Sean Manoochehri, Vancouver Mortgage Broker, Residential, Commercial, Construction

Carney holds rates steady even as his concerns increase

2012-01-23T12:35:00.001-08:00

jeremy torobin AND sean silcoff
OTTAWA— From Wednesday's Globe and Mail
Bank of Canada Governor Mark Carney is getting more worried about record levels of household debt, but until the global recovery is on more solid footing, he’ll be relying on others to deal with the issue.
It’s Mr. Carney’s dilemma. Low interest rates have underpinned a worrisome surge of debt, but the economy is too weak to justify higher rates any time soon.
The central bank leader left his key interest rate at 1 per cent Tuesday for an 11th consecutive meeting, marking policy makers’ longest pause since the mid-1990s, as he and his team watch nervously to see how risks linked to the European debt crisis unfold.
Mr. Carney has repeatedly warned that low borrowing costs are enticing too many Canadians to take on debt that won’t be affordable once interest rates rise. On Tuesday he upped the ante.
Mr. Carney took the unprecedented step of noting in an interest rate decision that he expects the debt-to-income ratio will keep rising. Moreover, he attributed this to “very favourable financing conditions” – i.e. the Bank of Canada’s low policy rate, and its influence on the cost of mortgages.
“When they add something that wasn’t there before,” said Michael Gregory, a senior economist with BMO Nesbitt Burns, “it’s a signal that something has moved on their radar screen.”
Mr. Carney appears increasingly uncomfortable with a byproduct of his low-rate policy, even as debt-fuelled spending holds up the housing market and the economy at a time when soft global demand is crimping exports.
The debt-to-income ratio rose to a record 153 per cent in the third quarter, according to Statistics Canada, and exceeds the current level in the U.S. and the U.K. Canada is inching closer to the 160-plus threshold that got the U.S. and the U.K. into so much trouble four years ago.
Risks tied to the slack global economy are already affecting business decisions in Canada and arguably contributing to the slowdown in the labour market. For that reason, economists say it’s unlikely Mr. Carney will raise interest rates until next year.
Mr. Carney has stressed that there may be cases where interest rate changes can buttress moves by regulators to tame asset bubbles or dangerous buildups of debt that could threaten the entire economy. But higher rates now would hurt manufacturers in Central Canada and deter business investment, and tightening while the U.S. Federal Reserve is debating whether it needs to ease more would boost the currency, adding to exporters’ woes.
“The challenge of monetary policy is that it’s a blunt instrument,” said Derek Burleton, deputy chief economist with Toronto-Dominion Bank. “Regulation tends to have the benefits of surgical precision.”
Mr. Carney is no doubt keenly aware of the U.S. Federal Reserve’s failure to grasp the seriousness of trouble that was brewing in the U.S. housing market in the past decade, and criticism that Alan Greenspan fuelled that debacle by keeping interest rates low for longer than he should have.
But Mr. Greenspan was not presiding over an export-dependent economy that, according to new projections Mr. Carney released Tuesday, will grow just 2 per cent this year and 2.8 per cent in 2013, and that’s assuming the European situation is stabilized.
“Standing pat seems appropriate,” Mr. Gregory said. “But if things nudge either way – Europe clarifies itself a bit sooner, or housing takes off – the case for rate hikes will come a lot closer.”
In the meantime, is appears homeowners can’t resist the allure of rock-bottom mortgage rates.
“In my marketplace I see the consumer confidence to be very high, and it’s high because interest rates have been kept low,” said Peter Majthenyi, a Toronto-based mortgage broker. “Since the holidays, my phone hasn’t stopped ringing.”

Bankers cautious on housing market

2012-01-05T18:43:00.000-08:00

One of Canada's leading economists says the best case scenario for Canada's hot housing market in 2012 would be for nothing to happen at all.

"What I hope to see is that house prices don't rise this year," CIBC economist Avery Shenfeld told a business audience at a breakfast luncheon in Toronto Thursday. "If we can get prices to level off, we can avoid some of the pain later on," he said.

Shenfeld's remarks came during a panel discussion at the Economic Club of Canada. Along with his peers at some of Canada's other major banks, Shenfeld answered reporters' questions on a slew of financial topics.

Real estate questions were a recurring theme. The average selling price of a Canadian home sat at $360,396 in November, a 4.6 per cent increase over the same month a year earlier. But that modest gain was a departure from growth rates in the first part of the year, where double-digit gains were the norm.

If we're lucky, Shenfeld says we'll see modest gains like that and even slightly lower through 2012.

Buoyed by record low interest rates, Canadians have been on a multi-year real estate tear of late, borrowing more money to invest in the hot Canadian real estate market.

Shenfeld says he thinks Canadian home prices may be overvalued by as much as 15 per cent at the moment, but he doesn't expect a hard correction any time soon because the other fundamentals of Canada's economy — the job market, for one — remain relatively strong.

"The catalyst for a correction just isn't there," he said. "We've largely lent to those who have the income and ability to pay."

Home prices are rising much faster than incomes, which has stoked fears of a bubble about to pop. Shenfeld said rather than a continuation of boom times, or a significant correction in home prices, he hopes to see zero growth in 2012. That would let off some of the steam from the market, while allowing incomes to catch up and put some breathing room back into Canadians' balance sheets.

"The bigger they are, the harder they fall," Shenfeld said. "I don't expect to see a crash, but if they level off we won't be borrowing as much for housing either, so we won't be chasing even higher prices."

Balanced market

Others echoed that cautious assessment. "The conditions aren't in place yet for even a mild correction in the Canadian housing market, let alone a serious one," BMO economist Douglas Porter said. "Sales numbers may be flat in 2012, but the underlying strength of Canada's economy is likely to hold up prices at their current level or moderately higher."

Porter says he expects new housing construction to come in about 10,000 units lower in 2012 than it did in 2011, a sign of a manageable slowdown in the market. "We've seen a real moderation in Vancouver already so that city will continue to be an outlier," Porter said, but in terms of the rest of the country, the market looks fairly balanced.

Indeed, there's a chance of higher prices to come. "We could see the housing market strengthen and deliver a surprise instead of having a relatively flat performance or a weakening one," TD Bank economist Craig Alexander said.

But if 2012 becomes a continuation of 2011 and strong price increases become the norm, that would bring its own set of challenges, Alexander warned. "If we see a surprise on the upside the government will take action to tighten mortgage rules," he said.

Twice in the past two years, Ottawa did just that, with Finance Minister Jim Flaherty implementing new mortgage rules that shaved the maximum amortization for an insured loan (it used to be as high as 40 years, but has been reduced to 30) and a steady increase in the minimum amount you must have as a downpayment to get a CMHC-insured mortgage (now up to 5 per cent for first-time buyers, and 20 per cent for a second investment property).

Alexander said if the market doesn't cool down enough for policymakers' liking this year, he wouldn't be surprised to see Ottawa lower the maximum amortization period down to 25 years. "I don't think they're inclined to do that," Alexander said, "but to be frank if you can't afford a house at 25 as opposed to 30 then you probably can't afford that house in the first place."

Title Insurance

2012-01-05T18:41:00.000-08:00

What is “Title?”

“Title” is a word lawyers use to describe the right of ownership to land. When you purchase a home, title is transferred to you, the new home owner.

What is Title Insurance

Title insurance is an insurance policy that protects you, the homeowner, against challenges to the ownership of your home or from problems related to the title to your home. The policy provides coverage against losses due to title defects, even if the defects existed before you purchased your home. A title defect is a problem with the title which prevents free and clear ownership. There are many types of defects such as rights of way, encroachments (from neighbouring properties), unpaid liens, etc.

Title insurance policies protect you for as long as you own the property. It protects against a number of risks that a solicitor’s opinion on title may not cover. These risks include:
Fraud and forgery, including someone taking your title through fraud or forgery
Encroachments that would be disclosed by a new survey (for example, a neighbour’s deck being partly on your land)
Easements (the right acquired for access to or over another person’s property for a specific purpose, such as for a driveway or public utilities. This is referred to as “servitude” in the Province of Quebec) over the property that would be disclosed by a new survey
Zoning non-compliance (i.e. where the property use does not meet the local municipal by-laws)
Someone other than the home owner having interest (i.e. a previous owner of the property not being discharged from title)

Title insurance is generally purchased when you buy your home or when you refinance it, although it can be purchased any time after you buy your home. You will only make one premium payment when you first buy the insurance. A title insurer can tell you how to purchase the policy.

How Do I Know if I Need Title Insurance?

If you are purchasing or refinancing your home, you should discuss title insurance with your lawyer/notary to see if a title insurance policy is right for you. Your lawyer/notary can arrange the purchase of a home owner’s policy.

Benefits of Title Insurance

Comprehensive coverage

The policy can provide broader coverage than a solicitor/notary’s opinion on title as well as post purchase fraud coverage.

Peace of mind

As the policy covers the items outlined above, you can rest easy knowing if there are defects affecting the title of your home that are covered by the title insurance policy, your title insurer will take steps to rectify the problem.

One time cost

The premium is usually due at the time of closing for purchases or refinances. Some insurers permit you to purchase title insurance at any time.

FCT Costs as an example when Purchasing Real Estate in BC:

For a property worth under $1 M and the mortgage is under $1M.

The Lender Title Insurance is $179 in BC and the Owner Title Insurance is $50.

The total of $229.

When the price is over a million the extra cost is 65 cents per $1000 mortgage.

The lenders usually enforce the Lender Title Insurance and it is up to the buyer to get the owners part.

Insurance Company

Website

Chicago Title Insurance Company

www.ctic.com

FCT Insurance Company Ltd. (carrying on business under the name First Canadian Title)

www.firstcanadiantitle.com

Lawyers’ Professional Indemnity Company (TitlePlus)

www.lawpro.ca

Travelers Guarantee Company of Canada

www.travelersguarantee.com

Stewart Title Guaranty Company

www.stewart.ca

© Copyright 2008 All rights reserved. Site Development Amiracledesign.

Bank of Canada maintains overnight rate target at 1 per cent

2011-12-09T10:35:00.000-08:00

FOR IMMEDIATE RELEASE

6 December 2011
Contact: Jeremy Harrison
613 782-8782
Ottawa - The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
Uncertainty around the global economic outlook has increased in the weeks since the Bank released its October Monetary Policy Report (MPR). Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. Additional measures will be required to contain the European crisis. The recession in Europe is now expected to be more pronounced than the Bank had anticipated in October, as a result of increased deleveraging and tighter financial conditions, as well as necessary fiscal austerity and structural reforms.

Recent economic data suggest that growth in the United States has been slightly more robust than anticipated, largely as a result of continued vigour in consumer spending and business investment. Nonetheless, household deleveraging, fiscal consolidation and negative spillover effects from the European crisis are all expected to weigh on U.S. growth. Growth in China and other emerging-market economies continues to be strong, although there are signs that it is moderating to a more sustainable pace in response to weaker external demand and the lagged effects of past policy tightening.

On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the Bank projected in October. Household expenditures have more momentum than had been expected and business investment remains solid. Going forward, the weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels. The economy also continues to face competitiveness challenges, including the persistent strength of the Canadian dollar.

Although total CPI inflation has been slightly higher than projected, the Bank continues to expect the inflation rate to decline as a result of reduced pressures from food and energy prices and ongoing excess supply in the economy. Core inflation has also been slightly firmer than projected and is expected to ease as the output gap persists well into 2013.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

ECONOMY 5 reasons why a fixed-rate mortgage could be your best bet

2011-12-09T10:32:00.000-08:00

t's a decision that millions of Canadian homeowners struggle with repeatedly during their time as homeowners: Do they choose the security of a fixed-rate mortgage, or opt for the flexibility (and usually lower cost) of a variable rate and hope that rates don't spike higher? But right now, conditions in the mortgage market mean homeowners can actually get the best of both worlds, according to market-watchers.

