Thursday, April 29, 2010
The Globe and Mail Published on Thursday, Apr. 29, 2010
Interest rates are rising – we all get that – but it looks like the Big Banks are pushing things a bit with mortgages.
After a pair of increases in the past two weeks, the posted Big Bank five-year fixed mortgage rate now stands at 6.25 per cent. Does that seem high? In fact, it’s just half a percentage point below the average level for the past decade.
We’re supposed to be in the early phase of what could be a long cycle of rate increases. The Bank of Canada hasn’t even started raising its overnight rate, which sets the trend for borrowing costs other than fixed-rate mortgages. The overnight rate could very well start rising June 1 (that’s the central bank’s next rate-setting date), but even then it’s not dead certain that rates will move.
Mortgage rates are linked to bond yields, which have been rising for a while now. But mortgage rates have been moving faster.
Thanks to the always helpful Bank of Canada online interest rate database, we know that the yield for five-year Government of Canada bonds has averaged 4.03 per cent since the beginning of 2000. Five-year Canada bonds had a yield of 3.02 per cent yesterday, which means they’re three-quarters of the way back to their average of the past decade.
The 10-year average for posted five-year fixed-rate mortgages is 6.75 per cent, which means this rate is almost 93 per cent of the way back to its long-term average. There is zero consensus that things have normalized after the financial crisis, but the banks are just about all the way back to pricing mortgages as if they were.
And, no, this “go big or go home” attitude to rates has not been extended to guaranteed investment certificates, which are one source the banks use for the money they lend out as mortgages. The current posted Big Bank five-year GIC rate tops out at 2.1 per cent, or 63 per cent of its 10-year average rate of 3.31 per cent.
John Turner, director of mortgages at Bank of Montreal, said the banks are simply reacting to the rising rate environment in setting borrowing costs for mortgages.
“It’s not about any of us trying to get ahead of things, because the market won’t let us,” he said. “It’s a very competitive market.”
Mr. Turner cited two factors that have driven fixed-rate mortgages lately. One is an effort by the banks to anticipate higher bond yields and avoid repeated increases in mortgage rates. “We don’t like to move rates because it causes dissatisfaction, and it causes disruption in the sales force.”
The other driver of higher mortgage costs is the rising cost of providing interest-rate guarantees for people who are smart enough to lock in a rate as soon as they start looking for a home. Mr. Turner said these costs haven’t been a factor much in recent years because the general trend for interest rates has been downward. Now, with rates on a definite upward path, rate guarantees are a bigger consideration for lenders.
Banks won’t say this out loud, but their own internal business considerations help set mortgage rates as well. Sometimes, this works in favour of borrowers. In February, for example, the banks lowered mortgage rates even as bond yields rose a tick or two. Now, the banks seem to be in a mood to emphasize profits over market share or, as it’s known in bank land, widen spreads between what they charge and what they pay.
“The banks normally do this when interest rates are moving,” said David McVay, a financial services industry consultant with McVay and Associates. “But their retail profits have been pretty strong, and they widened spreads quite well when they put up line-of-credit rates [in 2008-09]. That was a big boost to profits right there.”
Mr. McVay seconded Mr. Turner’s comment about the mortgage marketplace being too competitive for banks to be out of line with their mortgage rates. In fact, there is a huge variation in rates right now that demands some shopping around from homebuyers and people facing renewals.
One of the better deals in the mortgage market today is BMO’s offer of a 4.35-per-cent five-year, fixed-rate mortgage. You can’t take an amortization longer than 25 years with this mortgage, and there’s less room to make pre-payments than there is with a standard BMO mortgage. But a glance at the websites of several mortgage brokers yesterday suggests you won’t find a lower rate
Tuesday, April 27, 2010
Garry Marr, Financial Post
A new survey says more than four out of five home buyers feel comfortable with their debt, but another hike in interest rates might get Canadians squirming next time they're polled.
Canada and Mortgage and Housing Corp. surveyed 2,503 mortgage consumers between Feb. 11 and Feb. 28 and found 81% were comfortable with their current debt levels. However, the survey was done before three successive hikes in interest rates that have pushed the five-year, fixed-rate, closed mortgage from 5.25% to 6.25% in less than a month.
