quebec.
The Canadian Real Estate Association said 36,275 homes were sold across the country in February, up 44 per cent from the same month in 2009, when the recession was still impacting both consumer optimism and loan activity.
But February's year-over-year gain was much smaller than in the previous three months, CREA said. Part of the reason was that February home sales were down in Vancouver as the Olympics impacted activity there even as sales in Toronto logged an equally large gain.
Overall, seasonally adjusted home sales were down 1.5 per cent in February compared with January.
Economists predict that real estate markets in B.C. and Ontario will remain hot in the months prior to the introduction of the harmonized sales tax in those provinces on July 1, which will increase the transaction costs associated with a home purchase.
Douglas Porter, deputy chief economist at BMO Capital Markets, said some buyers in Ontario and B.C., which combined account for over half of national sales, are advancing their purchases to avoid paying the HST.
"It's no coincidence that Ontario and B.C. have seen the biggest gain in sales in the country," he said.
CREA chief economist Gregory Klump said buyers in those provinces are driving national sales activity higher in the first part of the year.
"It should remain a tight market with negotiations favouring the seller in a number of major markets in the first half of this year," he said.
Klump said that strong resale housing demand continues to draw down inventories, but softer sales activity and an increase in new listings in recent months has helped slow the depletion of available properties.
"Those sellers who moved to the sidelines at the depth of the recession will be putting their homes back on the market in response to headline average price increases," he said. "
Porter said the increase in supply from ultra-low levels helps bring the market closer to balance, but that the still-tight market means prices will remain high.
"We're going to get a very hot market in the next few months but it won't overheat," he said.
"I think we'll get one more wave of relatively strong numbers over the spring and then we'll crest and the market will come off the boil in the second half of the year."
He added that Ottawa's recent efforts to "release some steam from the market" will help slow activity, and "the housing market will pull up just short of bubble territory."
Finance Minister Jim Flaherty announced new mortgage qualification rules last month to discourage homeowners from taking out mortgages on homes they might not be able to afford down the road when rates return to more normal levels.
In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year, fixed-rate mortgage even if the period they choose is shorter and the interest rate they pay is lower.
Porter said the changes will prompt those affected - primarily first-time buyers and investors - to buy in advance of the new rules, and bump up sales in March.
Still, other buyers could be hesitant to enter the frenzied market this spring and may tolerate a small spike in interest rates and wait for conditions to cool off, he said.
"Some cooler heads will decide they can get a better deal in the second half of the year even if it does come at a higher interest rate."
TORONTO - Home prices will continue to rise this spring as buyers scramble to close deals ahead of expected higher interest rates, new mortgage rules and new taxes in two key markets.
A report by RBC Economics issued Monday found that the cost of owning a home in Canada increased slightly across all housing segments in the closing months of 2009.
Strong demand, fuelled by exceptionally low mortgage rates, has increased competition for the limited supply of homes for sale, which continues to drive prices up, the report said.
RBC senior economist Robert Hogue said the problem is likely to get worse with an anticipated rise in interest rates in the second half of the year.
The Bank of Canada has pledged to keep its key overnight rate at 0.25 per cent, where it has been since last spring, until the end of the second quarter. But economists anticipate it will begin rising as early as July.
Historically low interest rates have been cited among reasons for the strong housing market, with sales of existing homes moving higher again in February and setting monthly records in both Ontario and Quebec.
The Canadian Real Estate Association said 36,275 homes were sold across the country in February, up 44 per cent from the same month in 2009, when the recession was still impacting both consumer optimism and loan activity.
But February's year-over-year gain was much smaller than in the previous three months, CREA said. Part of the reason was that February home sales were down in Vancouver as the Olympics impacted activity there even as sales in Toronto logged an equally large gain.
Overall, seasonally adjusted home sales were down 1.5 per cent in February compared with January.
Economists predict that real estate markets in B.C. and Ontario will remain hot in the months prior to the introduction of the harmonized sales tax in those provinces on July 1, which will increase the transaction costs associated with a home purchase.
Douglas Porter, deputy chief economist at BMO Capital Markets, said some buyers in Ontario and B.C., which combined account for over half of national sales, are advancing their purchases to avoid paying the HST.
"It's no coincidence that Ontario and B.C. have seen the biggest gain in sales in the country," he said.
CREA chief economist Gregory Klump said buyers in those provinces are driving national sales activity higher in the first part of the year.
"It should remain a tight market with negotiations favouring the seller in a number of major markets in the first half of this year," he said.
Klump said that strong resale housing demand continues to draw down inventories, but softer sales activity and an increase in new listings in recent months has helped slow the depletion of available properties.
"Those sellers who moved to the sidelines at the depth of the recession will be putting their homes back on the market in response to headline average price increases," he said. "
Porter said the increase in supply from ultra-low levels helps bring the market closer to balance, but that the still-tight market means prices will remain high.
"We're going to get a very hot market in the next few months but it won't overheat," he said.
"I think we'll get one more wave of relatively strong numbers over the spring and then we'll crest and the market will come off the boil in the second half of the year."
He added that Ottawa's recent efforts to "release some steam from the market" will help slow activity, and "the housing market will pull up just short of bubble territory."
Finance Minister Jim Flaherty announced new mortgage qualification rules last month to discourage homeowners from taking out mortgages on homes they might not be able to afford down the road when rates return to more normal levels.
In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year, fixed-rate mortgage even if the period they choose is shorter and the interest rate they pay is lower.
Porter said the changes will prompt those affected - primarily first-time buyers and investors - to buy in advance of the new rules, and bump up sales in March.
Still, other buyers could be hesitant to enter the frenzied market this spring and may tolerate a small spike in interest rates and wait for conditions to cool off, he said.
"Some cooler heads will decide they can get a better deal in the second half of the year even if it does come at a higher interest rate."
Monday, March 15, 2010
The Flaherty effect
Helen Morris, National Post
Many of us have been enjoying supremely attractive interest rates on mortgages. However, with rates having been at historic lows for quite some time and with the economy heating up, the only direction rates will go from here is up. The finance minister wants to ensure borrowers are in good financial shape to withstand rate hikes, which are expected to hit this summer.
Finance Minister Jim Flaherty announced that by April 19 new mortgage criteria will apply. Lenders will now be testing whether buyers can afford a mortgage using a higher interest rate. The new rules apply to mortgages backed by government insurance, a requirement when there is less than a 20% deposit.
"What will tend to happen is that the same practices will cascade through the entire financial system. So when borrowers come in to take out mortgages, they all will be tested against the five-year posted rate," says Craig Alexander, deputy chief economist at TD Bank Financial Group. "It increases the qualifying interest rate by about one percentage point."
The higher rate will be used just for the qualifying process - it does not mean your mortgage rate will be higher - at least not right now.
"Any mortgage professional that's worth their salt is sitting down with their client already and saying, ‘Can you afford a 1% or 2% rate increase?' " says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. "We tend to want to have those customers looking forward. If they're stretched to their maximum at today's low interest rates, then there could be some financial considerations two years down the road if indeed they have to take a look at higher interest rates."
So, if there's an April 19 deadline, won't that make it more tempting to try to get a mortgage now?
"Folks shouldn't rush to buy; you don't want to get caught up in the potentially emotional period that might go on between now and April 19. If you can wait, I would suggest waiting," says John Turner, director of mortgages, Bank of Montreal. "It's important for the potential consumer to sit down with their banker and get prequalified. They want to lock in their interest rate so they can take their time and make the right decision. They want to make sure that they can afford the house that they are buying."
Mr. Alexander says about one-quarter of those looking to purchase a home will likely be affected by the new rules and may have to settle for a smaller home, but he estimates only 4% or 5% will not buy because of the tighter qualification process.
Under the new rules, existing homeowners will only be able to withdraw 90% of the value of their homes when refinancing, down from 95%.
"People who would be looking for [high refinancing] are probably in some sort of financial strife already, so it's probably something they shouldn't be doing," Mr. Rawson says.
The third set of property owners in Mr. Flaherty's sights are those looking to invest in rather than live in a home.
"People buying a property they are not going to live in now have to put 20% down; before, it was 5% down. That's a really big change," Mr. Alexander says. "That measure is really aimed at speculators. The government said specifically the objective was to diminish speculation in the marketplace."
The new requirement may affect the Toronto condo market, Mr. Alexander says.
"Demand growth will probably be tempered by some of these new rules. ... If there were people looking to buy a couple of extra condo properties as an investment ... it doesn't mean people can't do it but if you're going from 5% to 20%, instead of buying four properties with the same amount of money, maybe you end up buying one."