Estimated ranges for posted fixed mortgage rates:

2011
1-year: 3.4 - 3.7%
5-year: 5.3 – 5.5%
2012
1-year: 3.4 - 3.8%
5-year: 5.2 – 5.7%
(Source: CMHC)

For years, we’ve seen evidence that people who opted for variable-rate mortgages ended up saving money over the fixed-rate crowd —anywhere from 77 to 90 per cent of the time, depending on the period selected and the assumptions used.

Despite that, 60 per cent of the 5.8 million mortgages out there are fixed-rate mortgages, and the five-year term is especially popular. Another 31 per cent of mortgages are variable- or adjustable-rate. The rest are hybrids that have a bit of both types of mortgages built in.

In the past year, we've seen evidence that people have been starting to swing more towards variables (see table). But in the past few months, two things have happened in the Canadian mortgage market that may have the “variable-is-best” crowd changing their minds … or at least re-thinking what used to be an easy decision.

Variable has a catch
First of all, the traditional discount that lenders used to apply to variable rate mortgages is fast becoming a thing of the past.

“In the last couple of months, there’s been a big shift back to fixed rates,” says mortgage broker Robert McLister, who edits the popular mortgage news site CanadianMortgageTrends.com. “The average discount went from prime minus 0.80 per cent to prime minus a quarter,” he told CBC News.

Widespread discounts
Average posted 5-year fixed-rate mortgage: 5.38%
Average discounted 5-year fixed-rate mortgage: 3.92%
Average discount: 1.46 percentage points
Source: CAAMP/Maritz survey, Fall 2011

That puts a typical five-year variable-rate mortgage around 2.75 per cent.

At the same time, McLister says fixed rates have dropped. Mortgage brokers can arrange a five-year fixed-rate mortgage for as little as 3.25 per cent – or about two full percentage points below the posted rates at the big banks. That rate represents a spread of just half a percentage point over the variable-rate mortgage. McLister says the spread between these two is normally 125 basis points or more (1.25 percentage points).

At this point, you may be thinking that people who have variable-rate mortgages still can't lose, because they can always choose to lock in to a fixed-rate mortgage at any time. Very true. But McLister points out that people who do this typically don’t get the lowest rates.

That’s not too surprising. After all, you can’t change lenders when you switch from a variable to a fixed mortage without paying a penalty, and your lender knows this. “The rates that lenders give to people when locking in are always at least a quarter percentage point above what’s available elsewhere in the market,” he says.

McLister also points out that it’s never immediately clear where or when mortgage rates will bottom out. “Some people may think about getting a variable in hopes of riding down rates if they drop further,” he says. “The thing is, if you’re that good at predicting interest rates, you’d make a lot more money as a bond trader.”

What people are choosing
Mortgage type All mortgages
Renewed/ refinanced in past year

Fixed-rate 60% 56%
Variable or adjustable rate 31% 37%
Combination 8% 7%
Source: CAAMP/Maritz survey, Fall 2011

Fixed-rate bargains
Of course, there are other reasons besides interest rates that can sway someone’s decision on mortgage type. If someone needs to break a five-year fixed rate mortgage early, for example, the penalty (based on what’s called the interest rate differential) can be many thousands of dollars. With a variable-rate mortgage, the penalty is never more than three months interest.

But some people will always opt for fixed-rate mortgages simply for the security of knowing that they won’t be affected by any future upswing in interest rates – at least until their mortgage comes up for renewal.

Here’s another reason to consider fixed-rate mortgages. Some lenders have chosen to stake out some market share by offering exceptional bargains at terms other than five years.

The four-year fixed-rate mortgage – not a mainstay among the big banks – has become a battleground among some other lenders that mortgage brokers use. Brokers can arrange a four-year fixed-rate mortgage for 2.99 per cent at a few non-bank lenders, and the range generally available right now goes from 2.89 per cent to 3.09 per cent. One big bank lender – Scotiabank – offers a two-year fixed-rate mortgage for 2.49 per cent, which is even less than what lenders charge for a variable-rate mortgage.

As for the future, some mortgage experts see the variable-fixed spread continuing to narrow.

'Variable mortgage rates will stay at current levels well into 2012'
—RateSupermarket.ca
"Variable mortgage rates will stay at current levels well into 2012," says a panel of five mortgage industry and academic experts surveyed by RateSupermarket.ca in December.

At the same time, the panel members predicted that fixed mortgage rates would stay low or drop further over the next 30 to 45 days, noting that there's less demand for home loans over the holdays.

Still not sure what to go for? Fixed or variable? Short or long-term?

Either way, the good news is that rates are at historic lows. Rest assured that you can’t go far wrong these days, no matter which direction you go in.

“The cost of choosing the wrong term has probably never been lower,” says McLister.

How to Buy an Investment Property

2011-11-25T12:06:00.000-08:00

An investment property is a property which generates income through rental. The property up to 4 units falls in residential category. Then it can be financed the same way as owner occupied property through a lender. The lender can be a Bank, Credit Union or Mortgage Lender.
There are 2 ways to buy an investment property.
1. Income
2. Equity
Income:
The income method is for people who show their income. This is the income that you pay tax on. For example an employee with the gross income of $50,000 of income who pays tax through his/her employment. Another example is for a business owner which shows only $40,000 of his/her income on his/her tax assessment after his/her written off expenses. The gross income of the self employed is usually higher.
In this method based on your income you can be qualified for a rental/investment property. The down payment requirement is now 20% based on new rules. This is an Un-insured or Conventional mortgage. The income generated by the investment property can be used in your debt ration calculation in order to qualify you for a mortgage.
Equity:
The equity model usually is designed for business for self or self employed people. In this method the income made on the tax documents is not the main concern. However the income needed to qualify your application should be reasonable. But the down payment should be anywhere between 25%-35%. The less income you show the more down is needed.
Cash Flow:
The goal is investment property is usually to have positive cash flow. That means that if you deduct all the costs including Mortgage Payment, Strata/Condo fee, Annual Property Tax, Property Management and Maintenance/repair costs from the income by the rental, then it is positive amount.
Tax Benefits:
There is a tax benefit for having a rental or investment property that you can benefit from. The whole rental income is not added to your income but you can write off the following expenses from the income.
• Interest on mortgage
• Strata/Condo fee (if applicable)
• Annual Property Tax
• Property management
• Maintenance/repair
Overall Benefits:
The goal of having an investment property is to have
1. Cash Flow
2. Increased Equity
Even if at the beginning of having your mortgage you are break even or in a short fall, in long term when the mortgage principal is paid down with your mortgage or adding the pre-payments you would be positive cash flow.
The interest only or Secured Line of Credit is not a very good idea as you are enforced to just pay the interest portion of the mortgage. So your principal would not increase.
You can earn equity in the property by increased price in longer term or as said paying the mortgage down.
Caution:
Having a good tenant is very important. You can use the expertise of a good property manager in screening your potential tenant by doing a credit and reference check.
If you have more questions on how you can purchase an investment property, please do not hesitate to contact me for more details and free consultation. You can find additional information in my web site at www.CityViewMortgage.ca.
By: Sean Manoochehri
Sean Manoochehri, MSc Eng, AMP
Mortgage Consultant
Innovative Mortgage Solutions – The Mortgage Centre
Direct 778-995-5230
Email: Sean@CityViewMortgage.ca
Web: www.CityViewMortgage.ca

Low interest rates making home ownership slightly more affordable

2011-11-25T12:04:00.000-08:00

Low interest rates making home ownership slightly more affordable, says RBC
By The Canadian Press | The Canadian Press – 2 hours 25 minutes ago
By The Canadian Press
OTTAWA - A new report finds low interest rates are keeping Canadian house prices within reach of homebuyers in many markets.
The Royal Bank's quarterly report on housing trends, released early Friday, shows housing affordability improved slightly in the third quarter, after two consecutive quarters when things got worse.
RBC chief economist Craig Wright says a lower interest rate environment, which includes mortgage rates, is helping to reduce the cost of a home.
"Elevated uncertainty relating to the European sovereign-debt crisis and the downside risk for economic growth have contributed to keeping interest rates at low levels," said Wright.
Those lower rates are helping to cushion the impact of rising home prices in many cities even as the economy slow and consumer confidence weakens.
The bank says affordability levels rose for all housing categories, although most improvements were less than one per cent.
"Housing affordability levels are quite good in most parts of Canada and will pose little threat to overall housing demand," said Wright.
Among the most marked improvements in affordability were for two-storey homes and bungalows in Montreal, two-storey houses in Manitoba, and detached bungalows in Vancouver, Canada's most expensive housing market.
Royal's affordability measure for Vancouver fell slightly from the previous quarter, but remained above 90 per cent.
Toronto is next in the index at 52.1 per cent, Montreal is at 40.9, Ottawa 40.8, Calgary 37.6, and Edmonton 33.2.
"The Vancouver area market continues to be a major exception, with sky-high property values in upscale neighbourhoods making it both extremely unaffordable and the most at risk of a downward correction," said Wright
A reading of 50 per cent means homeownership costs take up 50 per cent of a typical household’s monthly pre-tax income. The higher the rate, the higher the cost.
RBC forecasts that interest rates will remain exceptionally low in Canada until mid-2012 and rise gradually after that.
"We expect to see further slowing in the pace of home price increases next year, as housing demand levels out," Wright said.
"These factors will set the stage for a period of relative stability in affordability trends in Canada."

Bank of Canada could slash interest rates in a big way next year

2011-11-10T16:28:00.000-08:00

Bank of Canada could slash interest rates in a big way next year
John Shmuel Nov 9, 2011 – 4:10 PM ET | Last Updated: Nov 10, 2011 2:06 AM ET
As the nail biter in Europe continues this week, two economists are predicting the Bank of Canada will move to cut rates in a big way next year.
Sheryl King, an economist at Bank of America Merril Lynch, said in a note that the volatility hitting Europe and the risk of damage to the global economy means the Bank of Canada will move to cut its benchmark interest rate to ward off the risk of recession. Her prediction is the cut will be a whopping 0.75% decrease from the current rate of 1%.
“With the Eurozone sovereign debt and banking crisis showing no sign of containment, we think the Bank of Canada will cut rates back to the effective lower bound of 25 basis points (0.25%) early next year,” she said.
Ms. King forecasts that the cut would come in two phases, with a 0.50% trim being announced during the bank’s January 17 meeting, while the second and final 0.25% cut coming during the March 8 meeting.
Also predicting a lower interest rate next year was David Madani, Canada economist at Capital Economics. He is forecasting a more mild cut of 50 basis points, however, saying he expects it to occur in April or June.
Either way, Mr. Madani said he expects interest rates in Canada will remain low for some time.
“The Bank might communicate that its policy rate will remain at 0.50% for a lengthy period of time, conditional on its projected outlook for consumer price inflation,” he said, in reference to the Bank of Canada’s target of 2% annual inflation.
“Even if we are wrong, the broader message remains that interest rates will remain unusually low for a very long time.”
Most economists, however, are still predicting that the Bank of Canada will raise interest rates rather than lower them in 2012. In a recent Reuters survey of 40 economists last month, the consensus was that an interest rate increase will occur in the third quarter of next year.
If rates are cut, it will mark a sharp turnaround for the Bank of Canada, which only last year raised interest rates. Canada became one of the first advanced economies to raise its benchmark interest rates following the recession when the Bank of Canada implemented a 25 basis point hike in September of last year. The benchmark rate has since remained unchanged at 1%.
Email: jshmuel@nationalpost.com | Twitter: jshmuel

Smart mortgage strategies for covering education costs

2011-10-14T12:17:00.000-07:00

Smart mortgage strategies for covering
education costs

The cost of post-secondary education continues to rise every year. If
you’re finding it a challenge to cover your children’s current or future
plans, talk to your mortgage broker today. It may make sense to
refinance your mortgage so you can fund their education at affordable
mortgage rates, instead of paying for expensive consumer loans.
Giving you the tools to succeed.
Please email me if you no longer wish to receive
the Benjamin Tal Economic Buzz.
extended flat stretches which were followed by growth. However,
with the US economy so fragile, it won’t take much of a miss to find
the US and then Canada in recession or something close to it. Plus,
there are enough clouds on the global horizon to be concerned
about the next several months.