"Rates were low throughout most of the time [of the survey]," said Pierre Serré, CMHC vice-president of insurance products and business development, adding it was unclear whether the 81% figure might fall because of the hike.
Based on an average Canadian home-sale price of $340,920 in March and a 5% down payment, the minimum allowed, mortgage payments for a five-year, fixed-rate product have climbed almost 10%.
As it has throughout this rate-hike cycle, Royal Bank of Canada got the ball rolling Monday by adding another 15 basis points to its fixed-rate product. Toronto-Dominion Bank was next, with most of banks expected to follow shortly.
The hike means that a typical Canadian homeowner with a 25-year amortization with that $340,920 home and 5% down is now paying $2,120.54 per month in mortgage costs, up sharply from the $1,930.03 it was costing them before the latest hike in rates. The dramatic shift is likely once again to push people back toward a variable product linked to prime.
The same mortgage based on the current prime rate of 2.25% would cost only $1,410.84 to carry. Still, many economists predict the Bank of Canada will begin raising its rates as early as June, lifting the prime rate.
The survey also found homebuyers are relatively cautious when taking out their mortgages. Only 20% of them took out mortgages based on amortizations of longer than 25 years. CMHC also said 68% of consumers plan to pay off their mortgage sooner than current amortizations.
"In talking to some lenders I've heard of lots of people who get extended amortizations but accelerate their payments," Mr. Serré said.
The survey came out the same day as new statistics from Re/Max which show the high-end of the housing market continues to soar. Re/Max surveyed 13 markets in the first quarter and found records for high-end homes sales in nine of them.
Michael Polzler, executive vice-president of Re/Max Ontario-Atlantic Canada didn't think the latest hike in rates would do anything to slow the market. "It's still minor. Interest rates overall, as far as I'm concerned, are still at historic lows," he said. "Are they climbing up? Yes. It's time to consider locking in. Are they going to skyrocket? I don't think so."
Bernice Dunsby, Royal Bank's director of home equity, said the one percentage point rise in rates was not that large a leap on a historical basis.
"It has been widely anticipated that rates would be on the rise. The cost of funds just continues to raise," said Ms. Dunsby. "The thing our clients are looking for is options that provide additional rate protection."
She said customers have been opting for mortgage products that divide their debt in half, some of it going long and some of it going short. But the percentage of customers just going short continues to slide with variable rate products becoming less popular at Royal Bank.
Monday, April 12, 2010
'Orphan mortgages' begin to surface
John Greenwood, Financial Post
Rod and Joyce Marentette bought their house in Chatham, Ont., a month before getting married in 2005. The economy was booming and credit was plentiful, so even though they didn't have a down payment and Rod had recently gone through a bankruptcy, there were plenty of mortgage companies willing to lend to them.
The house was $98,000 and with the additional legal fees the total price came to $100,000, all of which they were able to borrow from the mortgage company.
Things took a turn for the worse when Rod, who is 39, suffered a workplace injury and had to leave his job as a factory supervisor. But Joyce, 40, was determined to hold on to the house, taking on extra work to make ends meet. When Rod finally recovered two years later, he found a new job with a construction company. While the paycheque was lower, it took the financial pressure off.
That's when they got the call from the mortgage company. It was the year the credit crunch hit. The economy was in a tailspin and lenders around the world were scrambling for liquidity. The mortgage, they were informed, could not be renewed and as the company was closing its subprime business, they would have to find another lender.
But the little lenders who had been so eager for their business back in 2005 had disappeared. That left the big banks and insurance companies, but they wouldn't lend either and the Marentettes quickly realized their dream of owning a home was about to become a nightmare.
It ends up that despite its squeaky-clean financial image, Canada does indeed have its own subprime-mortgage mess.
Industry insiders say that over the next few years the Marentettes' story will play out over and over again across Canada, as an estimated 30,000 so-called "orphan mortgages" reach maturity. Unless the government takes action, this may trigger a flood of foreclosures.
In the wake of the financial crisis, the business of subprime loans has dried up. Prior to 2007, there were at least a dozen subprime lenders in Canada and it was the fastest-growing sector of the entire mortgage market, says Benjamin Tal, senior economist at CIBC World Markets, who pegged it at about 5% of the total market.
But most of those lenders, including players such as Xceed Mortgage Corp., GMAC Residential Lending and Wells Fargo, have either changed their business or closed up shop.