The new rules plus more new condos coming on stream may cool the market, Mr. Alexander says, but adds that the Toronto real estate market remains fundamentally strong with demand boosted by immigration.
Many of us have been enjoying supremely attractive interest rates on mortgages. However, with rates having been at historic lows for quite some time and with the economy heating up, the only direction rates will go from here is up. The finance minister wants to ensure borrowers are in good financial shape to withstand rate hikes, which are expected to hit this summer.
Finance Minister Jim Flaherty announced that by April 19 new mortgage criteria will apply. Lenders will now be testing whether buyers can afford a mortgage using a higher interest rate. The new rules apply to mortgages backed by government insurance, a requirement when there is less than a 20% deposit.
"What will tend to happen is that the same practices will cascade through the entire financial system. So when borrowers come in to take out mortgages, they all will be tested against the five-year posted rate," says Craig Alexander, deputy chief economist at TD Bank Financial Group. "It increases the qualifying interest rate by about one percentage point."
The higher rate will be used just for the qualifying process - it does not mean your mortgage rate will be higher - at least not right now.
"Any mortgage professional that's worth their salt is sitting down with their client already and saying, ‘Can you afford a 1% or 2% rate increase?' " says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. "We tend to want to have those customers looking forward. If they're stretched to their maximum at today's low interest rates, then there could be some financial considerations two years down the road if indeed they have to take a look at higher interest rates."
So, if there's an April 19 deadline, won't that make it more tempting to try to get a mortgage now?
"Folks shouldn't rush to buy; you don't want to get caught up in the potentially emotional period that might go on between now and April 19. If you can wait, I would suggest waiting," says John Turner, director of mortgages, Bank of Montreal. "It's important for the potential consumer to sit down with their banker and get prequalified. They want to lock in their interest rate so they can take their time and make the right decision. They want to make sure that they can afford the house that they are buying."
Mr. Alexander says about one-quarter of those looking to purchase a home will likely be affected by the new rules and may have to settle for a smaller home, but he estimates only 4% or 5% will not buy because of the tighter qualification process.
Under the new rules, existing homeowners will only be able to withdraw 90% of the value of their homes when refinancing, down from 95%.
"People who would be looking for [high refinancing] are probably in some sort of financial strife already, so it's probably something they shouldn't be doing," Mr. Rawson says.
The third set of property owners in Mr. Flaherty's sights are those looking to invest in rather than live in a home.
"People buying a property they are not going to live in now have to put 20% down; before, it was 5% down. That's a really big change," Mr. Alexander says. "That measure is really aimed at speculators. The government said specifically the objective was to diminish speculation in the marketplace."
The new requirement may affect the Toronto condo market, Mr. Alexander says.
"Demand growth will probably be tempered by some of these new rules. ... If there were people looking to buy a couple of extra condo properties as an investment ... it doesn't mean people can't do it but if you're going from 5% to 20%, instead of buying four properties with the same amount of money, maybe you end up buying one."
The new rules plus more new condos coming on stream may cool the market, Mr. Alexander says, but adds that the Toronto real estate market remains fundamentally strong with demand boosted by immigration.
Friday, March 12, 2010
What we can learn from the crash
Monday, 8 March 2010
In February, industry experts from the broker, lender, insurer and technology realms gathered at the Business Television Network (BCN.tv) studios for what was called "After the Storm," a series of discussion panels that were broadcast to groups across Canada. CMP was with the Toronto group during this interactive CAAMP event that allowed participants to e-mail questions and thoughts to the various experts.
While the topics covered were varied, one common thread that could be taken away from it was that Canada fared better than the U.S. during the financial downturn with the help of a little planning and a lot of luck. Moving forward, the Canadian mortgage professional industry needs to pay attention to regulation, education and maintaining close lender relationships if it wants to continue to be a model for the rest of the world.
Apples to orangesWhen comparing the U.S. and Canadian markets, all experts agreed that the Canadian system was different enough to escape the same hardships our neighbours south of the border face. But it's also important to look at what was so different between the two countries, and whether it is enough to keep Canada on the high road into the New Year.For starters, one major difference between the two systems was the way Canadian lenders operate.
"The way we find our mortgages, by and large, most of it is on the balance books so it's underwritten rigorously," said MCAP's Ron Swift. "In the U.S. it just kept getting moved on and no one had any skin in the game. In Canada when you lend it's your own money."
While this had a large part to do with why we avoided a U.S. scale meltdown, it also had to do with timing.
"Were we lucky? Let's not kid ourselves," said Swift. "We were headed towards the edge of the cliff, and we were able to see the U.S. go over it and stop before we got there."
For Peter Vukanovich, president and COO of Genworth Financial, it was less of a difference between Canada being lucky or smart, but just being different, primarily when it comes to insuring loans.
"In the U.S., the lender and the underwriter have the pen, and insurance is only handled when the claim comes in," he said, adding bluntly that it's as simple as "garbage in, garbage out. You just need to act like you are lending your own money."
Keeping a close eye on regulationCurrently broker share in the U.S., said Vukanovich, has gone from being around 20 to 25 per cent around 18 months ago, to around 12 to 15 per cent today.
Throughout the day, most experts blamed this on over-regulation in the U.S. in reaction to the recession (which right or wrong, brokers shouldered a lot of blame for) and fortunately Canada has not followed its example - at least not yet.
"The pendulum will swing to over-regulation," warned Peter Aceto, president and CEO at ING Direct, adding that it's "something [Canadians] need to watch for."
Swift agreed, saying that while the Canadian system is not "over-regulated now, [Federal Finance Minister] Flaherty has mentioned that the government might have to step in and do something. We have to be careful about that and be sure not to over-react to a local phenomenon."
The mention of a local phenomenon was in reference to a comment made by Jason Smith, president and CEO at Solidifi, who said that technologically speaking, Canada is treated like it is just one giant market, when, in fact, it is made up of several regional markets, each with their own strengths and weaknesses.
While he said that technology needs to adapt so as not to treat every market the same, the media and government also have to be careful when talking about bubble scenarios.
"There is one national interest rate and its low," he said, "but in terms of a bubble, it is a regional issue."
As such, it should be treated like one.
As an interesting side note, Gerrard Schmidt, president and COO of Davis + Henderson, offered that "super brokers are actually better positioned to take the increased cost of regulation," even though, he added, the big banks' mobile sales forces are growing faster than the mortgage market in Canada overall.
"Super brokers need to think about how they will compete," he said.
Education is keyCurrently on Genworth Financial's website there is a homebuyer survey that asks some very basic questions, such as: True or false, by reducing your mortgage amortization period you will save interest costs over the life of the mortgage; and, which payment frequency pays down your mortgage the fastest, monthly, semi-monthly or bi-weekly accelerated? On average, homeowners answer five of the 10 questions correctly, said Vukanovich.
"If the U.S. has taught us anything, it's that people are going into this without knowing anything. Education is key, and the mortgage professional and the consumer were just not in sync. The more consumers know the better."
Unfortunately, test results like these point to the fact that consumers are very much still in the dark about their mortgages, and the onus falls on those who deal with the consumers most.
"Those who are sitting in front of the consumer, it's their responsibility to educate the consumer," said Swift. "People just want the cheapest monthly cost, but it's one thing to be able to afford homes at historic low rates, it's another when rates go up. Mortgage professionals have to educate consumers to make the right decisions."
Aside from educating the consumer, the consensus was that slowing down and making sure all the proper information is obtained is a crucial step in keeping the Canadian mortgage market ahead of the curve.
"I'm hearing a lot about the Canadianization of the mortgage world - U.S., Mexico, Europe andAsia," concluded Vukanovich.
Now it's up to us to be sure we are setting the right example.
In February, industry experts from the broker, lender, insurer and technology realms gathered at the Business Television Network (BCN.tv) studios for what was called "After the Storm," a series of discussion panels that were broadcast to groups across Canada. CMP was with the Toronto group during this interactive CAAMP event that allowed participants to e-mail questions and thoughts to the various experts.
While the topics covered were varied, one common thread that could be taken away from it was that Canada fared better than the U.S. during the financial downturn with the help of a little planning and a lot of luck. Moving forward, the Canadian mortgage professional industry needs to pay attention to regulation, education and maintaining close lender relationships if it wants to continue to be a model for the rest of the world.