Economic Report by Benjamin Tal

2011-10-14T11:55:00.000-07:00

Deputy Chief Economist, CIBC World Markets
Accidents can happen to any economy.
Temporary troubles in energy and autos hit
exports hard during the second quarter, which
was enough to push Canada’s Gross Domestic
Product (the size of our economy with inflation
factored in) into a decline—even though
demand was healthy at home. This made the
quarter look worse than it really was, and a
rebound is therefore likely in the third quarter. Indeed, June’s monthly
data showed a decent 0.2% gain as a signpost of an upward trend.
Aside from January’s strong growth, Canada’s GDP has been
essentially flat for five months. Flat economies don’t inevitably signal
a recession—both Canada and the US have gone through many

The Bank of Canada is no longer as
worried about inflation

Until the global economy is on a more solid track, the Bank of
Canada is being very patient in raising rates. It hinted at rate hikes
for July and September, neither of which materialized. Now the Bank
is no longer as worried that low interest rates will trigger inflation, and
therefore the need to withdraw monetary stimulus has diminished.

No rate hikes until 2013: BMO

2011-10-05T10:04:00.001-07:00

• By Eric Lam, Financial Post

BMO Capital Markets pushed its rate hikes forecast back to 2013 on Tuesday, citing continued serious economic risks both home and abroad.
The new forecast pushes the expected time frame for the Bank of Canada to raise its benchmark interest rates back from previous expectations of the second half of 2012.
As recently as this spring, economists had been speculating about a rate hike before the end of 2011, but the market turmoil of the past few months sparked by the eurozone debt crisis has changed all that.
"As global economic risks have escalated, casting commodity prices and the Canadian dollar much weaker, the Bank of Canada's diminishing tightening bias has probably diminished further," Michael Gregory, senior economist with BMO Capital Markets, said in a report.
Mr. Gregory noted that the market has now actually swung all the way into cut territory pricing in two 25-basis point rate cuts by April 2012. But with inflation slightly below target, a weak loonie and credit markets still functioning, movement in either direction is unlikely.
"The policy easing bar remains high. Short of signs of imminent recession, the bank should remain on hold," he said.
Mr. Gregory also forecasts the loonie to tumble further, down to US93¢ before recovering to parity by 2013.

Read more: http://www.ottawacitizen.com/business/fp/rate+hikes+until+2013/5500200/story.html#ixzz1ZuLldhA5

Canada best for business: Forbes

2011-10-05T10:03:00.000-07:00

By Theresa Tedesco, Financial Post

Canada ranks as the top country among 134 major developed nations for business, according to the annual Best Countries for Business survey by influential business magazine Forbes.
The move from fourth in 2010 to top billing is based on a ranking of 11 different factors – including property rights, taxes, freedom of trade, money, corruption, innovation, investor protection and market performance. According to the survey, Canada is the only country to score in the top 20 consistently in 10 of those metrics.
“As an affluent, high-tech industrial society in the trillion-dollar class, Canada resembles the US in its market-oriented economic system, pattern of production and affluent living standards,” the report says.
Canada is lauded for avoiding the financial meltdown that has seen banks teetering perilously in the U.S. and Europe since 2008, for tax reform, mostly with the introduction of the Harmonized Sales Tax in Ontario and British Columbia, and for its ability to maintain a lower unemployment rate than its trading partners. In fact, in terms of overall tax burden, Canada ranked ninth in 2011, up from 23rd in 2010.
“During the run-up to every U.S. presidential election, countless Americans threaten to move to Canada if their preferred candidate does not emerge victorious,” declared Forbes. “Of course, few follow through with a move north. Maybe it is time to reconsider.”
While the U.S. is “paralyzed by fears of a double-dip recession and Europe struggles with sovereign debt issues,” Canada’s economy held its own, the report gushes. “Canada enjoys a substantial trade surplus with the US, which absorbs about three-fourths of Canadian exports each year.”
The unemployment rate of 7.3% in Canada compares favourably with the U.S. rate of over 9% and the eurozone unemployment rate of 10%.
Even economic expansion, projected at 2.4% but down from last year’s 3.1%, is heralded.
While many Canadians have a love-hate relationship with their banks, the folks at Forbes are unequivocal in their adoration. “Canada’s major banks, however, emerged from the financial crisis of 2008-09 among the strongest in the world, owing to the financial sector’s tradition of conservative lending practices and strong capitalization.”
The other countries rounding out the top 10 are New Zealand, Hong Kong, Ireland, Denmark, Singapore, Norway, the United Kingdom, and the U.S, at 10th spot, down from ninth in 2010. The culprit in 2011: the U.S. surpassed Japan as having the highest corporate tax rate among major developed countries.
Three African countries – Burundi, Zimbabwe and Chad – bring up the rear among the 134 nations ranked, all faring poorly mostly because of corruption and red tape.
© Copyright (c) National Post

Read more: http://www.ottawacitizen.com/business/fp/Canada+best+business+Forbes/5501273/story.html#ixzz1ZuMgbrCH

How to benefit from a Line of Credit

2011-09-23T17:08:00.001-07:00

There are many people out there with a line of credit, but many don’t truly know how to use it to its full potential. Firstly, you should determine how long you will be using the LOC for ie. when you will be paying it off. Currently prime is at 3.00% with average discounts ranging from prime minus .50% to .65%. However, a LOC will cost anywhere from prime plus .50% to 1.00% depending on the lender. Thus, the difference in rates can range from 1.00% to 1.65%, which is a big difference. If you plan to pay out the LOC soon it will make sense to pay a higher rate to avoid a penalty. However, if you have an existing LOC and plan to keep it for at least a year, you might want to consider going with the closed variable product instead.

If you fall into the latter category, you don’t have to worry about being able to repay because many lenders offer good pre-payment options, allowing up to a 20% increase in your mortgage payment and a lump sum payment of 20% of the original mortgage amount. This will allow you to pay off the mortgage faster without any penalties. You are only required to make interest only payments on a LOC, but will have to make additional payments to decrease your principal. Contact me and I can run the numbers and determine if you will benefit from converting your LOC to a closed variable.

The second thing you want to consider is what you will be using the LOC for. Many people don’t realize that you can qualify to tax deduct the interest paid on a LOC when you use it to purchase investments; your mortgage interest is not tax deductible. There are many types of qualifying investments: you could purchase a rental property, for example, or blue-chip stocks or mutual funds.

If you are considering a LOC, you may want consider converting your existing mortgage to a re-advancable mortgage/line of credit combination, which will allow you to automatically take advantage of any increasing equity in your home. As you create equity in your mortgage account through mortgage paydown, your LOC is automatically increased by the same amount. Any tax refunds you generate should be used to accelerate mortgage paydown, which in turn, increases the LOC portion for further investments. If at any point you decide that it would be more beneficial for you to move back to a closed variable, you can choose to convert all or a portion of your LOC without any penalty. This product allows you to balance the two pressing financial goals of debt paydown and investing for your future.

LOC products can be great if used properly under the right set of circumstances. If you have or want to consider getting an LOC I recommend that you call me to go over your financial details to determine if the LOC product is the right fit for you. Sometimes there are better products out there that can fit your need much better than the one you have. Feel free to call me.

Changing the frequency from Monthly to Bi-weekly

2011-09-16T09:25:00.003-07:00

If you change the frequency of payment from monthly to biweekly (every 2 weeks) you can also reduce the amortization to from 30 years to 26 years. 4 years earlier you pay off your mortgage.

In this scenario your biweekly payments are calculated based on the half of the monthly payments. Also remember not only you pay more frequently (bi-weekly vs. monthly) but also there would be 26 payments in a year. This is vs. 12 payments of monthly in a year. In another word, it looks like you pay one extra monthly payment in each year. Please note the weekly payment help very little in the mathematical calculations comparing to biweekly.

Balance of Mortgage: $300,000
Initial Amortization: 30 years
Rate: 5 years fix 3.6%
Monthly payment: $1,359
Biweekly Payment: $679.5 (half of monthly payment)
Amortization: 26 Years

Home prices show August increase

2011-09-16T09:25:00.001-07:00

Canadians paid 7.7 per cent more for sales of existing homes in August than they did in the same month last year, a real estate group said Thursday.

In its monthly report, the Canadian Real Estate Association said the average sale price for an existing home rose to $349,916 last month from $324,992 in August 2010.

CREA president Gary Morse said the market remained on a "firm footing in August when compared to volatile financial markets."

MAPAverage home prices across Canada

CREA said the national average price has actually moderated compared to earlier this year, with Vancouver's sales activity — and more recently Toronto's — exerting less influence on the average. Vancouver and Toronto's share of provincial and national sales activity reached "unusually elevated" levels earlier this year, but has since pulled back into normal seasonal variations, the group said.

“Once again, economic and financial market headwinds outside Canada are keeping interest rates lower for longer,” said CREA chief economist Gregory Klump. “Those headwinds will likely persist until, and indeed after, fiscal quagmires in the U.S. and Europe are resolved. In the meantime, the Bank of Canada will have ample reason to delay raising interest rates further, which is supportive for the Canadian housing market.”

Nationally, overall year-over-year sales for August were up 15.8 per cent, the largest year-over-year increase since last April, CREA said, but added that the big increase was mainly due to weak activity in 2010.

Between July 2011 and August 2011, sales eased by a seasonally adjusted 0.5 per cent.

The real estate group also said that a record 70 per cent of all local markets across the country are considered to be in balance. CREA says a market is considered to be in balance when the seasonally adjusted ratio of sales to new listings is between 40 and 60 per cent. Below 40 per cent is considered a buyers' market, while over 60 per cent is considered a sellers' market .

CREA also said the number of months of inventory on the market stood at 6.2 months at the end of August on a national basis. That was relatively unchanged from the 6.1 months seen at the end of July. National inventory figures have been stable at about six months since April. Inventory — a gauge of market health — refers to how long it would take to sell of the current supply of houses on the market at the current rate of sales.

Economists said housing markets remain healthy for now despite tumbling consumer confidence and weak global growth.

"Extremely low interest rates appear to be just the medicine as Canadians continue to borrow, and a number of the banks lowered their five-year fixed rates again in recent days, which could continue to lend support," BMO Financial Group economist Robert Kavcic wrote in a commentary.

However, some observers said the market is eventually headed for a drop.

Fannie Fong of TD Economics said a peak-to-trough drop of roughly 10 per cent for both home sales and prices is expected, though that change isn't expected until the Bank of Canada begins hiking interest rates in earnest in early 2013.