Meanwhile, the rules around home loans have been tightened. Earlier this year, the federal government raised the minimum down payment required for Canada Mortgage and Housing Corp. insurance.
The mortgage industry clearly has a problem on its hands.
"This thing is a wave and it's just starting," says Eric Putnam, formerly with a subprime lender, now managing director of Debt Coach Canada, a company that provides financial and bankruptcy advice to consumers.
Estimates vary on the total value of the subprime market in Canada.
No one knows for sure how big it really is because there is no central database tracking these mortgages.
But according to Ivan Wahl, chief executive of Xceed, one of the biggest players in Canada until it recently converted to a bank, the subprime market in this country grew to about $11-billion in 2006, the year before things started to implode.
Given that the total mortgages outstanding in Canada amount to around $1-trillion today, the subprime portion is not a huge slice.
But the vast majority were made toward the middle of the decade with terms of three and five years and they're coming due over the next two years.
"Given the current environment it will be very difficult to finance these [people]," says Mr. Tal, who calls it "a big problem for specific borrowers but not one from a macro perspective."
But the industry is so concerned about the situation that it recently approached the federal government with a request for a bailout.
According to Mr. Putnam and others, it wants the federal government to participate in a $1-billion fund to help finance the coming flood of orphan mortgages.
During the credit bubble, subprime lenders funded themselves through the asset-backed commercial paper market.
The loans they made were packaged up and sold to securitization pools and then to investors in the form of ABCP.
But when the commercial paper market froze up in the financial crisis, lenders were suddenly left without a way to fund their businesses.
"Investors are no longer willing to continue on and these mortgages were not insured by the Canada Mortgage and Housing Corp., so the borrowers are not going to be able to move to another lender in today's environment," Mr. Putnam says.
The definition of subprime depends on who you ask, but for practical purposes the term generally refers to high-interest loans made to people who are unable to get a better deal at one of the big banks. Many such borrowers are simply self employed entrepreneurs but a good part are people with bad credit histories.
In the United States, the subprime market took off in the run-up to the crisis, growing to more than 20% of total mortgages outstanding as the loans were packaged up into complex securities and sold to investors around the world. When real estate prices finally started to crumble the value of the securities cratered, ultimately destabilizing the global financial system.
Analysts say it's difficult to draw comparisons between the U.S. subprime market and what happened in Canada. The market here never grew to more than a sliver of the total and, more important, the type of loans offered by Canadian players were more conservative than those offered by their peers south of the border.
But there are nevertheless some disturbing parallels between the two markets. "Compared to what was going on in the U.S., it never got to the same level here, but having said that, they were going down the same slippery slope," says Mr. Putnam.
"The Canadian population wanted to buy a home, that was the No. 1 goal.
"People were taking on high debt loads, stretching the amortization out as long as possible and lenders were looking at all the opportunities. It made sense when the market was hot, but of course, no one could foresee the problems."
Exacerbating the situation, the early part of the decade saw the arrival of a number of U.S. players looking to get in on the Canadian market.
Because many of the players were not deposit-taking institutions, they qualified for looser regulations than banks and other traditional players.
That meant, for instance, that they didn't need insurance for risky loans and they could lend in excess of the value of the property. Borrowers loved it at the time but in today's post-crisis world, such loans are almost impossible to renew.
The good news for the Marentettes is that they succeeded in finding a new lender, though they're still paying almost double the interest rate of a conventional mortgage.
Thousands of other subprime borrowers may not be so lucky.
Friday, April 9, 2010
OTTAWA - With the Canadian economy doing surprisingly well over the past six months, many see higher interest rates from the Bank of Canada in the not so distant future, but according to a report released Thursday from CIBC's chief economist Avery Shenfeld, rates are likely to remain at a very low 2.5% through to 2011.
In CIBC World Markets' latest Global Positioning Strategy report, Mr. Shenfeld lists several reasons for Bank of Canada Governor Mark Carney to keep interest rates subdued after July. He points out that the U.S. will probably have a more gradual approach to raising rates and if Canada gets too far ahead, that could send the Canadian dollar soaring.
"While factories are recovering in Canada alongside a global industrial revival, output remains nearly 20% below the pre-recession peak, and wages are now substantially above those stateside without the productivity gains to match. There's only so much of a competitive challenge that non-resource exporters can take in short order," Mr. Shenfeld said.