Apples to orangesWhen comparing the U.S. and Canadian markets, all experts agreed that the Canadian system was different enough to escape the same hardships our neighbours south of the border face. But it's also important to look at what was so different between the two countries, and whether it is enough to keep Canada on the high road into the New Year.For starters, one major difference between the two systems was the way Canadian lenders operate.
"The way we find our mortgages, by and large, most of it is on the balance books so it's underwritten rigorously," said MCAP's Ron Swift. "In the U.S. it just kept getting moved on and no one had any skin in the game. In Canada when you lend it's your own money."
While this had a large part to do with why we avoided a U.S. scale meltdown, it also had to do with timing.
"Were we lucky? Let's not kid ourselves," said Swift. "We were headed towards the edge of the cliff, and we were able to see the U.S. go over it and stop before we got there."
For Peter Vukanovich, president and COO of Genworth Financial, it was less of a difference between Canada being lucky or smart, but just being different, primarily when it comes to insuring loans.
"In the U.S., the lender and the underwriter have the pen, and insurance is only handled when the claim comes in," he said, adding bluntly that it's as simple as "garbage in, garbage out. You just need to act like you are lending your own money."
Keeping a close eye on regulationCurrently broker share in the U.S., said Vukanovich, has gone from being around 20 to 25 per cent around 18 months ago, to around 12 to 15 per cent today.
Throughout the day, most experts blamed this on over-regulation in the U.S. in reaction to the recession (which right or wrong, brokers shouldered a lot of blame for) and fortunately Canada has not followed its example - at least not yet.
"The pendulum will swing to over-regulation," warned Peter Aceto, president and CEO at ING Direct, adding that it's "something [Canadians] need to watch for."
Swift agreed, saying that while the Canadian system is not "over-regulated now, [Federal Finance Minister] Flaherty has mentioned that the government might have to step in and do something. We have to be careful about that and be sure not to over-react to a local phenomenon."
The mention of a local phenomenon was in reference to a comment made by Jason Smith, president and CEO at Solidifi, who said that technologically speaking, Canada is treated like it is just one giant market, when, in fact, it is made up of several regional markets, each with their own strengths and weaknesses.
While he said that technology needs to adapt so as not to treat every market the same, the media and government also have to be careful when talking about bubble scenarios.
"There is one national interest rate and its low," he said, "but in terms of a bubble, it is a regional issue."
As such, it should be treated like one.
As an interesting side note, Gerrard Schmidt, president and COO of Davis + Henderson, offered that "super brokers are actually better positioned to take the increased cost of regulation," even though, he added, the big banks' mobile sales forces are growing faster than the mortgage market in Canada overall.
"Super brokers need to think about how they will compete," he said.
Education is keyCurrently on Genworth Financial's website there is a homebuyer survey that asks some very basic questions, such as: True or false, by reducing your mortgage amortization period you will save interest costs over the life of the mortgage; and, which payment frequency pays down your mortgage the fastest, monthly, semi-monthly or bi-weekly accelerated? On average, homeowners answer five of the 10 questions correctly, said Vukanovich.
"If the U.S. has taught us anything, it's that people are going into this without knowing anything. Education is key, and the mortgage professional and the consumer were just not in sync. The more consumers know the better."
Unfortunately, test results like these point to the fact that consumers are very much still in the dark about their mortgages, and the onus falls on those who deal with the consumers most.
"Those who are sitting in front of the consumer, it's their responsibility to educate the consumer," said Swift. "People just want the cheapest monthly cost, but it's one thing to be able to afford homes at historic low rates, it's another when rates go up. Mortgage professionals have to educate consumers to make the right decisions."
Aside from educating the consumer, the consensus was that slowing down and making sure all the proper information is obtained is a crucial step in keeping the Canadian mortgage market ahead of the curve.
"I'm hearing a lot about the Canadianization of the mortgage world - U.S., Mexico, Europe andAsia," concluded Vukanovich.
Now it's up to us to be sure we are setting the right example.
Understanding house prices
Mortgageman says the best time to buy a home is ALWAYS now! Yes there are ups and downs but in the long run the ups win!
A home may be one of the biggest investments you ever make. Saving up a down payment is just the first step. Find out more.
What factors affect the value of a home?
Location: Real estate people always say “Location, location, location.” That’s because the area you live in will be the biggest factor affecting your home’s price. It’s smart to buy a home where housing prices are likely to increase. Also, the people who may buy your home from you one day may be willing to pay more for a home that is close to schools, sports centres, stores, services, and so on. Keep that in mind as you look.
The condition of the home and the property it is on: Does the home need a lot of repairs? How is the roof, plumbing, and electrical wiring? A home in good repair may be worth more. Also, the condition of the outside of the home, the lawn, gardens, driveway, and trees will all affect the value of a home. These are the first things that buyers see, and are together known as curb appeal.
Renovations and updates: An older home might need some work to keep it safe, modern, and comfortable. If you are buying at a home that has had some renovations, check the quality. When you do work on a home you own, do it as well as you can. Poor work can lower the value.
The economy: There are some things you can’t control that affect house prices, like interest rates. Higher interest rates mean it costs more for a mortgage, so fewer people buy homes. When that happens, the prices of homes can fall. Lower interest rates, on the other hand, can boost buying and drive prices up. House prices often go up for a while, and then come down a bit. Try to find out as much as you can about how prices are changing, or may change, when deciding to buy or sell a home. Often there will be stories in the paper about housing prices.
How much is my home worth today?
If you’re considering buying a home, or you just bought one, you know how much it’s worth. But if you’ve owned your home for a while, its value has probably changed. Here’s how you can find out how much it’s worth now:
Call a real estate agent: Ask them for an estimate of your home’s value. You may be able to get an agent to do this for free, because they hope to get your business in the future.
Ask an appraiser: Your bank or a real estate agent should know a number of appraisers. Banks use them to estimate house values before they approve mortgages. You can also look in the yellow pages. An appraiser will charge a fee for the service.
Check to see what other homes in your area have sold for recently: Compare your home with similar ones that have sold. Unless you keep up with what’s happening in your area, this information may be hard to get. Ask your real estate agent if you can’t find it yourself.
How much will my home be worth in the future?
To estimate a home’s future value, you will have to do some informed guessing. Start with finding out what has happened to prices in your location over several years.
City
Price, 1990
Price, 2005
Total % increase, 1990–2005
Average % increase per year
Saint John
97,238
188,484
93.84%
6.26%
Halifax
78,041
119,718
53.40%
3.56%
Quebec City
81,462
141,485
73.68%
4.91%
Montreal
111,197
203,720
83.21%
5.55%
Ottawa
141,562
248,358
75.44%
5.03%
Toronto
254,890
336,176
31.89%
2.13%
Windsor
106,327
163,001
53.30%
3.55%
Greater Sudbury
108,596
134,440
23.80%
1.59%
Winnipeg
81,740
137,062
67.68%
4.51%
Saskatoon
76,008
144,787
90.49%
6.03%
Calgary
128,484
250,832
95.22%
6.35%
Vancouver
226,385
425,745
88.06%
5.87%
Source: Canadian Real Estate Association (MLS®)
A home may be one of the biggest investments you ever make. Saving up a down payment is just the first step. Find out more.
What factors affect the value of a home?
Location: Real estate people always say “Location, location, location.” That’s because the area you live in will be the biggest factor affecting your home’s price. It’s smart to buy a home where housing prices are likely to increase. Also, the people who may buy your home from you one day may be willing to pay more for a home that is close to schools, sports centres, stores, services, and so on. Keep that in mind as you look.
The condition of the home and the property it is on: Does the home need a lot of repairs? How is the roof, plumbing, and electrical wiring? A home in good repair may be worth more. Also, the condition of the outside of the home, the lawn, gardens, driveway, and trees will all affect the value of a home. These are the first things that buyers see, and are together known as curb appeal.
Renovations and updates: An older home might need some work to keep it safe, modern, and comfortable. If you are buying at a home that has had some renovations, check the quality. When you do work on a home you own, do it as well as you can. Poor work can lower the value.
The economy: There are some things you can’t control that affect house prices, like interest rates. Higher interest rates mean it costs more for a mortgage, so fewer people buy homes. When that happens, the prices of homes can fall. Lower interest rates, on the other hand, can boost buying and drive prices up. House prices often go up for a while, and then come down a bit. Try to find out as much as you can about how prices are changing, or may change, when deciding to buy or sell a home. Often there will be stories in the paper about housing prices.
How much is my home worth today?