Carney keeps rate steady at 1% - Primes Stays at 3%

2011-09-09T13:07:00.003-07:00

Carney keeps rate steady at 1%
CBC News
Posted: Sep 7, 2011 9:05 AM ET
Last Updated: Sep 7, 2011 5:59 PM ET
Bank of Canada Governor Mark Carney held Canada's benchmark interest rate steady at one per cent on Wednesday.
It was the eighth consecutive time the central bank has opted to stand pat. The target for the overnight rate was raised to one per cent in September 2010.
"The global economic outlook has deteriorated in recent weeks," the bank said in a release Wednesday morning. "Canadian economic growth stalled in the second quarter."
MAPInterest rates around the globe
The decision to hold rates steady was in line with what economists had been expecting. But as recently as last spring, expectations were that the bank would begin to hike rates at some point in the summer of 2011.
That was before the economic outlook in Europe and the United States worsened, tying the central banks hands somewhat. Some economists now think there will be a rate cut before another hike.
"They might have to cut, but I'm not expecting anything more than standing still for the next few meetings," said Ian Nakamoto, research director at Toronto investment firm MacDougall, MacDougall, & MacTier.
The bank makes its policy decisions with a view to keeping inflation at two per cent over the medium term.
"In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished," the bank said.
'They might have to cut, but I'm not expecting anything more than standing still'—Economist Ian Nakamoto
That's the central bank's way of saying it's no longer as worried that low interest rates will trigger inflation, suggesting there's no rush to raise just yet.
The bank still thinks growth in Canada's economy will return in the second half of 2011. But the economic problems in Europe and the United States are going to require "additional significant initiatives by European authorities" — a hint that those places can expect a low rate environment to continue.
Economists now expect the bank will stay on the sidelines for the time being. "There is nothing in this statement that would support the cut camp, now or in future," Scotiabank economist Derek Holt said.
Scotia expects the central bank to hold steady until the third quarter of 2012 before hiking the rate toward 2 per cent.
"The statement was very dovish ... but the Bank of Canada certainly wasn't signalling their intent to ease monetary policy at this point in time," said TD Bank chief economist Craig Alexander.
"I think the bar is set extraordinarily high for the Bank of Canada to actually ease policy."
Absent a domestic economic contraction, Carney is unlikely to cut what is already an interest rate below inflation, Alexander said.
The Canadian dollar rose slightly Wednesday and was trading up about one-fifth of a cent at 101.22 US near noon.
Investors welcomed the news, with the S&P/TSX Composite Index up 165 points to 12,684.

The Bank of Canada's changing language

2011-09-09T13:07:00.001-07:00

On Wednesday September 7, 2011, 4:51 pm EDT
Watching the Bank of Canada's language on the economy change over the past year is like seeing a healthy, upbeat person gradually come around to the idea that a serious illness is overtaking them.
A year ago, the central bank was continuing the slow process of raising its key interest rate toward familiar levels, as the western world began to put the financial cataclysms of 2008 behind it. On Sept. 8, 2010, the target rate for overnight loans between banks rose to one per cent.
And here's how the world economy looked to the Bank of Canada — getting better, but though not steadily: "The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies," the Bank of Canada said in September of 2010.
And Canada's economy — buoyed by demand for commodities like oil, gas, uranium and fertilizer — was recovering: "The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity," the central bank's statement read at the time.
It was canny, however, about forecasting any further increases in rates, sensing possible trouble ahead: "Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook."
That was code for don't get too excited, folks: a lot could still go wrong — and it did.
Remember that for more than a year, from April 2009 to June 2010, the central bank's key rate had been 0.25 per cent — effectively zero, or maximum stimulus, as a rising Canadian dollar did some of the bank's inflation-cooling work and the world began to recover its appetite for Canadian commodities.
The bank had gradually increased its key rate over the next few months to 0.75 per cent. Then came the bump to one per cent exactly a year ago.
Since then, as Europe's debt problems have flared in Greece, Ireland, Portugal and Spain, and in some people have taken to the streets to protest government attempts to curb spending and remain solvent, the Bank of Canada's key rate has been rock steady at one per cent.
Now watch how the language has moderated, as central bank economists saw the economy flattening:
On Oct. 10, leaving the rate at one per cent, the bank said: "In advanced economies, temporary factors supporting growth in 2010 — such as the inventory cycle and pent-up demand — have largely run their course and fiscal stimulus will shift to fiscal consolidation over the projection horizon .… The combination of difficult labour market dynamics and ongoing deleveraging in many advanced economies is expected to moderate the pace of growth relative to prior expectations. These factors will contribute to a weaker-than-projected recovery in the United States in particular."
By Dec. 7, it saw recovery "largely as expected," but sounded the first note of bigger trouble ahead: "At the same time, there is an increased risk that sovereign debt concerns in several countries could trigger renewed strains in global financial markets."
On Jan. 18, 2011 — happy new year! — there were signs the economy was rebounding all too well, with government spending in the U.S. and Canada showing up in growth all over. As well, Canadian commodities remained hot sellers, pushing up the value of the Canadian dollar.
In fact, the bank said, "the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high."
Translation: "No need to raise interest rates."
On March 1, the recovery kept pushing ahead, driven by exports, but the bank left rates unchanged, and stuck with this now-boilerplate paragraph at the end of its release: "This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered."
On April 12, the bank forecast 2.9 per cent gross domestic product growth in 2011 and 2.6 per cent in 2012 — all good, with robust spending and business investment leading investors to "become noticeably less risk-averse."
And yet, searching the horizon for clouds, the bank saw enough to stick with its boilerplate: "This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered."
By May 31, however, the bank began to see some of its more horrible imaginings coming true, and the boilerplate was dropped. Again leaving the key rate at one per cent, the bank said global inflation might be growing, but "the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices."
Stimulus might be "eventually withdrawn," it said, but "such reduction would need to be carefully considered. "
On July 19, the bank's language noted slower-than-expected U.S. economic growth, Japan recovering at a lower-than-expected pace from its nuclear disaster, and said "widespread concerns over sovereign debt have increased risk aversion and volatility in financial markets." In other words, investors were getting jumpy about how Europe might pull itself together without major defaults and weakened currency."
And on Wednesday, laying out all the factors that are besetting global growth and the Canadian economy, the bank finally sounded a doctor facing a sick patient.
It didn't explicitly suggest returning to more stimulus (lowering interest rates), as some economists had forecast it might, but the bank no longer expected to withdraw economic stimulus:
"In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term."

Housing correction not in the cards, according to CMHC report

2011-09-09T13:06:00.001-07:00

By John Morrissy, Financial Post Full Article
A much anticipated correction in the Canadian housing market is not in the cards, according to a report by the Canada Mortgage and Housing Corp.
In its third-quarter market outlook, the national housing agency forecasts the market will ease slightly but "remain steady"this year and next.
"Housing starts have been strong in the last few months, but are forecast to moderate closer in line with demographic fundamentals," Mathieu Laberge, deputy chief economist for CMHC, said Wednesday. "Despite recent financial uncertainty, factors such as employment, immigration and mortgage rates remain supportive of the Canadian housing sector."
2. B.C. residents have unrealistic hopes of shedding debt, poll finds. Link below.

B.C. residents have high hopes of retiring debt-free, but for many, this reality show has an unhappy ending.
While most B.C. residents believe they'll be debt-free by age 58, fewer than one-third of B.C. residents aged 45 to 64 don't owe any money, according to a Harris-Decima poll conducted for the Canadian Imperial Bank of Commerce.
About one-quarter of B.C. residents report that they've abandoned hopes for a debtfree retirement. Fourteen per cent believe they will pay off all debts in their 70s and one in 10 says they will never be debtfree, the poll found. That compares with only four per cent of Alberta residents who believe they'll carry debt into their 70s.
http://www.vancouversun.com/business/residents+have+unrealistic+hopes+shedding+debt+poll+finds/5326783/story.html

Power of Pre-Payments

2011-09-02T12:31:00.000-07:00

Adding $100 to your monthly mortgage payment

Remember that at any point of time you are paying the interest on the current balance of mortgage. This is called the principal. So if you reduce this principal, you would pay less interest. Almost all mortgage products let you 1) increase your monthly payments by 15%-20% or 2) pay lump sum of 15%-20% of your balance of mortgage per year. In the case that the interest rate is not changing, paying the lower interest means shortening the amortization.
Amortization is number of years it takes until you pay off a mortgage.
In a real example below it shows your saving. This is considering you can save $100 per month. If you use the $100 to pay toward the principal of your mortgage by increasing your monthly mortgage payment, your amortization will decrease from 30 years to 26.5 years. Almost 4 years earlier you pay off your mortgage.
Balance of Mortgage: $300,000
Initial Amortization: 30 years
Rate: 5 years fix 3.6%
Monthly payment: $1,359
Monthly Payment: $1,459 (increase by $100)
Amortization: 26.5 Years

Canada banks face storm clouds after good quarter

2011-09-02T10:12:00.001-07:00

TORONTO (Reuters) - Gloomier times are ahead for Canada's resilient banks, which stayed strong through the financial crisis and beyond and which largely beat analysts' expectations with their third-quarter results.
The banks impressed investors with strong loan growth and wealth management revenue in their most recent results. But analysts expect narrow lending margins and increased caution by already overstretched borrowers to weigh on earnings growth in the months ahead.
"The next four quarters will not be as powerful as the last four quarters for the sector," said CIBC World Markets analyst Robert Sedran.
Canada's banking sector is dominated by a half dozen big banks which are both protected from foreign takeovers and prevented from merging with each other. They generate billions in profits from their domestic branch-bank businesses and required no bailouts during the 2008-09 crisis.
Analysts had expected weaker loan growth to start to bite in the third quarter, which ended on July 31. But it rarely pays to bet against Canada's banks, and the lenders surprised with strong performances in their Canadian and U.S. retail operations.
Toronto-Dominion Bank -- which owns vast branch networks in both Canada and the United States -- capped off reporting period for the big banks with a better than expected profit on Thursday.
It earned C$1.72 a share profit, compared with analysts' estimates of a C$1.62 a share profit, and net profit rose 23 percent to C$1.45 billion ($1.48 billion).
BORROWING TO DRY UP
But Canada's No. 2 lender said earnings growth should moderate in coming quarters due to slower loan volume growth and margin pressure. "Obviously there's a lot of uncertainly given what's going on in the world," said Chief Financial Officer Colleen Johnston.
Europe's banks are in the grip of a debt crisis, while U.S. banks are selling assets to build up capital.
Even Canada, which has ridden a strong housing sector to a relatively even-keel economic performance over the past two years, experienced an unexpected economic contraction in the second quarter, data this week showed.
Through it all, Canadians have kept borrowing, enticed by rock bottom interest rates that have proven a double-edged sword for the banks.
Profits from strong loan growth is partially offset by the low rates charged. With central banks in Canada and the United States both seen holding rates low for the foreseeable future, margins are expected to continue to narrow.
And with Canadians carrying record debt, observers say mortgage and credit card lending growth will likely stall and business lending may not make up the shortfall.
"Most banks are talking lower levels of loan growth as we go through the rest of the year," said Juliette John, a portfolio manager at Bissett Investment Management in Calgary.
The results this quarter have helped drive Canadian financial stocks up by more than 7 percent since reporting began, against a 5.8 percent rise for the broader market.
Along with TD, Bank of Montreal , Bank of Nova Scotia , Canadian Imperial Bank of Commerce and National Bank of Canada all topped analysts' estimates.
Royal Bank of Canada , the country's biggest lender, was the only one to miss estimates, as market volatility hit its proportionally large capital markets division.
That's the weaker trend that many observers had expected to take hold in the current earnings period.
"I hadn't expected too much (profit) this quarter, so I may have been one quarter too early," said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.
(Reporting by Cameron French; editing by Janet Guttsman)