He also pointed out that inflation is not expected to rise much further and stimulus spending is expected to be reigned in by governments - including Canada's - which will slow growth.
"If the U.S., the U.K., and Japan all move from huge stimulus to even modest restraint, Canada will feel it in our export prospects come 2011," Mr. Shenfeld pointed out.
Mr. Carney has promised to keep interest rates where they are at 0.25% until the end of June. However, the latest reading of Canada's economic growth showed the core inflation rate at 2.1% in February, far above the Bank of Canada's forecast of 1.6% for the first quarter of the year. Many analysts believe the Bank of Canada will not wait until mid-2010 to raise rates.
Wednesday, April 7, 2010
Vancouver's super-hot real estate market has hit an expensive milestone, with the average price of a home reaching $1 million for the first time.
More than 1,300 single detached homes were sold in greater Vancouver last month, for a whopping total of $1.35 billion.
That puts the average sale price tag for a home at slightly more than $1 million -- an achievement that the B.C. Real Estate Association says is unprecedented.
"It was the first month ever we saw that price crest a million dollars," said Cameron Muir, the association's chief economist.
The $1-million average includes high-end homes. But the average price for a single, standard detached home in the city reached $800,341, the Real Estate Board of Greater Vancouver said Tuesday. That's up from $650,000 a year ago.
The soaring prices have local realtors like Paul Eviston feeling good.
"If you look at our market in the last 12 months, (it's) probably the hottest real estate market in the world," he said.
Local housing prices jumped 23 per cent in March compared to a year earlier, according to the city's real estate board. The recovery means housing prices in Vancouver are now 3 per cent higher than they were before the recession hit.
It's the market's strongest rebound in 40 years, Muir said.
Housing prices are recovering in other Canadian cities, but not at the same pace as Vancouver.
Eviston said the city is leading the way for a few reasons.
"You can attribute a lot of that to the Olympics, and you can't underestimate how weather affects peoples' buying patterns," he said. "That's a huge part of it, and we had a very mild winter."
Tuesday, April 6, 2010
OTTAWA — The high-flying loonie renewed its flight towards parity Monday, forcing firms and individuals to adjust to what many believe will become a new normal in the relative value of the two currencies.
Boosted by cycle-high prices for oil and commodities, the loonie soared to within a whisker of parity Monday, reaching as high as 99.87 cents US before closing at 99.72.
The currency has been flirting with par for more than a month, and economists believe it is now only a matter of time before the psychologically important barrier is breached.
“We’re one good number away from seeing the Canadian dollar through parity,” said CIBC chief economist Avery Shenfeld.
If it doesn’t happen earlier, the trigger may be Friday’s employment report for March, particularly if Statistics Canada announces a higher gain than the 25,000 consensus call.
Scotiabank economists sent a note to clients Monday predicting the dollar will appreciate “well north of parity over the spring and summer months.”
RBC currency analyst Matthew Strauss also believes the loonie could stay above parity for several months, although his view is that it will dip slightly below the greenback later in the year when the U.S. starts hiking interest rates.
Regardless of which side of the line the currency trades at any given time, Strauss said Canadians should get used to a strong loonie — within five cents of parity either way — perhaps for years.
Economists say the shock for Canadians won’t be as acute this time as in the fall of 2007, when the loonie rose as high as $1.10 US, resulting in a flood of cross-border shoppers heading south for bargains, and a commensurate dwindling of traffic the other way.
A recent report by the Conference Board of Canada suggested that many industries, particularly multi-nationals in the manufacturing and oil and gas sectors, had globalized their operations to mitigate against a stronger Canadian currency.
Still, there were indications Monday that many Canadians are looking to insulate themselves against currency fluctuations.
Toronto-based currency broker Knightsbridge Foreign Exchange said business has been brisk — about three or four times higher than normal — with small firms and individuals anxious to hedge against volatility.
Knightsbridge president Rahim Madhavji said small firms that import from the U.S. want to ensure that their purchase price won’t be wildly different when it comes time to pay in U.S. dollars. And he says he’s also getting calls from Canadians buying homes in U.S. vacation spots who want to lock in the purchase price months before the closing date.