If you’re considering buying a home, or you just bought one, you know how much it’s worth. But if you’ve owned your home for a while, its value has probably changed. Here’s how you can find out how much it’s worth now:
Call a real estate agent: Ask them for an estimate of your home’s value. You may be able to get an agent to do this for free, because they hope to get your business in the future.
Ask an appraiser: Your bank or a real estate agent should know a number of appraisers. Banks use them to estimate house values before they approve mortgages. You can also look in the yellow pages. An appraiser will charge a fee for the service.
Check to see what other homes in your area have sold for recently: Compare your home with similar ones that have sold. Unless you keep up with what’s happening in your area, this information may be hard to get. Ask your real estate agent if you can’t find it yourself.
How much will my home be worth in the future?
To estimate a home’s future value, you will have to do some informed guessing. Start with finding out what has happened to prices in your location over several years.
City
Price, 1990
Price, 2005
Total % increase, 1990–2005
Average % increase per year
Saint John
97,238
188,484
93.84%
6.26%
Halifax
78,041
119,718
53.40%
3.56%
Quebec City
81,462
141,485
73.68%
4.91%
Montreal
111,197
203,720
83.21%
5.55%
Ottawa
141,562
248,358
75.44%
5.03%
Toronto
254,890
336,176
31.89%
2.13%
Windsor
106,327
163,001
53.30%
3.55%
Greater Sudbury
108,596
134,440
23.80%
1.59%
Winnipeg
81,740
137,062
67.68%
4.51%
Saskatoon
76,008
144,787
90.49%
6.03%
Calgary
128,484
250,832
95.22%
6.35%
Vancouver
226,385
425,745
88.06%
5.87%
Source: Canadian Real Estate Association (MLS®)
Should I buy a home now, or wait and save more money?
Should I buy a home now, or wait and save more money?
Sometimes people can’t wait to buy a home because of family or personal reasons. For example, they may have a new baby coming and need more room. Or, they are worried about house prices going up faster than they can save.
What if you don’t have the down payment you need for the house of your dreams? Should you wait and save more, or find another way to borrow the money you need? You won’t be able to get a standard mortgage but you could get another type of loan.
Should I save more or borrow more?
Here is a summary of the reasons to buy now, or wait.
Should you:
Reasons for:
Reasons against:
Wait and build up a large down payment?
You will pay less interest. You can avoid paying for mortgage insurance. You reduce the risk of not being able to pay back the loan if the value of your home drops and you have to sell.
You have to wait to own a home and you will pay more rent. You could have put that rent towards paying a mortgage, and owning more of your home faster. You have to be disciplined or you could spend your savings on other things. In some areas, house prices may rise faster than you can save the down payment.
Buy earlier with some other type of loan?
• You can stop paying rent sooner and get into a home faster. • You have the chance to own more of your home sooner. • You don’t risk house prices rising more than you can afford.
• You will pay more interest. • You will have more worries if you take on more debt than you can handle. • If you have to sell and the value of your home drops, you may not be able to pay back the loan.
Sometimes people can’t wait to buy a home because of family or personal reasons. For example, they may have a new baby coming and need more room. Or, they are worried about house prices going up faster than they can save.
What if you don’t have the down payment you need for the house of your dreams? Should you wait and save more, or find another way to borrow the money you need? You won’t be able to get a standard mortgage but you could get another type of loan.
Should I save more or borrow more?
Here is a summary of the reasons to buy now, or wait.
Should you:
Reasons for:
Reasons against:
Wait and build up a large down payment?
You will pay less interest. You can avoid paying for mortgage insurance. You reduce the risk of not being able to pay back the loan if the value of your home drops and you have to sell.
You have to wait to own a home and you will pay more rent. You could have put that rent towards paying a mortgage, and owning more of your home faster. You have to be disciplined or you could spend your savings on other things. In some areas, house prices may rise faster than you can save the down payment.
Buy earlier with some other type of loan?
• You can stop paying rent sooner and get into a home faster. • You have the chance to own more of your home sooner. • You don’t risk house prices rising more than you can afford.
• You will pay more interest. • You will have more worries if you take on more debt than you can handle. • If you have to sell and the value of your home drops, you may not be able to pay back the loan.
Tuesday, March 9, 2010
More young Canadians taking advantage of low interest rates in housing market
More young Canadians taking advantage of low interest rates in housing market
By Luann Lasalle, The Canadian Press
MONTREAL - Younger Canadians are expected to lead the way with home buying this year as they take advantage of low interest rates, new jobs and what they consider "good prices," a bank survey says.
The survey for the Royal Bank suggested that 15 per cent of Canadians between the ages of 18 and 24 were very likely to buy, almost double from eight per cent in 2009.
It's a marked shift in the attitudes of younger Canadians, who have tightened their budgets over the past few years to cope with tough jobs markets and the recession.
"Our poll found that 35 per cent of younger Canadians, between the ages of 18 and 24, are intending to buy a home due to good real estate prices," Marcia Moffat, RBC's head of home equity financing in Toronto, said Monday.
The national average price for a home was $328,537 in January, according to the Canadian Real Estate Association.
Thirty-one per cent of 18 to 24-year-olds surveyed in the online poll said they would buy a house because of a new job. The survey also found 22 per cent in that young age group wanted to buy a home because they considered interest rates were good.
CIBC World Markets senior economist Benjamin Tal said more young people are getting into the real estate market, taking advantage of low interest rates, lower down payments and more years to pay off their mortgages.
Tal said he estimates the young people getting into the market as a bit older, between the ages of 22 and 28.
"Basically parents are begging their kids to buy now because they remember when they were paying 12 to 15 per cent mortgage interest," Tal said.
"So there's a sense of urgency to get into the market and young people are a part of it."
Tal described the coming real estate market of the next three or four years as "boring."
"I think that what we are doing now is that we are basically stealing activity from the future."
The RBC survey also suggested that overall attitudes are changing as more Canadians return to shopping for homes as the economy recovers, even though it's considered a seller's market.
"Confidence in the housing market is back, essentially," RBC senior economist Robert Hogue said.
Royal Bank said the study found more Canadians are "very likely" to buy a new home in the next two years.
Ten per cent of the 2,047 people of all ages surveyed for the study said they planned to buy a home within two years - up from seven per cent two years ago.
The RBC study also found that 91 per cent of Canadian homeowners believe a home is a good investment, the highest level in 12 years.
"At this stage last year, there was doom and gloom all around and it definitely affected the housing market," Hogue said.
One-quarter of those surveyed, 26 per cent, said they expect their home to be their primary source of income when they retire.
However, the surge in optimism doesn't necessarily mean that Canadians have forgotten about past economic troubles.
The survey found they are still more cautious when it comes to mortgages. Forty-four per cent of those surveyed who plan to buy a home in the next two years said they would take a fixed-rate mortgage.
Also on Monday, the latest new homes numbers showed that the annual rate of housing starts were up in February.
The Canada Mortgage and Housing Corp. said that the seasonally adjusted annual rate of housing starts reached 196,700 units in February, an increase from 185,400 in January 2010.
Senior CMHC economist Bill Clark said the market is seeing a lot of "catch-up" and consumers in Ontario and B.C. are likely trying to avoid the harmonized sales tax before the summer.
"So if you roll all of that together it's really sort of one big recipe for housing starts to go up," Clark said.
The report showed the gain was concentrated in the multiple starts segment, particularly in Toronto.
Urban starts increased nine per cent to 179,100 units in February.
Urban multiple starts increased by 19.1 per cent to 89,900 units, while single urban starts increased by 0.5 per cent to 89,200 units.
The annual rate of urban starts increased 28.6 per cent in Ontario in February, 14.3 per cent in Atlantic Canada, 10.8 per cent in the Prairies and by eight per cent in British Columbia.
In Quebec, urban starts fell 14.1 per cent.
Rural starts were estimated at a seasonally adjusted annual rate of 17,600 units in February.
By Luann Lasalle, The Canadian Press
MONTREAL - Younger Canadians are expected to lead the way with home buying this year as they take advantage of low interest rates, new jobs and what they consider "good prices," a bank survey says.
The survey for the Royal Bank suggested that 15 per cent of Canadians between the ages of 18 and 24 were very likely to buy, almost double from eight per cent in 2009.
It's a marked shift in the attitudes of younger Canadians, who have tightened their budgets over the past few years to cope with tough jobs markets and the recession.
"Our poll found that 35 per cent of younger Canadians, between the ages of 18 and 24, are intending to buy a home due to good real estate prices," Marcia Moffat, RBC's head of home equity financing in Toronto, said Monday.