TD raises possibility of recession in Canada if U.S. economy weakens By Craig Wong, The Canadian Press | August 24, 2011 OTTAWA - A major Canadian b

2011-08-26T13:48:00.001-07:00

TD raises possibility of recession in Canada if U.S. economy weakens
By Craig Wong, The Canadian Press | August 24, 2011
OTTAWA - A major Canadian bank says the economy ground to a halt in the second quarter and could slip into recession if the United States continues to weaken.
In a report Wednesday, TD Bank estimated zero growth for Canada in the second quarter which ended June 30. The bank also said there's a reasonable chance the economy actually shrank in the spring quarter.
"If a contraction is realized, worries that Canada's economy has already entered a recession will increase, especially in light of the financial market turmoil that erupted midway through the third quarter," TD said.
Economists define a recession as two consecutive quarters that real gross domestic product shrinks.
Canada last slipped into recession in 2008-2009 after the Wall Street financial crisis sparked a global credit crunch that battered economies around the world and led to a huge restructuring in the North American auto sector, with the loss of tens of thousands of jobs.
Statistics Canada has said that the recession in Canada lasted from the fourth quarter of 2008 to the second quarter of 2009, but was less severe and shorter than in other G7 countries.
Between the third quarter of 2008 and the third quarter of 2009, Canada's real GDP fell 3.3 per cent, compared with 3.7 per cent in the United States and bigger declines in Europe and Japan.
In its report Wednesday, TD Bank said it expects the U.S. economy to narrowly avoid a recession in the coming quarters. But if the forecast is wrong that could spell trouble for Canada.
The U.S. is being squeezed by a troubled housing market, weak consumer and business confidence and worries about government debt.
A wave of public sector layoffs in many cash-strapped states and corporate reluctance to hire new workers has contributed to a U.S. jobless rate of more than nine per cent, two points higher than in Canada.
"If the U.S. economy contracts, the chances that Canada will follow suit are high," TD said.
TD's new economic outlook calls for the Canadian economy to grow 2.3 per cent for 2011, down from a June forecast of 2.8 per cent. TD also cut its expectations for 2012 to growth of two per cent compared with an previous estimate of 2.5 per cent.
The report came as the Conference Board of Canada said consumer confidence slipped 6.6 points to 74.7 in August, its lowest level since July 2009.
The Conference Board's Pedro Antunes said Wednesday it was the fourth consecutive monthly decline, but noted it was the first really substantial month-to-month drop.
"Negativity towards future job creation and an unwillingness to make a major purchase were the primary signs of this waning consumer confidence," Antunes said.
The survey found pessimism was higher on answers to questions about current and future household finances.
It also suggested consumers were at their most pessimistic since April 2009 about whether it is a good or a bad time to make a major purchase.
The survey was done between Aug. 4 and Aug. 14, a volatile period for financial markets that saw daily triple-digit swings and debt-rating agency Standard & Poor's downgrade the credit rating of the United States.

Flaherty, Carney take cautious tone on economy

2011-08-19T12:50:00.000-07:00

Bank of Canada governor Mark Carney told MPs on Friday that the turmoil working its way through financial markets will bring uncertainty, but the bank is ready to deal with any problems.

Carney was speaking to the Commons finance committee, which had asked him and Finance Minister Jim Flaherty to share their views on the outlook for Canada's economy.

Carney took a cautious tone in his remarks, explaining that while there are many threats to growth, the central bank is monitoring developments closely and has not made any major changes to its outlook recently.

"The considerable headwinds are now blowing hard," Carney said. "[But] the bank has a wide range of tools and policy options it will continue to employ [to deal with the crisis]."
Carney renewed his call for productivity improvements, noting that U.S. firms have invested heavily in becoming more productive while credit is comparatively cheap.

"Their actual investment in machinery and equipment is well above what's happened in Canada," he said.

He also said the Canadian dollar's strength is compounding the current crisis for Canadian firms.

Inflation data released earlier Friday morning — which showed that Canada's consumer price index fell to 2.7 per cent last month — is well within the parameters the central bank expected in its last monetary policy report, Carney said.

The recent U.S. debt ceiling crisis has the potential to negatively impact Canada, but it's not yet clear to what extent, he said. That's because the solution called for cutting more than $1 trillion in spending over the next decade, and it's not yet known where the cuts will be made.

"The devil is in the details [because] the specific spending cuts have not been decided on," Carney said.

He lauded the U.S. Federal Reserve's move last week to publicly state its conditional commitment to keeping interest rates low for the next two years. But he stopped well short of making a similar pledge for Canada.

"We do not outsource monetary policy to the Federal Reserve," Carney said. "There's been times when rates have been 200 basis points above the rate in the U.S. and there's been times when it's been 200 points below, because that's what was appropriate at the time."

"The policy stance at the Federal Reserve is not the policy stance of the Bank of Canada."

Flaherty preaches calm

Earlier, Finance Minister Jim Flaherty told committee members the economic crisis in the U.S. and Europe will inevitably have an impact on Canada, but the economy here is growing, albeit slowly.

Flaherty said the current crisis is largely due to lack of confidence in the ability of governments to lower their debt levels. Fixing the problem will require bold action by the U.S. and other governments, he said.

He continued his refrain that Canada is comparatively better off than other countries but not immune to the global problems.

"We're on track to balance the budget," Flaherty told the Commons finance committee. But he also acknowledged that the journey there might be a bit bumpy.
Finance Minister Jim Flaherty says the economy is growing, albeit slowly.Chris Young/Canadian Press
"Global turmoil will inevitably impact our trading relationships and our economy."

Flaherty rejected the notion that current economic problems are a continuation of the malaise that began in 2008. That crisis was largely triggered by financial institutions, he said.

"The current problem is largely a lack of confidence in governments to move forward with concrete plans to deal with their deficits," he said.

NDP finance critic Peggy Nash, the first to question the minister after his opening statement to the committee, asked why the government has chosen spending cuts as opposed to investment in growth to bring Canada back to balanced budgets.

"The member is advocating more spending now," Flaherty responded. "That actually is the problem. Too much spending. It's exactly what we should not do."

He noted the NDP voted against the government's initial stimulus spending program to react to the crisis in 2008.
"That was wrong then and I daresay wrong now," Flaherty said.

Power & Politics: The War Room

Podcast: Host Chris Hall speaks with Janet Ecker, John Duffy and Rebecca Blaikie as they analyze today's finance committee meeting.

No new bank tax
He also reiterated the government's opposition to any sort of new financial transactions tax. The idea gained steam last week when French and German leaders floated a tax on all financial transactions in Europe as a way to build a rainy-day fund to bail out troubled firms and countries, while discouraging speculation.

The idea was also popular in the run-up to the G20 Summit in Toronto last year, where Flaherty poured cold water it.

"Canada will continue to oppose any sort of financial transactions tax," Flaherty said in response to a question by Conservative MP Dean Del Mastro. "It is scapegoating and it doesn't address the issue."

Deputy Bank of Canada governor Tiff Macklem, speaking after Carney and Flaherty, said the central bank predicts "roughly flat" or "possible slightly negative" economic growth for Canada in the second quarter.

In its July Monetary Policy Report, he said, the bank forecast a "fairly weak" second quarter, with growth of 1.5 per cent in gross domestic product.

Macklem said subsequent data prompted the bank to downgrade its projections from July. He told MPs, however, that the bank expects the Canadian economy to "recover" in the second half of the year.

Shall I rent or shall I own?

2011-08-18T15:25:00.000-07:00

Mark Wahlberg buys a Toronto condo despite real estate bubble
Golden Girl Finance, On Thursday August 11, 2011, 10:00 am EDT
Donnie Wahlberg may have been a New Kid on The Block, but his cutie-boy brother Mark Wahlberg, (Marky Mark to those who remember the 90s) has become a new kid on a block in Toronto…in the form of a $12 million penthouse condo. The posh bachelor pad is close to Wahlberg's usual digs at The Hazelton Hotel, where rooms run between $500 to $2400 a night. Given that the star of Boogie Nights, The Fighter and former leader of hip-hop group The Funky Bunch spends an increasing amount of time filming movies in the city and hanging out at the Toronto International Film Festival, it seems he's decided to quit forking over money in hotel room rentals and instead buy his own place.
Wahlberg probably has the advantage of owning his new condo outright, giving him full equity ownership. For the rest of us mortgage-carrying mortals, however, now is not an ideal time to be investing in a condo in Toronto. According to Ben Rabidoux, financial adviser, real estate expert and author of the website The Economic Analyst (www.TheEconomicAnalyst.com), in most Canadian cities right now (but certainly not all), the house price versus rent ratio and the house price versus income ratio are at or near their all-time highs. This suggests that, overwhelmingly, it makes better financial sense to rent in these markets and invest your equity elsewhere.
There is no free equity
Building equity is undeniably a wise financial move. The mistake many people make is equating equity with a mortgage. A mortgage doesn't give you equity; equity is only as much as you pay. A down payment is equity. Anything you pay toward the principle of your mortgage is equity. Paying interest to the bank is as useful to your financial situation as paying rent to your landlord.
If you start out with a very small down payment and arrange for a long future of low monthly payments, your ability to build equity before selling your home becomes seriously limited. With less than 15 per cent equity, you may end up merely trading one mortgage for another. If there is a drop in the housing market, the value of your home could fall to the point that if you were to sell it, you would owe more on your mortgage than the actual selling price of the house. Once it's sold, you'd have to write the bank a cheque to make up for the difference. This is called a 'negative equity' situation and while it's a worst case, it happens more often than you might realize.
Renting space or renting money?
Most likely, everyone from your father to your banker has drilled the idea into your head that renting is a waste of money and buying a home is the only prudent way to build equity. According to Rabidoux, this is not always the case, especially in markets that are currently overvalued and highly vulnerable to a real estate crash, such as Vancouver, Victoria and the Toronto condo market.
"There is a very unfortunate stigma attached to renting," Rabidoux says. "This is dangerous and damaging to many people's finances. The reality is that the majority of new home 'owners' are still renters; they've just gone from renting space to renting money." With rents in large cities exceptionally cheap compared to owning, home ownership becomes a very steep tax on those unwilling to crunch the numbers or who give into the societal pressure to buy. Don't be that girl!
Comparing the costs
Rabidoux suggests wannabe-homeowners start by figuring out the monthly costs of owning a home. Calculate the mortgage principal and interest, taxes, insurance and any additional monthly payments such as condo fees. Also add the often ignored but very necessary maintenance costs — two per cent of the cost of the house per year is a good rule of thumb — then divide by 12 to get a monthly cost.
Next, figure out what it would cost you to rent a similar property in the area. Kijiji and online classifieds are a good place to start. Realtors can also help with rent statistics. Remember that rent is often negotiable, particularly if you don't have pets or kids, if you do have a stable job, are a non-smoker and have good references. Landlords often give steep discounts to 'good tenants' they believe will care for their property.
Most importantly, consider the lost opportunity cost of your down payment: what you could be earning by investing your equity in something other than real estate. With stocks or bonds, for example, you can earn a minimum of three to four per cent with a very conservative, low-risk investment. If you have a $20,000 down payment, that means you are foregoing at least $600-$800 a year that this money could be earning you.
You may be tempted to think that you can easily earn that kind of return on the value of a home, as house prices climb to teetering levels and buyers engage in wild bidding wars for the luxury of overleveraging themselves to buy their dream home. Yet, the definition of a housing 'bubble' is an unreal, overly inflated market where people expect prices to rise forever. Depending on the market where you live, you must consider the risk of when the bubble may burst and how you might safely build equity elsewhere. This needs to be factored into the 'true' cost of ownership.
Save the difference
If you find a substantial cost difference between owning and renting and choose to rent, you have a great opportunity to have the best of both worlds — rent the place you want and bank the difference. Of course, there is no financial benefit if you end up using the cost savings to splash out every month on Frette linens, Fall & Barrow paint and a fabulous home theatre system. The wise renter is disciplined enough to invest her monthly cost savings and therefore build that equity that everyone has told you can only come from home ownership.
The long-term view
If you plan to buy a home and live in it for many years or even decades, you will likely ride out numerous market fluctuations, will be more likely to sell at a profit and less likely to find yourself in a negative equity situation. As for Marky Mark, he's probably not in it for the profit; he has his movies for that. We do hope, however, that his foray into Canadian real estate means that he and his "Good Vibrations" will be here for a very long time. http://ca.finance.yahoo.com/news/Shall-I-rent-I-own-goldengirlwp-1790810207.html?x=0

U.S. 30-year mortgage falls to 1971 low

2011-08-18T15:08:00.001-07:00

The average rate on a 30-year fixed U.S. mortgage has fallen to its lowest level on records dating to 1971.