“Volatility is good for our business,” he said. “People are hedging now because . . . who knows what the rate is going to be in 90 days.”
Kevin Desjardins of the Tourism Industry Association of Canada said the country’s 180,000 tourism operators are also keeping a close eye on the currency, knowing that each cent of appreciation likely means a little less business for them.
With summer’s peak season approaching, the loonie’s strength couldn’t come at a worse time for an industry already hobbled by the poor economy in the U.S. and new border restrictions that require American visitors to carry passports.
“You have to think of tourism as an export industry and like any export industry, a strong Canadian dollar is going to have an impact on our ability to get foreigners to buy Canadian,” he explained.
Many industries have made adjustments for the currency, said Avrim Lazar of the Forest Products Association of Canada, but no one should fool themselves into thinking there isn’t a stiff price to pay whenever the loonie appreciates.
He said a strong dollar means that as his industry recovers from recession, mill owners are likely to re-open in the U.S. over Canada, meaning jobs will go south.
“The government and the (Bank of Canada) feeling complacent about a high dollar would be a serious error (because) we export most of our non-government GDP to the U.S.,” he explained.
Economists say there is not much the central bank can do about the currency because it is appreciating on fundamentals — rising oil and commodity prices, the relatively low national debt, expectations interest rates will rise, and an economy recovering faster than expected and faster than most industrialized countries.
Strauss said the loonie has risen faster than any major currency since the beginning of the year, but looked at in the context of other so-called commodity plays, it has not been a fluke.
“The rally in commodities started in March 2009 and if we look at commodity currencies (Norway, Australia, New Zealand), we’re pretty much in the middle of the pack,” he said
Thursday, April 1, 2010
The month’s 0.6 per cent rise in real gross domestic product, reported today by Statistics Canada, was the biggest one-month lift in more than two years and just ahead of an economist consensus forecast of 0.5 per cent.
“The Canadian recovery is becoming more fully entrenched and is showing surprising strength, with the goods-producing sector in full rebound mode,” Douglas Porter, deputy chief economist for BMO Capital Markets, wrote in a note to clients.
“Importantly, the recovery looks to be broadening beyond the initial push in housing and consumer spending, as manufacturing has advanced for five straight months.”
The solid improvement will likely put more pressure on the Bank of Canada to raise interest rates in the next couple of months from their historic lows of 0.25 per cent.
Goods-producing industries grew 1.3 per cent, largely on the strength of manufacturing and construction, the agency said. After a 1.2 per cent gain in December, manufacturing was up 1.9 per cent in January, with 17 of 21 major groups advancing.
The construction sector advanced 1.7 per cent, on a four per cent increase in residential construction and a one per cent rise in engineering and repair work. Non-residential building construction bucked the trend, falling off a slight 0.5 per cent.
“These are unambiguously strong results, with GDP now rising at a whopping 6.9 per cent annual pace over the November-to-January period,” Porter said.
“And, the economy has already recouped more than half of its recession losses, with GDP now up by 2.7 per cent from last May’s low.”
The loonie rose following the announcement, moving up 0.43 cents to 98.52 cents US in morning trading.
Mining and oil-and-gas extraction also increased in January.
The production of services advanced 0.4 per cent, led by wholesale trade.
Retail trade, the finance and insurance sector, transportation and the public sector also rose.
Meanwhile, the output of real estate agents and brokers, some tourism-related industries as well as agriculture and forestry retreated.
The volume of wholesaling activity increased 2.9 per cent with all wholesaling trade groups posting gains except apparel and alcohol and tobacco.
Value added in the retail trade sector rose 0.8 per cent in January.
Significant increases were registered in building and outdoor home supplies stores, home furnishings stores as well as food and beverage stores. Declines were recorded at new- and used-car dealers and at gasoline stations.
Porter added that early statistics for the month of February also look promising, with the gain of 60,000 full-time jobs, housing starts up six per cent and auto sales at their highest level in almost two years.
“Given today’s results, and the fact that February is shaping up well, first-quarter GDP growth looks set to easily surpass our recently revised call of a gain of 4.7 per cent (let alone the Bank of Canada’s latest estimate of 3.5 per cent), with growth on track for 5 ½ per cent even if the next two months come in at just up 0.2 per cent.”
The Canadian Press