The national average price for a home was $328,537 in January, according to the Canadian Real Estate Association.
Thirty-one per cent of 18 to 24-year-olds surveyed in the online poll said they would buy a house because of a new job. The survey also found 22 per cent in that young age group wanted to buy a home because they considered interest rates were good.
CIBC World Markets senior economist Benjamin Tal said more young people are getting into the real estate market, taking advantage of low interest rates, lower down payments and more years to pay off their mortgages.
Tal said he estimates the young people getting into the market as a bit older, between the ages of 22 and 28.
"Basically parents are begging their kids to buy now because they remember when they were paying 12 to 15 per cent mortgage interest," Tal said.
"So there's a sense of urgency to get into the market and young people are a part of it."
Tal described the coming real estate market of the next three or four years as "boring."
"I think that what we are doing now is that we are basically stealing activity from the future."
The RBC survey also suggested that overall attitudes are changing as more Canadians return to shopping for homes as the economy recovers, even though it's considered a seller's market.
"Confidence in the housing market is back, essentially," RBC senior economist Robert Hogue said.
Royal Bank said the study found more Canadians are "very likely" to buy a new home in the next two years.
Ten per cent of the 2,047 people of all ages surveyed for the study said they planned to buy a home within two years - up from seven per cent two years ago.
The RBC study also found that 91 per cent of Canadian homeowners believe a home is a good investment, the highest level in 12 years.
"At this stage last year, there was doom and gloom all around and it definitely affected the housing market," Hogue said.
One-quarter of those surveyed, 26 per cent, said they expect their home to be their primary source of income when they retire.
However, the surge in optimism doesn't necessarily mean that Canadians have forgotten about past economic troubles.
The survey found they are still more cautious when it comes to mortgages. Forty-four per cent of those surveyed who plan to buy a home in the next two years said they would take a fixed-rate mortgage.
Also on Monday, the latest new homes numbers showed that the annual rate of housing starts were up in February.
The Canada Mortgage and Housing Corp. said that the seasonally adjusted annual rate of housing starts reached 196,700 units in February, an increase from 185,400 in January 2010.
Senior CMHC economist Bill Clark said the market is seeing a lot of "catch-up" and consumers in Ontario and B.C. are likely trying to avoid the harmonized sales tax before the summer.
"So if you roll all of that together it's really sort of one big recipe for housing starts to go up," Clark said.
The report showed the gain was concentrated in the multiple starts segment, particularly in Toronto.
Urban starts increased nine per cent to 179,100 units in February.
Urban multiple starts increased by 19.1 per cent to 89,900 units, while single urban starts increased by 0.5 per cent to 89,200 units.
The annual rate of urban starts increased 28.6 per cent in Ontario in February, 14.3 per cent in Atlantic Canada, 10.8 per cent in the Prairies and by eight per cent in British Columbia.
In Quebec, urban starts fell 14.1 per cent.
Rural starts were estimated at a seasonally adjusted annual rate of 17,600 units in February.
Home purchase intentions full steam ahead: RBC poll
Vast majority of Canadians view buying a home as a good investment
TORONTO, March 8 /CNW/ - Homebuying momentum in Canada continues to gain steam with the portion of Canadians who are very likely to purchase a home in the next two years rising to 10 per cent from seven per cent two years ago, according to the 17th Annual RBC Homeownership Study. Younger Canadians, aged 18 to 24, will lead the charge this year, with those very likely to buy almost doubling to 15 per cent from eight per cent in 2009.
The RBC study conducted by Ipsos Reid found that 91 per cent of Canadian homeowners believe a home is a good investment, the highest level in 12 years, and one-quarter (26 per cent) expect their home to be their primary source of income when they retire.
"With the Canadian housing market showing continued vigour, it's not surprising that Canadians feel more confident in the long-term value of owning a home," said Robert Hogue, senior economist, RBC. "Exceptionally low mortgage rates and improved affordability have been key reasons for the resurgence in the housing market this past year."
Most Canadians who intend to buy a new home in the next two years are planning to take a fixed rate mortgage (44 per cent). However, combination mortgages had the highest increase in popularity this year, with 40 per cent intending to take both a variable and fixed rate component, up from 32 per cent last year.
For Canadians planning to take a fixed rate or combination mortgage, seven-in-10 intend to take a term of five years or longer. Sixteen per cent said they intend to take a variable rate mortgage, down from 20 per cent in 2009.
"Canadians seem to be opting for more caution this year and may be factoring in potential rate increases down the road," said Marcia Moffat, RBC's head of home equity financing. "Choosing a combination mortgage can take some of the guesswork out of making a decision between whether it is better to lock in to a longer-term or stay in a variable rate."
In the wake of the recent housing rebound, most Canadians (six-in-10) also believe housing prices will rise in 2010, up significantly from 25 per cent in 2009. Similarly, a majority (64 per cent) believe mortgage rates will be higher over the next year, also up from 33 per cent a year ago.
"The expectation of higher mortgage rates on the horizon could be motivating buying intentions this year. But it's important that homeowners - especially first time buyers - get solid advice about what they can afford, not only today, but down the road," added Moffat.
In addition to seeking customized advice from a financial advisor, Moffat provides the following tips:
For homebuyers:
1. Lock in your rate when you apply for your mortgage.
Depending on your situation, there are rate guarantees that allow you to lock in your mortgage rate for up to 120 days.
2. "Stress test" your mortgage for rate increases.
If you are concerned about affordability down the road, knowing what your payments would be with a one - three per cent rate increase will give you greater peace of mind that your new home is affordable both today and in a few years time, when rates might be higher.
3. For first time homebuyers, leave some wiggle room.
With a pre-approved mortgage you will know what you can afford today. But before making a decision to find a home at the top of your pre-approval amount, also consider your current lifestyle preferences and how future changes in your circumstances could impact your payment comfort zone.
For homeowners renewing their mortgage:
1. Take advantage of early renewal options.
Some mortgages allow you to renew up to 120 days before the end of your term. This means you can lock in your new mortgage rate early.
2. Consider a combination (hybrid) mortgage to manage your interest costs.
If you are unsure of where rates are headed, consider splitting your mortgage into part fixed and part variable. You will have rate protection on the fixed rate mortgage portion, while you benefit from today's low interest rates on the variable rate mortgage portion. Transmitted by CNW Group
TORONTO, March 8 /CNW/ - Homebuying momentum in Canada continues to gain steam with the portion of Canadians who are very likely to purchase a home in the next two years rising to 10 per cent from seven per cent two years ago, according to the 17th Annual RBC Homeownership Study. Younger Canadians, aged 18 to 24, will lead the charge this year, with those very likely to buy almost doubling to 15 per cent from eight per cent in 2009.
The RBC study conducted by Ipsos Reid found that 91 per cent of Canadian homeowners believe a home is a good investment, the highest level in 12 years, and one-quarter (26 per cent) expect their home to be their primary source of income when they retire.
"With the Canadian housing market showing continued vigour, it's not surprising that Canadians feel more confident in the long-term value of owning a home," said Robert Hogue, senior economist, RBC. "Exceptionally low mortgage rates and improved affordability have been key reasons for the resurgence in the housing market this past year."
Most Canadians who intend to buy a new home in the next two years are planning to take a fixed rate mortgage (44 per cent). However, combination mortgages had the highest increase in popularity this year, with 40 per cent intending to take both a variable and fixed rate component, up from 32 per cent last year.
For Canadians planning to take a fixed rate or combination mortgage, seven-in-10 intend to take a term of five years or longer. Sixteen per cent said they intend to take a variable rate mortgage, down from 20 per cent in 2009.
"Canadians seem to be opting for more caution this year and may be factoring in potential rate increases down the road," said Marcia Moffat, RBC's head of home equity financing. "Choosing a combination mortgage can take some of the guesswork out of making a decision between whether it is better to lock in to a longer-term or stay in a variable rate."
In the wake of the recent housing rebound, most Canadians (six-in-10) also believe housing prices will rise in 2010, up significantly from 25 per cent in 2009. Similarly, a majority (64 per cent) believe mortgage rates will be higher over the next year, also up from 33 per cent a year ago.
"The expectation of higher mortgage rates on the horizon could be motivating buying intentions this year. But it's important that homeowners - especially first time buyers - get solid advice about what they can afford, not only today, but down the road," added Moffat.
In addition to seeking customized advice from a financial advisor, Moffat provides the following tips:
For homebuyers:
1. Lock in your rate when you apply for your mortgage.
Depending on your situation, there are rate guarantees that allow you to lock in your mortgage rate for up to 120 days.