The rate on the most popular mortgage dipped to 4.15 per cent from 4.32 per cent a week ago, mortage lender Freddie Mac said Thursday. Its previous low of 4.17 percent was reached in November.

The last time long-term rates were lower was in the 1950s, when 30-year loans weren't widely available. Most long-term home loans lasted 20 or 25 years.

Few expect record-low rates to energize the depressed U.S. home market. Over the past year, the average rate on the 30-year fixed mortgage has been below five per cent for all but two weeks. Yet prices and sales remain unhealthy and are holding back the overall economy.

Five years ago, the average 30-year fixed rate was near 6.5 per cent. In 2000, it exceeded eight per cent.

Most homeowners are paying rates more than a full percentage point higher than the current average. The average rate on all outstanding mortgages is 5.3 per cent, Freddie Mac said, citing data from the Bureau of Economic Analysis.

Canada rates seen lower for longer; cuts unlikely

2011-08-11T11:32:00.000-07:00

(Reuters) - A dovish U.S. Federal Reserve will likely force the Bank of Canada to keep its interest rates lower for longer, but market bets on a Canadian rate cut by year-end are unlikely to pay off.
Analysts said a rate cut would send all the wrong signals for an economy that is growing, albeit slowly, and could hurt the central bank's credibility.
"In the current situation, a rate cut by the Bank of Canada would mean that you have a second recession in Canada," said , Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International in New York.
"And that's not something that we see happening."
Expectations for Canadian interest rates have swung wildly in recent weeks. As recently as July 19 traders priced in higher expectations of a rate increase this year, following unexpectedly hawkish language from the Bank of Canada.
A July 20 survey of primary dealers showed most saw a rate hike in September or October.
But tightening expectations fell sharply as the U.S. debt ceiling debate and the downgrading of the U.S. credit rating by Standard & Poor's fueled fears of a recession there, triggering some of the worst stock market selloffs since the collapse of Lehman Brothers in 2008.
Canadian overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, and short-dated government debt began to show expectations of a rate cut rather than an increase.
The Canadian dollar also fell more than a nickel against the greenback as the outlook for monetary policy moved from tightening to easing.
Rate cut expectations were reinforced by the U.S. Federal Reserve 's unprecedented announcement on Tuesday that it would likely keep rates near zero for another two years.
Analysts said the Bank of Canada is likely to keep interest rates lower for longer than previously expected because of the Fed move. One issue is that widening the rate differential between the two countries could cause an unwelcome appreciation in the Canadian dollar.
But they caution that swap markets, which are pricing in a quarter-point rate cut before year end, have it wrong.
Analysts said a cut is not needed because the Canadian economy, though highly dependent on the big U.S. market, is still growing. The central bank's key policy rate, currently at 1.0 percent, is also seen as still being very accommodative. The rate was cut to a record low of 0.25 percent after the financial crisis.
HOUSING, RISK TO CONFIDENCE FACTORS
Those emergency rates provided conditions for the domestic housing market to surge to bubble-like proportions in some parts of the country, and allowed Canadians to take on massive personal debt loads.
Analysts said a rate cut could reignite these two segments of the economy, risks that have already been flagged by the central bank.
"The bank is going to need a lot more evidence that the downside risks are going to stick with us before they totally rewrite their script from the last statement and move toward outright easing," said Derek Holt, an economist at Scotia Capital, noting that dovish language would inevitably have to accompany a decrease in the central bank's key rate.
"That would be a blow to business and consumer confidence in the country as opposed to the more supportive role, which would be essentially to just stay off on the sidelines and not do anything on rates for a long time yet."
Holt is already the most bearish among Canada's 12 primary dealers -- institutions that deal directly with the central bank as it carries out monetary policy -- and is comfortable with his call that the next rate hike will be in the second quarter next year.
If anything, it could be later, "if the Fed is true to its word in terms of maintaining stimulative policy all of next year and into 2013," he said.
Analysts said the risk of a rate cut is now more likely than an increase, given Canada's trading ties to the United States and the risk that a recession there would also pull Canada's economy lower.
"It is probably appropriate to price in some risk of the next move by the BoC being more a cut than a hike, just at this stage," said Michael Gregory, senior economist at BMO Capital Markets.
"But I think that fades within six months and you start to believe that is going to skew to the next risk being a hike rather than a cut." http://ca.finance.yahoo.com/news/Analysis-Canada-rates-seen-reuters-1938074017.html

Bank of Canada faces interest rate dilemma

2011-08-11T11:29:00.000-07:00

The Bank of Canada had been expected to start raising interest rates in September, but is now likely to keep them on hold or even announce a cut, experts say.

Canada's central bank is due to make an announcement on rates in September, on the heels of the recent decision by the U.S. Federal Reserve Bank to keep interest rates south of the border low and stable for two years.

CBC business commentator Michael Hlinka, who also teaches at the University of Toronto School of Continuing Studies, is among those to predict a cut in Canadian rates. He calls the announcement by the U.S. Federal Reserve "extraordinary" and also "short-sighted and utterly clueless."

"I've never heard of a central bank in North America ever put an extended time frame on interest rates like this," said Hlinka, not even after the Sept. 11, 2001, attacks.

"The announcement in the U.S. that interest rates won't go up any time soon is public policy makers saying to consumers, there is no reward in saving your money, so don't think about saving for your retirement or a rainy day, you might as well spend it now in the hope that this consumer spending will stimulate the economy and lead to job creation."

Canada will have no choice but to follow suit in cutting rates, said Hlinka.
"To raise interest rates would drive up the Canadian dollar, making our exports that much less competitive. Now it seems almost inevitable that the next move for our benchmark interest rates will be down."

But that could push the country into a deep and prolonged recession with record levels of private debt, according to Hlinka.

Cutting interest rates could further overheat the housing market and encourage people to spend beyond their limits, creating a bubble that will soon burst, predicts Hlinka.

He points to Vancouver, a city whose housing market has cooled considerably this summer, as a harbinger of things to come for Toronto and other Canadian cities.

BMO deputy chief economist Doug Porter said the the bank will likely keep its key overnight rate target at one per cent well into next year.

Until the recent turmoil, Porter said, he thought the Canadian central bank would start raising interest rates this fall with two quarter-point rate hikes by the end of the year.

"In fact, because of the weakness in equities there has been some talk recently that there is even a remote possibility the Bank of Canada could cut rates in the coming weeks or months," Porter said.

"I still think that's a long shot, but at the very least events have conspired to keep the Bank of Canada on the sidelines for a lot longer than most had anticipated as recently as a few weeks ago."

Andreas Park, a professor of economics at the University of Toronto, is more cautious, hedging his predictions and taking a wait-and-see approach.

"If economic conditions stay as they are now in Canada, I predict interest rates will go up. If we see a deterioration in the U.S. on a small scale that affects Canada slightly, then they will stay as they are. If there is another recession in the U.S. the interest rates will be cut in Canada," says Park.

"All of this is a big unknown for Canada at this point. And the Americans don't know it either."

If the U.S. government cuts spending dramatically that could have a negative impact on the economy, he adds. If that happens, Canada will be affected.

If interest rates are cut in Canada in September, it will mark five years of low rates.

Hlinka draws parallels between the Bank of Canada and its Swiss equivalent, which announced last week it was cutting its benchmark interest rate from one-quarter of a per cent to as close to zero as possible.

With unemployment at 3.2 per cent and an economy that is growing at two per cent in the midst of all the turmoil in Europe, the Swiss are the envy of the world.

"They're terrified that the appreciation of the Swiss franc is going to upset that apple cart," says Hlinka.

P.O.V.: Are you confident in the Canadian economy?

"So their public policy makers and central bank is saying, 'We'd much rather run the risk of creating an asset bubble, instead of sitting and watching the Swiss franc appreciate day after day and make the products we export to the rest of the world utterly uncompetitive,'" says Hlinka.

Switzerland's major trading partners are in the EU, while Canada's major trading partner is the U.S. Switzerland's economy is much healthier than its peers in the EU, just as Canada's economy is much healthier than the U.S.'s.

But Hlinka warns there is a risk in cutting interest rates.

"I feel like the wild-eyed Cassandra inside the gates of Troy who said 'Don't bring in that statue. It can lead to no good.'"

Rather than addressing fundamental economic problems, public policy makers are playing on the margins with factors that have nothing to do with what the real issues are, such as structural imbalances in the economy, says Hlinka.

"The public sector is too big relative to the private sector in the developed countries of the world. The public sector has a much better deal in terms of wages, benefits, job security, and working conditions, and it's creating a two-tier society of haves and have-nots."

The private sector creates wealth while the public sector distributes it, and the result of the imbalance is there are too many people who are working to distribute the wealth and too few people who are working to create it, according to Hlinka.

"By the way, these are very unpopular things to say and I'm the first to admit it."

It's an easier fix to fiddle with interest rates, rather than tackle politically sensitive issues, says Hlinka.