2. "Stress test" your mortgage for rate increases.
If you are concerned about affordability down the road, knowing what your payments would be with a one - three per cent rate increase will give you greater peace of mind that your new home is affordable both today and in a few years time, when rates might be higher.
3. For first time homebuyers, leave some wiggle room.
With a pre-approved mortgage you will know what you can afford today. But before making a decision to find a home at the top of your pre-approval amount, also consider your current lifestyle preferences and how future changes in your circumstances could impact your payment comfort zone.
For homeowners renewing their mortgage:
1. Take advantage of early renewal options.
Some mortgages allow you to renew up to 120 days before the end of your term. This means you can lock in your new mortgage rate early.
2. Consider a combination (hybrid) mortgage to manage your interest costs.
If you are unsure of where rates are headed, consider splitting your mortgage into part fixed and part variable. You will have rate protection on the fixed rate mortgage portion, while you benefit from today's low interest rates on the variable rate mortgage portion. Transmitted by CNW Group
Monday, March 8, 2010
Canadian mortgage industry gets praise from southern neighbour
Canadian mortgage industry gets praise from southern neighbour
| Monday, 1 March 2010
A U.S. scholar recently has lavished praise on Canada's "marvelous" mortgage and banking system in an article published for the American Enterprise Institute.
Mark Perry, a visiting scholar at the institute, says Canada's system proved "more prudent, more resilient, and much less prone to excesses." He says examining the differences between the U.S. and Canada might lead to more insight as to how America's difficulties started and what reforms are necessary.
He outlines eight major advantages to Canada's system: full recourse mortgages, shorter-term fixed rates, mortgage insurance is more common in Canada, no tax deductibility of mortgage interest, higher repayment penalties, public policy differences on low-income housing, a more concentrated bank system, and a lower rate of loan originations.
"While Canada's banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with homeownership," Perry writes.
| Monday, 1 March 2010
A U.S. scholar recently has lavished praise on Canada's "marvelous" mortgage and banking system in an article published for the American Enterprise Institute.
Mark Perry, a visiting scholar at the institute, says Canada's system proved "more prudent, more resilient, and much less prone to excesses." He says examining the differences between the U.S. and Canada might lead to more insight as to how America's difficulties started and what reforms are necessary.
He outlines eight major advantages to Canada's system: full recourse mortgages, shorter-term fixed rates, mortgage insurance is more common in Canada, no tax deductibility of mortgage interest, higher repayment penalties, public policy differences on low-income housing, a more concentrated bank system, and a lower rate of loan originations.
"While Canada's banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with homeownership," Perry writes.
Wednesday, March 3, 2010
Australia central bank raises interest rates
Australia central bank raises interest rates
Wayne Cole, Reuters
SYDNEY-- Australia's central bank raised its benchmark interst rate by 25 basis points to 4.0% on Tuesday and flagged further hikes ahead, saying a surprisingly strong recovery allowed it to move policy toward more normal settings.
Interest rate futures slid as investors priced in further gradual hikes from the Reserve Bank of Australia (RBA). A rise in April was seen as unlikely but the odds of an increase in May were evenly split and almost fully priced in for June.
"It is very likely the RBA will hike again in the next three months," said Rory Robertson, interest rate strategist at Macquarie. "It's a ‘normalisation' of policy given the economy has performed better than anyone dreamed a year ago."
This was the fourth increase in five policy meetings, putting Australia far ahead of most other rich nations where rates are at 1% or less.
Indeed, RBA Governor Glenn Stevens flatly stated that lending rates were still below average and Tuesday's move was just a step toward getting back there.
"With growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average," Stevens said in a statement.
Last month he estimated a more normal range for lending rates would be between 4.25 and 4.75%, and investors assume the bank will get to the top of that band by year-end.
Interbank futures are fully priced for a move to 4.25% by July, and then in stages to 4.75% by December. One-year swap rates edged up to 4.65%.
Reaction in the currency market was restrained as the Australian dollar had already risen sharply in recent days, hitting a record high on the euro and a 25-year peak on sterling.
Treasurer Wayne Swan spun the hike as a sign of Australia's relative strength. Rising mortgage rates are always unpopular in a country obsessed with home ownership.
"The economy is recovering and rate rises are an inevitable consequence of a recovering economy that is outperforming the rest of the world," Swan told reporters.
BACK TO GROWTH
His optimism should be supported by figures due on Wednesday which are expected to show the economy grew by a solid 0.9% in the fourth quarter of 2009, a marked step up from 0.2% the previous quarter.
Growth for the year is seen accelerating to around 2.4%, from a pedestrian 0.5% in the third quarter.
Some of that revival was courtesy of fiscal stimulus which saw public spending jump 3.8% last quarter, the biggest rise in a decade. That alone should add 0.9%age points to gross domestic product (GDP) in the quarter.
By concentrating on the labour-intensive building sector, the fiscal splurge also helped keep people in jobs and was one reason unemployment surprised everyone by falling late last year.
The drop in the jobless rate to just 5.3% in January from a high of 5.8% in October, is a critical plank in the case for higher interest rates.
And there was more evidence the revival had gathered steam this year. Data out Tuesday showed retail sales jumped 1.2% in January, well above forecasts for a 0.5% gain and a return to growth after December's 0.9% drop.
Retail sales account for around 23% of GDP and the sector is the biggest single employer.
"It all hints at a consumer little affected by higher borrowing costs and is spending without any fiscal assistance," said Su-Lin Ong, senior economist at RBC Capital Markets.
"The bottom line is that a 3.75% cash rate was too low for an economy that is returning to 3%-plus growth, underpinned by a recovery in the terms of trade, and with limited capacity in both goods and labour markets," she added.
The buoyant outlook for trade was underlined by the country's official commodities forecaster which predicted that exports of liquefied natural gas would nearly double by 2014/15, while exports of iron ore could rise almost 70%.
If correct, that would deliver a huge windfall to Australian profits, investment, wages and tax receipts and is a major reason the RBA is so bullish on the country's longer-term outlook.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2631549#ixzz0h3vSj2ws
Wayne Cole, Reuters
SYDNEY-- Australia's central bank raised its benchmark interst rate by 25 basis points to 4.0% on Tuesday and flagged further hikes ahead, saying a surprisingly strong recovery allowed it to move policy toward more normal settings.
Interest rate futures slid as investors priced in further gradual hikes from the Reserve Bank of Australia (RBA). A rise in April was seen as unlikely but the odds of an increase in May were evenly split and almost fully priced in for June.
"It is very likely the RBA will hike again in the next three months," said Rory Robertson, interest rate strategist at Macquarie. "It's a ‘normalisation' of policy given the economy has performed better than anyone dreamed a year ago."
This was the fourth increase in five policy meetings, putting Australia far ahead of most other rich nations where rates are at 1% or less.
Indeed, RBA Governor Glenn Stevens flatly stated that lending rates were still below average and Tuesday's move was just a step toward getting back there.
"With growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average," Stevens said in a statement.
Last month he estimated a more normal range for lending rates would be between 4.25 and 4.75%, and investors assume the bank will get to the top of that band by year-end.
Interbank futures are fully priced for a move to 4.25% by July, and then in stages to 4.75% by December. One-year swap rates edged up to 4.65%.
Reaction in the currency market was restrained as the Australian dollar had already risen sharply in recent days, hitting a record high on the euro and a 25-year peak on sterling.
Treasurer Wayne Swan spun the hike as a sign of Australia's relative strength. Rising mortgage rates are always unpopular in a country obsessed with home ownership.
"The economy is recovering and rate rises are an inevitable consequence of a recovering economy that is outperforming the rest of the world," Swan told reporters.
BACK TO GROWTH
His optimism should be supported by figures due on Wednesday which are expected to show the economy grew by a solid 0.9% in the fourth quarter of 2009, a marked step up from 0.2% the previous quarter.
Growth for the year is seen accelerating to around 2.4%, from a pedestrian 0.5% in the third quarter.
Some of that revival was courtesy of fiscal stimulus which saw public spending jump 3.8% last quarter, the biggest rise in a decade. That alone should add 0.9%age points to gross domestic product (GDP) in the quarter.
By concentrating on the labour-intensive building sector, the fiscal splurge also helped keep people in jobs and was one reason unemployment surprised everyone by falling late last year.
The drop in the jobless rate to just 5.3% in January from a high of 5.8% in October, is a critical plank in the case for higher interest rates.