U.S. avoids default but fails to dispel economy fears

2011-08-05T14:50:00.001-07:00

http://ca.reuters.com/article/topNews/idCATRE7646S620110803?sp=true
Tue Aug 2, 2011 9:01pm EDT

By Andy Sullivan and Jeff Mason
WASHINGTON (Reuters) - The United States stepped back from the brink of default on Tuesday but congressional approval of a last-ditch deficit-cutting plan failed to dispel fears of a credit downgrade and future tax and spending feuds.
President Barack Obama and lawmakers from across the political divide expressed relief over the hard-won compromise to raise the country's borrowing authority after weeks of rancorous partisan battles.
Nevertheless, U.S. stocks tumbled, turning negative for the year, as investors shifted their attention to the increasingly grim state of the U.S. economy and the potential for a downgrade of America's gold-plated debt rating.
That risk grew when one of the three major ratings agencies said it was affirming the U.S. government's AAA-rated sovereign debt but slapping it with a negative outlook.
The announcement by Moody's Investors Service after U.S. markets closed could lead to a downgrade within 12 to 18 months. That could raise borrowing costs for U.S. companies and consumers as the economy risks slipping back into recession.
The Senate's approval by 74-26 votes of the $2.1 trillion deficit-reduction plan warded off the immediate specter of a catastrophic U.S. debt default. The bill passed the Republican-controlled House of Representatives on Monday.
Obama immediately signed it into law, lifting the $14.3 trillion debt ceiling with just hours to spare before the government was due to run out of money to pay all its bills.
The bitter feud between Democrats and Republicans has bruised Obama as he heads into a campaign to win a second term in 2012.
The $2.1 trillion deficit-reduction plan fell well short of a $4 trillion 'grand bargain' that was nearly agreed last month between the White House and congressional leaders.
Another ratings agency, Standard & Poor's has said $4 trillion in deficit-reduction measures would be needed as a "downpayment" to put America's finances in order.
S&P said in mid-July there was a 50-50 chance it would cut the U.S. rating in the next three months if lawmakers failed to craft a meaningful deficit-cutting plan. Investors are on tenterhooks about the chance of a downgrade by S&P.
The deal leaves political battles ahead over spending cuts and tax reform as the deficit-cutting plan is implemented. Obama and Democratic and Republican leaders said the agreement, while a welcome first step, was not enough on its own.
"We just kicked the can down the road ... the agreement doesn't really do anything about what got us into debt," Republican Senator Lindsey Graham told Reuters Insider.
"We had a good opportunity, we let it pass so we will keep struggling."
THREAT OF CHAOS RECEDES
The deal drew a line -- for the moment -- under months of bitter partisan squabbling over debt and deficit strategy that had threatened chaos in global financial markets and dented America's stature as the world's economic superpower.
The law lifts the debt ceiling enough to last beyond the November 2012 elections, calls for $2.1 trillion in deficit savings spread over 10 years and creates a bipartisan joint House and Senate committee to recommend further cuts by late November. It does not yet include any tax increases.
International Monetary Fund chief Christine Lagarde said the deal reduced uncertainty in the markets.
The governor of the central bank of China, the biggest foreign holder of U.S. Treasuries, urged the the United States to responsibly protect investor interests.
Questions lingered about the fragile U.S. economy and whether the bipartisan deficit-cutting compromise could deliver the desired results.
Data on Tuesday showed U.S. consumer spending dropped in June for the first time in nearly two years and incomes barely rose, the latest in a string of gloomy economic indicators.
Moody's said the deal was a step toward fixing the budget problems but the United States risked a downgrade if fiscal discipline weakened in the coming year, if no further steps were taken in 2013 or if the economy deteriorated.
"We would expect that growth would accelerate in 2012 from the first half of the year," Steven Hess, Moody's top U.S. analysts told Reuters in an interview. "But if it doesn't, that means that the whole process of fiscal consolidation and the plans to achieve lower deficits and lower debt ratios will be made all the more difficult."
Fitch Ratings did not rule out putting a negative outlook on the U.S. AAA rating when it concludes a review of the country later this month, the agency's top analyst for the United States told Reuters on Tuesday.
TUSSLE OVER TAXES
Investors said the move by Moody's on Tuesday was expected and did not ruffle financial markets.
Earlier, Wall Street stocks slumped broadly by more than 2 percent, ending down for a seventh consecutive session as gloom over the economy mounted, marking the longest losing streak since the financial crisis period in October 2008.
"I think that the most troubling aspect we have going on right now is the performance of U.S. equities. The equity market for whatever reason seems to think that this deal is not sufficient," said Greg Salvaggio, senior vice president at Tempus Consulting in Washington.
U.S. Treasury Secretary Timothy Geithner said in an opinion piece in the Washington Post that the debt deal should allow room for Congress to implement short-term measures to strengthen the economy this fall such as extending a payroll tax cut and funding infrastructure projects.
Obama said the sacrifices required to reduce the deficit needed to be fairly shared, apparently nodding to anger among many Democrats that the deal did not include tax increases and risked hurting social programs.
"We cannot balance the budget on the back of the very people who have borne the brunt of the recession ... everyone is going to have to chip in, that's only fair," the president said in an address from the White House Rose Garden.
He said he expected tax reform to emerge from deliberations by the new congressional committee, and that a "balanced approach" in which the wealthier pay more taxes was needed.
Only moments after final passage, rival congressional leaders were handing out their political recipes for the way forward -- Republicans in favor of more spending cuts, and Democrats looking for tax reform or hikes.
(Additional reporting by Jeff Mason, Thomas Ferraro, Donna Smith, Richard Cowan, Lesley Wroughton, Laura MacInnis, Alister Bull and Steve Holland in Washington and Chris Sanders in New York; Writing by Stuart Grudgings and Pascal Fletcher; Editing by Jackie Frank and Anthony Boadle)

World markets bleed

2011-08-05T14:41:00.000-07:00

http://business.financialpost.com/2011/08/04/world-markets-bleed/ David Pett Aug 4, 2011 –
7:09 PM ET | Last Updated: Aug 4, 2011 7:13 PM ET
Investors are losing faith in the global economy and the policymakers in charge of keeping it afloat, putting the two and a half-year bull market in serious jeopardy.
Stock markets around the world plummeted their most since the financial crisis on Thursday, as escalating U.S. recession fears and Europe’s ballooning sovereign debt crisis were further exacerbated by an emergency intervention of the Japanese yen.
“It’s getting more and more difficult to see the glass half full,” says Serge Pepin, head of investments at BMO Investments Inc. “I’ve always been sort of an optimist if anything, but it is definitely not a rosy picture.”
The S&P/TSX composite index, Canada’s key equity benchmark, suffered its biggest drop since June 2009, by falling 435.90 points or 3.4% to close at 12,380.13. It was the eighth time in the past nine sessions that the market has tumbled.South of the border, the Dow Jones Industrial Average dropped 512.76 points or 4.31% to 11,383.68. It was the Dow’s worst point drop since December 2008. With each market now down 13% and 11% respectively since their most recent peaks in April, stocks have dropped well below the 10% pullback that marks an official correction.
Mr. Pepin said investors are starting to question whether the bull run that began on March 9, 2009 has finally come to an end.
“We are now more than 20% off the market’s all-time high in 2007, so by some people’s definition, we’re already in a new bear market,” he said. “If we can get a clear signal from the U.S. economy that things are moving to the positive, that’s when people will get some solace. At this point we just aren’t seeing that.”
In this type of environment, it makes sense that investors are selling some of their riskier assets including cyclical stocks and commodities, in favour of so-called safe haven investments, such as bonds, defensive equities like consumer staples and healthcare, and gold, which briefly hit another record high at US$1,684.90 an ounce on Thursday.
That said, Mr. Pepin thinks it’s premature to compare the market’s recent malaise with the extreme meltdown that occurred in 2008 at the height of the financial crisis.
“I think this is strictly sentiment and we are getting close to a bottom, ” he said. “I don’t believe we are headed for recession and corporate earnings are still very strong. That has to matter for investors.”
Just how much futher markets will fall could hinge on Friday’s crucial U.S. jobs report for July. If figures are better than estimates calling for an increase of 85,000 in non-farm payrolls and an unchanged unemployment rate at 9.2%, then a relief rally could take place. If the opposite transpires, the sell-off will likely only get worse, as the risk of a U.S. recession moves closer to reality.
“The economy is only one shock away from falling into recession,” said Michelle Meyer, an economist at Bank of America Merrill Lynch, in a note to clients Thursday.
Ms. Meyer believes there is now a 35% chance of a U.S. recession in the next year, about double what her odds were this spring.
With this week’s new debt deal in place, there is no appetite in Washington to provide more fiscal stimulus in aid of the slumping recovery, she said. At the same time, the Federal Reserve, which has left interest rates at near zero for nearly three years, may not have enough ammunition left to prevent another contraction.
On the one hand, investors are in a state of confusion and alarm, not knowing if the world’s problems can be resolved, said Andrew Pyle, a financial advisor at ScotiaMcLeod. On the other hand, panic is often the mother of all innovation.
“The [market slide] is creating the same pro-growth elements as we’ve seen before, such as lower energy prices and interest rates,” he said. “This doesn’t mean we jump and start loading up on equities, but as Warren Buffett says the best time to buy is when there’s blood in the streets.”

Economy shrank in May, StatsCan says

2011-07-29T14:06:00.000-07:00

CBC News

Canada's economy unexpectedly shrank in May as mining and oil and gas activity fell sharply, Statistics Canada said Friday.

Real gross domestic product was down 0.3 per cent in May, after a flat April and a 0.3 per cent increase in March.

The decline surprised analysts, who had forecast the economy would grow by 0.2 per cent in May. It suggests that economic growth in the second quarter will be weak after strong gains early in the year and during the last quarter of 2010, they said.

The Canadian dollar moved sharply lower Friday morning following the release of the weak GDP report.

The loonie was down 0.60 of a cent to 104.49 cents US.

Resource sector weak

A 5.3 per cent drop in mining, oil and gas extraction drove the overall decline.

Wildfires in northern Alberta and maintenance shutdowns cut oil output, the agency said.

In mining, production of copper, nickel, lead and zinc mines dropped 9.6 per cent.

"While the declines should reverse in the months ahead, especially for oil output, the deep drop will nevertheless further dampen an already soft quarter for the economy," said Sherry Cooper, chief economist with the BMO Financial Group.

Manufacturing and construction also fell, by 0.4 per cent and 0.3 per cent, respectively, Statistics Canada said.

Outlook weakens

The May report suggests that second quarter growth will be around 0.5 per cent at an annual rate, Cooper said. That's well below the 3.9 per cent rate seen in the first quarter "and even below the soggy U.S. result of 1.3 per cent" for the second quarter, Cooper said.

While growth could pick up in the second half, "the starting point is even weaker than we expected and there are still clearly plenty of potential dangers lurking ahead for the economy."

BoC Leaves Key Rate Untouched at 1.00%

2011-07-28T16:03:00.000-07:00

BoC Leaves Key Rate Untouched at 1.00%

The Bank of Canada startled no one today by leaving its key lending rate unchanged at 1.00%.

The BoC has been in a holding pattern for almost 10 months now, keeping prime rate at 3.00%—to the benefit of variable-rate mortgage holders.

A Reuters survey of 37 economists conducted prior to this announcement was unanimous in predicting today's rate hold.

All eyes quickly focused on the BoC’s official statement. Analysts say it included more hints of a rate tightening mindset. Here are highlights from that report:

The BoC said that some monetary stimulus "will be withdrawn." Its previous wording was "(will be) eventually withdrawn."
"Total CPI inflation is expected to remain above 3 per cent in the near term"
"Core inflation is slightly firmer than anticipated"
"Core inflation is now expected to remain around 2 per cent over the projection horizon."
"High" commodity prices and "persistent excess demand in major emerging-market economies are contributing to broader global inflationary pressures."
"(Canadian) Household spending remains solid and business investment robust."
"Financial conditions in Canada remain very stimulative"

"...the Bank expects growth in Canada to re-accelerate in the second half of 2011."
Canada's economy will return to "(full) capacity in the middle of 2012."
"...there are clear risks" posed by the "European sovereign debt crisis"
Pending continued economic expansion and absorption in "the current material excess supply in the economy...some of the considerable monetary policy stimulus currently in place will be withdrawn."
Despite awakening inflation and growing employment in Canada, economic risks are not dissipating. Those risks include a fragile North American economy, strong loonie and European debt concerns, to name a few. These factors combined have pushed back rate hike expectations until late 2011, or even the first half of 2012.

But some, like Citigroup Capital Markets, are still forecasting higher rates by October.