And there was more evidence the revival had gathered steam this year. Data out Tuesday showed retail sales jumped 1.2% in January, well above forecasts for a 0.5% gain and a return to growth after December's 0.9% drop.
Retail sales account for around 23% of GDP and the sector is the biggest single employer.
"It all hints at a consumer little affected by higher borrowing costs and is spending without any fiscal assistance," said Su-Lin Ong, senior economist at RBC Capital Markets.
"The bottom line is that a 3.75% cash rate was too low for an economy that is returning to 3%-plus growth, underpinned by a recovery in the terms of trade, and with limited capacity in both goods and labour markets," she added.
The buoyant outlook for trade was underlined by the country's official commodities forecaster which predicted that exports of liquefied natural gas would nearly double by 2014/15, while exports of iron ore could rise almost 70%.
If correct, that would deliver a huge windfall to Australian profits, investment, wages and tax receipts and is a major reason the RBA is so bullish on the country's longer-term outlook.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2631549#ixzz0h3vSj2ws
Economy improving, but interest rates to stay at historic lows for now
Economy improving, but interest rates to stay at historic lows for now
By Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada is keeping interest rates at historic lows for a few more months, while sending out signals that the economy is rebounding strongly and could trigger inflationary pressures.
The central bank's more positive take on the economy followed a Statistics Canada report Monday of a surprising five per cent growth spurt in the fourth quarter of 2009 and sent a strong loonie even higher.
"The level of economic activity in Canada has been slightly higher than the bank had projected in January," the bank said Tuesday morning before markets opened.
"The economy grew at an annual rate of five per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports."
"Slightly higher" may be an understatement, as the bank had projected growth of only 3.3 per cent for the last three months of 2009.
The bank also noted that "core inflation" has been slightly firmer than projected, although it added that some of the price increases were due to transitory factors.
The governing council continued to reiterate that despite the improved conditions, they would likely leave the overnight rate where it has been since last spring - at 0.25 per cent - until at least July.
But some economists weren't buying it and the reaction of money markets suggested that there may be some pressure on governor Mark Carney to move on interest rates ahead of schedule.
"They are getting ready to take away the punch bowl," said Derek Holt, vice-president of economics with Scotia Capital.
"I think they are priming the markets for a second-quarter hike."
The next interest rate announcement comes in April, but June would be a more likely time to move, said Holt, if indeed the bank is preparing to act. http://ca.news.finance.yahoo.com/s/02032010/2/biz-finance-economy-improving-interest-rates-stay-historic-lows.html
By Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada is keeping interest rates at historic lows for a few more months, while sending out signals that the economy is rebounding strongly and could trigger inflationary pressures.
The central bank's more positive take on the economy followed a Statistics Canada report Monday of a surprising five per cent growth spurt in the fourth quarter of 2009 and sent a strong loonie even higher.
"The level of economic activity in Canada has been slightly higher than the bank had projected in January," the bank said Tuesday morning before markets opened.
"The economy grew at an annual rate of five per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports."
"Slightly higher" may be an understatement, as the bank had projected growth of only 3.3 per cent for the last three months of 2009.
The bank also noted that "core inflation" has been slightly firmer than projected, although it added that some of the price increases were due to transitory factors.
The governing council continued to reiterate that despite the improved conditions, they would likely leave the overnight rate where it has been since last spring - at 0.25 per cent - until at least July.
But some economists weren't buying it and the reaction of money markets suggested that there may be some pressure on governor Mark Carney to move on interest rates ahead of schedule.
"They are getting ready to take away the punch bowl," said Derek Holt, vice-president of economics with Scotia Capital.
"I think they are priming the markets for a second-quarter hike."
The next interest rate announcement comes in April, but June would be a more likely time to move, said Holt, if indeed the bank is preparing to act. http://ca.news.finance.yahoo.com/s/02032010/2/biz-finance-economy-improving-interest-rates-stay-historic-lows.html
Tuesday, March 2, 2010
Pressure grows for Bank of Canada to hike rates
Pressure grows for Bank of Canada to hike rates
Paul Vieira, Financial Post
OTTAWA -- Pressure on the Bank of Canada to move early on raising interest rates mounted Monday after data on fourth-quarter gross domestic product suggested the economy is roaring its way out of recession after recording the fastest pace of growth in nearly a decade.
The central bank could provide hints of a change Tuesday morning when it releases its latest statement on interest rates. Its plan for almost a year has been to conditionally keep its benchmark rate at 0.25% until July in an effort to pump up economic growth after the great recession.
Data from Statistics Canada suggest the emergency-level rates have worked their magic, perhaps faster and better than anticipated.
The economy expanded 5% in the final three months of 2009, blasting past market expectations for a 4% gain - and the bank's own 3.3% forecast - and setting the stage for robust growth this quarter. It is also the fastest pace of quarterly economic growth since late 2000. Further, the data were solid across the board, with personal consumption and net trade contributing to the performance.
Third-quarter data were also revised upward, with growth of 0.9% as opposed to the original 0.4% reading.
This comes on top of January inflation data that indicated price increases have moved closer to the central bank's 2% target earlier than envisaged.
"With growth being stronger than expected and inflation sticky ... we remain of the view that the Bank of Canada has the full green light to hike as emergency conditions have passed and with it justification for sticking to the zero lower bound on rates," said economists Derek Holt and Karen Cordes from Scotia Capital.
Yanick Desnoyers, assistant chief economist at National Bank Financial, said a rate hike could come as early as next month, when data might show the output gap - or the amount of slack in the economy - is narrowing faster than the central bank expected.
He added the headline GDP data might be underestimating how quickly economic slack is being absorbed. For instance, gross domestic income – or the sum of all wages, corporate profits and tax revenue – climbed by 8.5% in the quarter, the best showing since 2005. And that follows a 4.5% gain in the third quarter.
Sheryl King, chief economist and strategist at Bank of America/Merrill Lynch Canada, said she expects a rate hike in June, based on a belief the central bank will want to see through its conditional pledge for as long as possible.
Among the data points she said she found most encouraging was a 4% gain in real wage growth – defined as gains in household income excluding transfers from governments. The last time there was growth in this category was prior to the recession.
"This signals that risk taking and organic growth is coming back in Canada," she said.
Of course, not all analysts believe the data will push Bank of Canada governor Mark Carney to veer off course. Douglas Porter, deputy chief economist at BMO Capital Markets, said the data surely raises the odds of a July rate rise but anything earlier than that remained remote. Analysts at TD Securities also shared a similar view.
Also, the data contained one key blemish – a 9.2% drop in machinery and equipment investment by Canadian companies, which does not bode well for efforts to boost abysmal productivity levels.
The GDP data attracted investors, as the Canadian dollar gained a full US1¢, to US96.01¢, on the possibility of an early rate hike.
Canadian growth should remain robust as the global recovery takes hold. Business surveys released Monday indicated manufacturers continue to lead the recovery, with factory activity expanding last month across Asia, the United States and Europe.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2628952#ixzz0gySOg5Bz
Paul Vieira, Financial Post
OTTAWA -- Pressure on the Bank of Canada to move early on raising interest rates mounted Monday after data on fourth-quarter gross domestic product suggested the economy is roaring its way out of recession after recording the fastest pace of growth in nearly a decade.
The central bank could provide hints of a change Tuesday morning when it releases its latest statement on interest rates. Its plan for almost a year has been to conditionally keep its benchmark rate at 0.25% until July in an effort to pump up economic growth after the great recession.
Data from Statistics Canada suggest the emergency-level rates have worked their magic, perhaps faster and better than anticipated.
The economy expanded 5% in the final three months of 2009, blasting past market expectations for a 4% gain - and the bank's own 3.3% forecast - and setting the stage for robust growth this quarter. It is also the fastest pace of quarterly economic growth since late 2000. Further, the data were solid across the board, with personal consumption and net trade contributing to the performance.
Third-quarter data were also revised upward, with growth of 0.9% as opposed to the original 0.4% reading.
This comes on top of January inflation data that indicated price increases have moved closer to the central bank's 2% target earlier than envisaged.
"With growth being stronger than expected and inflation sticky ... we remain of the view that the Bank of Canada has the full green light to hike as emergency conditions have passed and with it justification for sticking to the zero lower bound on rates," said economists Derek Holt and Karen Cordes from Scotia Capital.
Yanick Desnoyers, assistant chief economist at National Bank Financial, said a rate hike could come as early as next month, when data might show the output gap - or the amount of slack in the economy - is narrowing faster than the central bank expected.
He added the headline GDP data might be underestimating how quickly economic slack is being absorbed. For instance, gross domestic income – or the sum of all wages, corporate profits and tax revenue – climbed by 8.5% in the quarter, the best showing since 2005. And that follows a 4.5% gain in the third quarter.
Sheryl King, chief economist and strategist at Bank of America/Merrill Lynch Canada, said she expects a rate hike in June, based on a belief the central bank will want to see through its conditional pledge for as long as possible.
Among the data points she said she found most encouraging was a 4% gain in real wage growth – defined as gains in household income excluding transfers from governments. The last time there was growth in this category was prior to the recession.
"This signals that risk taking and organic growth is coming back in Canada," she said.
Of course, not all analysts believe the data will push Bank of Canada governor Mark Carney to veer off course. Douglas Porter, deputy chief economist at BMO Capital Markets, said the data surely raises the odds of a July rate rise but anything earlier than that remained remote. Analysts at TD Securities also shared a similar view.
Also, the data contained one key blemish – a 9.2% drop in machinery and equipment investment by Canadian companies, which does not bode well for efforts to boost abysmal productivity levels.
The GDP data attracted investors, as the Canadian dollar gained a full US1¢, to US96.01¢, on the possibility of an early rate hike.
Canadian growth should remain robust as the global recovery takes hold. Business surveys released Monday indicated manufacturers continue to lead the recovery, with factory activity expanding last month across Asia, the United States and Europe.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2628952#ixzz0gySOg5Bz
Monday, March 1, 2010
U.S. economy bolts ahead at 5.9 per cent pace in fourth quarter
U.S. economy bolts ahead at 5.9 per cent pace in fourth quarter
By Jeannine Aversa WASHINGTON — The U.S. economy rocketed ahead at a 5.9 per cent pace in the final quarter of 2009, stronger than initially estimated. But the growth spurt isn’t expected to carry over into this year.
The fresh reading on the nation’s economic standing, released by the Commerce Department on Friday, was better than the government’s initial estimate a month ago of 5.7 per cent growth. It would mark the strongest showing in six years.
Even so, it didn’t change the expectation of much slower economic activity in the current January-to-March quarter. Roughly two-thirds of last quarter’s growth came from a burst of manufacturing — but not because consumer demand was especially strong. In fact, consumer spending weakened at the end of the year, even more than the government first thought.
Instead, factories were churning out goods for businesses that had let their stockpiles dwindle to save cash. If consumer spending remains lacklustre as expected, that burst of manufacturing — and its contribution to economic activity — will fade. The signs aren’t hopeful. Consumer confidence took an unexpected dive in February. Unemployment stands at 9.7 per cent. Home foreclosures are at record highs. And many Americans are still having trouble getting loans.
Forecasters at the National Association for Business Economics predict the economy will expand at only a three per cent pace in the first quarter of this year. The next two quarters should log similar growth, they predict.
Unlike past rebounds driven by the spending of shoppers, this one is hinging more on spending by businesses and foreigners. Stronger spending by businesses and foreigners contributed to the bump-up in economic growth in the fourth quarter. So did the fact that companies stopped slashing their stockpiles of goods. During the worst of the recession, companies cut inventories at record rates.
Businesses boosted spending on equipment and software at a sizzling 18.2 per cent pace, the fastest in nine years. Foreigners snapped up U.S.-made goods and services, which propelled exports to grow at 22.4 pace, the most in 13 years.
And the slower drawdown in businesses’ stockpiles accounted for nearly four percentage points of the fourth-quarter’s overall growth, even more than the government first estimated.
Consumers, however, lost energy. They increased their spending at a pace of just 1.7 per cent. That was weaker than first thought and down from a 2.8 per cent growth rate in the third quarter.
Looking ahead, consumer spending is expected to aid the recovery — not lead it. That’s one reason why the recovery is expected to move forward at only a moderate pace of around three per cent in coming quarters.
In normal times, such growth would be considered respectable. But the nation is emerging from the worst recession since the 1930s. Sizzling growth in the five per cent range would be needed for an entire year to drive down the unemployment rate, now 9.7 per cent, by just one percentage point.
For all of this year, the economy is expected to grow 3.1 per cent, according to the NABE forecasters. Though modest, that pace would mark a big improvement from 2009, when the economy contracted by 2.4 per cent — the worst showing since 1946.
As government stimulus wanes and Federal Reserve economic-support programs end, the economy — especially the fragile housing market — could suffer. Economists say the odds of the economy sliding back into a recession this year are low, but they won’t rule it out.
In appearances on Capitol Hill on Wednesday and Thursday, Federal Reserve Chair Ben Bernanke said record-low interest rates are still needed to make sure the recovery becomes firmly rooted and to help ease high unemployment.
If gains from inventories and exports are taken out, the economy last quarter grew at just a 1.6 per cent pace.And, improvements in the housing market also tailed off at the end of last year — despite massive government support.
There’s worry inside and outside the Fed about how housing will fare once a homebuyer tax credit ends in the spring and the Fed stops a mortgage-securities buying program that has lowered mortgage rates and boosted sales. The Associated Press
By Jeannine Aversa WASHINGTON — The U.S. economy rocketed ahead at a 5.9 per cent pace in the final quarter of 2009, stronger than initially estimated. But the growth spurt isn’t expected to carry over into this year.
The fresh reading on the nation’s economic standing, released by the Commerce Department on Friday, was better than the government’s initial estimate a month ago of 5.7 per cent growth. It would mark the strongest showing in six years.
Even so, it didn’t change the expectation of much slower economic activity in the current January-to-March quarter. Roughly two-thirds of last quarter’s growth came from a burst of manufacturing — but not because consumer demand was especially strong. In fact, consumer spending weakened at the end of the year, even more than the government first thought.
Instead, factories were churning out goods for businesses that had let their stockpiles dwindle to save cash. If consumer spending remains lacklustre as expected, that burst of manufacturing — and its contribution to economic activity — will fade. The signs aren’t hopeful. Consumer confidence took an unexpected dive in February. Unemployment stands at 9.7 per cent. Home foreclosures are at record highs. And many Americans are still having trouble getting loans.
Forecasters at the National Association for Business Economics predict the economy will expand at only a three per cent pace in the first quarter of this year. The next two quarters should log similar growth, they predict.
Unlike past rebounds driven by the spending of shoppers, this one is hinging more on spending by businesses and foreigners. Stronger spending by businesses and foreigners contributed to the bump-up in economic growth in the fourth quarter. So did the fact that companies stopped slashing their stockpiles of goods. During the worst of the recession, companies cut inventories at record rates.
Businesses boosted spending on equipment and software at a sizzling 18.2 per cent pace, the fastest in nine years. Foreigners snapped up U.S.-made goods and services, which propelled exports to grow at 22.4 pace, the most in 13 years.
And the slower drawdown in businesses’ stockpiles accounted for nearly four percentage points of the fourth-quarter’s overall growth, even more than the government first estimated.
Consumers, however, lost energy. They increased their spending at a pace of just 1.7 per cent. That was weaker than first thought and down from a 2.8 per cent growth rate in the third quarter.
Looking ahead, consumer spending is expected to aid the recovery — not lead it. That’s one reason why the recovery is expected to move forward at only a moderate pace of around three per cent in coming quarters.
In normal times, such growth would be considered respectable. But the nation is emerging from the worst recession since the 1930s. Sizzling growth in the five per cent range would be needed for an entire year to drive down the unemployment rate, now 9.7 per cent, by just one percentage point.
For all of this year, the economy is expected to grow 3.1 per cent, according to the NABE forecasters. Though modest, that pace would mark a big improvement from 2009, when the economy contracted by 2.4 per cent — the worst showing since 1946.
As government stimulus wanes and Federal Reserve economic-support programs end, the economy — especially the fragile housing market — could suffer. Economists say the odds of the economy sliding back into a recession this year are low, but they won’t rule it out.
In appearances on Capitol Hill on Wednesday and Thursday, Federal Reserve Chair Ben Bernanke said record-low interest rates are still needed to make sure the recovery becomes firmly rooted and to help ease high unemployment.
If gains from inventories and exports are taken out, the economy last quarter grew at just a 1.6 per cent pace.And, improvements in the housing market also tailed off at the end of last year — despite massive government support.
There’s worry inside and outside the Fed about how housing will fare once a homebuyer tax credit ends in the spring and the Fed stops a mortgage-securities buying program that has lowered mortgage rates and boosted sales. The Associated Press
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