In a report released Monday, Citi analyst Todd Elmer said current expectations put too much weight on downbeat external factors and underestimate Canada’s consistently buoyant economic performance.

The financial market has thus far disagreed with economists like Elmer.

One proxy for market sentiment is trading in overnight index swaps (OIS). OIS trade based on expectations of interest rate changes. As of yesterday, they weren't fully pricing in a 1/4 point rate hike until May 2012. Those expectations will shift closer to the beginning of 2012 after today's more hawkish tone in the BoC's statement.

BNN analyst Linda Nazareth suggests that economists may soon have to adjust their forecasts to keep up with market expectations. Within a month or so, she says, economists may take rate hikes "off the table" for 2011.

Three BoC rate meetings remain in 2011. The next interest rate decision will be on Sept. 7.

C.D. Howe Institute monetary policy council urges Bank of Canada to raise rates

2011-07-15T14:05:00.004-07:00

By The Canadian Press
OTTAWA - The C.D. Howe Institute's monetary policy council recommended Thursday the Bank of Canada raise its target for the overnight interest rate.
The group of economists recommended the central bank raise the key rate by a quarter point to 1.25 per cent at its rate announcement next week.
Bank of Canada governor Mark Carney is expected to keep rates on hold at one per cent when the announcement is made July 19.
"The principal theme of the group’s discussion was the contrast between the Canadian domestic scene, which most attendees felt justified a more restrictive stance by the Bank," the think tank council said in a statement.
However, the recommendation by the mix of private sector economists and academics was not unanimous.
Five members of the panel recommended the increase, while four others suggested the Bank of Canada keep the rate at one per cent.
The bank last hiked interest rates in September 2010.
"Looking abroad, participants generally agreed that the potential negative impact on global growth and on financial conditions in Canada and elsewhere of sovereign debt defaults was enormous, but they differed in their views about how the Bank of Canada should respond to this prospect," the council said.
"Some argued for more accommodative policy on the grounds that inflation expectations are well anchored and the Bank should support domestic demand. Others stressed the risks of postponing needed tightening for too long in preparation for events that might not occur. "
The group was unanimous though in their recommendation that the rate, which is at an exceptionally low level, needs to rise over the coming year.
The central bank will make its decision next week as the U.S. and global economy present an uncertain future. Even as the Canadian economy appears on track, weakness in the U.S. and threats of sovereign debt defaults threaten the outlook.
Speaking to a Senate committee last month, Carney warned that the U.S. economy is a shadow of its former self and a mountain of debt weighing on the balance sheets of advanced countries around the world will dampen growth for years.
Carney told the committee that the second quarter in Canada could see growth drop all the way to the one per cent range, from 3.9 per cent in the first three months. http://ca.finance.yahoo.com/news/C-D-Howe-Institute-monetary-capress-3527802669.html

conomy cranking out new jobs, but economists question quality of work

2011-07-15T14:05:00.003-07:00

E
By Craig Wong, The Canadian Press
OTTAWA - The Canadian economy has been on a three-month streak of job creation and businesses appear set to continue that into the next three months, but some economists are raising concerns about the quality of jobs that are being created.
CIBC World Markets senior economist Benjamin Tal said while the headline numbers about job creation have been good, the quality of the jobs has not been great.
And Tal suggested that as governments look to cut spending to balance their budgets, the situation isn't likely to improve.
"This deterioration will probably continue over the next few months because I see some softening in government jobs which always tend to be relatively high quality jobs and I see some softening in construction jobs," Tal said.
"So those two forces that have been very strongly supporting the economic recovery and the job market recovery of the past two years, will not be there and what will replace them will probably be service-oriented jobs."
The Canadian economy created 28,000 jobs in June and 238,000 over the last 12 months. The results blew past a disappointing month in the U.S. where its much larger economy added just 18,000 jobs in June.
And the Bank of Canada's business outlook survey found businesses were optimistic about the prospects of hiring new workers with 57 per cent of the firms surveyed expected to hire new workers over the next year compared with just four per cent of firms expected to have fewer employees.
However, the unemployment rate in Canada stood at 7.4 per cent, a full percentage point higher than where it stood before the financial crisis in 2008.
And average hourly wages in June were up just under two per cent compared with a year ago, less than the rate of inflation.
Tal pointed to the relative weakness in the other economic indicators for the second quarter that came even as the economy continued to crank out more jobs.
"There is a link between employment and income and if quality is going down, then this link is not as clear. You can have more and more jobs, creating less and less income," he said.
"Consumer spending, income growth, retail sales, they're all linked to quantity and quality. Granted, a low quality job is better than no job, but the headline numbers exaggerate the real health of the Canadian labour market."
Canadian Auto Workers union economist Jim Stanford said the growth in the absolute number of jobs in Canada, while better than the U.S., is not as impressive as it appears to be.
Stanford notes that during that month, the Canadian population continued to grow so the increase in the number of jobs in Canada, while significant, doesn't tell the whole picture.
He pointed to the employment rate in Canada as a better indicator. It stood at 62 per cent in June, up 0.2 percentage points from 12 months ago.
"At most we've recouped one-fifth of the damage," he said of the losses in the recession.
"So even on the quantity grounds we have a huge distance to travel before we can reasonably say that the recession is over."
Stanford pointed to the gains in part-time and self-employment as signs of weakness in the quality of the jobs created.
"There is some self-employment that reflects the positive dream of being your own boss and having a good idea that you want to build a business around, but a very large proportion of self-employment is people who lost their paid work and are now trying to make ends meet by doing consulting or selling Amway from their basement," he said.
Tal said the change in the workforce and the available jobs has also been a structural one for the economy and education will be the key to success in finding work.
"It will be more difficult to find a job if you don't have the qualifications," he said.
"This is going to be a very brutal labour market with many opportunities, but if you don't have the qualifications you have no chance." http://ca.finance.yahoo.com/news/Economy-cranking-new-jobs-capress-4268813369.html

Home prices to fall, TD warns

2011-07-15T14:05:00.001-07:00

The average price of a resale home in Canada will fall by more than 10 per cent over the next couple of years, an analysis by TD Economics predicted Wednesday.
Calling it a "moderate correction," the report's authors also say sales will decline by more than 15 per cent over the same period.
"A combination of more subdued job and household income growth, rising interest rates, the recent tightening in borrowing rules for insured mortgages and fewer first time home buyers are expected to be the chief culprits behind the slowdown," the report said.
TD economists profiled 12 urban markets across the country. They highlighted Vancouver and Toronto — currently the two most expensive housing markets in Canada — as the cities most vulnerable to a larger-than-average decline, "reflecting in part their exposure to the condominium segment, which appears particularly ripe for a correction."
No city will experience a housing boom in the near-term, the authors say. But price drops in Regina, Saint John, N.B., Halifax, Calgary and Edmonton will be less than the average — what the report calls "a soft landing."
On a national basis, the report's prediction of an average 10.2 per cent price decline translates into an average resale price of $329,000 in 2013, down $38,000 from its 2011 peak.
But the red-hot Vancouver market, where the average resale home now goes for about $793,000, the authors predict a 14.8 per cent decline by 2013 to a still lofty $675,000 — a drop of $118,000.
"Vancouver has been the poster child for those individuals worried about a real estate bubble here in Canada," the report says, with the authors pointing out that household debt levels are higher in Vancouver than in any other city.
Toronto's forecast price drop over the same period will be almost as dramatic — an 11.7 per cent decline to $415,000 by 2013. That's $55,000 lower than the current peak.
The authors note that sales are already off their peak. But they say the biggest drivers of housing demand are likely to remain "supportive" for the rest of 2011. The bulk of the price correction will come in 2012 and 2013, they say.
TD economists say the Bank of Canada is likely to start hiking interest rates again at the start of 2012.
With the central bank's policy rate directly tied to variable rate mortgages — which 40 per cent of current mortgage holders now have — the authors point out that a $400,000 mortgage will cost $440 a month more to service by mid-2013, assuming the Bank of Canada raises its key overnight rate from the current 1.00 per cent to 3.00 per cent by that point. http://ca.news.yahoo.com/home-prices-fall-td-warns-212248003.html

U.S. Tackles Housing

2011-07-15T14:04:00.002-07:00

By NICK TIMIRAOS The Wall Street Journal
The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery—and possibly the president's re-election in 2012.
Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House.
Housing "hasn't bottomed out as quickly as we expected," President Barack Obama said at a White House town hall last week. Mr. Obama said housing remained the "most stubborn" problem facing the country and conceded that a raft of federal mortgage-aid programs were "not enough, and so we're going back to the drawing board."
Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. In certain markets, Fannie and Freddie could hold some foreclosed homes off the market and rent them out to ease the property glut.
Officials also could sweeten incentives for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth.
Discussions are in early stages, and there isn't consensus around particular ideas. A spokeswoman said the president and his advisers "are always looking at new ways" to strengthen the housing market but wouldn't disclose details. "While we continue to consider the options available to us, it would be inaccurate to say we are proposing any of these particular ideas at this time," White House spokeswoman Amy Brundage said.
Home-buyer tax credits worth up to $8,000 in 2009 and 2010 gave a short-term boost to home sales, but demand plunged after they expired. Foreclosures have put pressure on prices and damped residential construction, traditionally an engine of job growth during economic expansions.
"As conditions change, some options that were below the line the way the market was 18 months ago might be above the line today," said Peter P. Swire, who teaches law at Ohio State University and until last year was a top housing adviser to the White House.
Most of the administration's housing efforts have focused on helping borrowers refinance or modify their loans to avoid foreclosure. But some economists say too many borrowers won't be saved through loan workouts and that the administration must do more to soak up the flood of foreclosures by boosting housing demand.
President Obama's signature loan-modification program, announced during his first month in office, has lowered payments for around 600,000 borrowers. Meanwhile, around four million borrowers are in foreclosure or have missed three or more consecutive mortgage payments. While mortgage-delinquency rates have fallen, millions more remain at risk of defaulting if they experience a payment shock because they owe more than their homes are worth.
More recent housing relief has targeted unemployed borrowers. Last week, officials said unemployed borrowers with loans backed by the Federal Housing Administration could miss up to 12 months of payments while they look for new jobs. A separate $1 billion program is set to begin providing interest-free loans of up to $50,000 for temporarily jobless borrowers this month.
Unlikely to get Congress to provide additional funds, the administration is left to examine options that it can implement without congressional consent. Fannie and Freddie, the so-called government-sponsored enterprises or GSEs, could be one policy lever. "There are a number of things that we can look at on the GSE side," said Austan Goolsbee, departing chairman of the Council of Economic Advisers.
Last year, officials considered a range of policies that included allowing borrowers with loans backed by Fannie and Freddie to refinance more easily by relaxing fees that lenders are charged for riskier borrowers. Others outside the administration have pushed for federal entities to lend more freely to mom-and-pop investors or to create public-private initiatives that would allow institutional investors to buy more foreclosed properties. "Because we have limited credit availability, we need investors to help soak up the supply," said Ivy Zelman, chief executive of housing-research firm Zelman & Associates.
Fannie and Freddie also could rent, instead of sell, some of their huge inventory of foreclosed homes, which could take some pressure off prices. The firms owned about 218,000 properties at the end of March, and sold around 100,000 during the first quarter, or more than one-third of all foreclosed property sales, according to analysts at Barclays Capital. The firms could take back as many as 700,000 homes over the next year, according to estimates by economists at Goldman Sachs.
That idea has generated interest among some housing officials but could meet resistance from Fannie and Freddie's independent federal regulator. Renting out homes hasn't been tried on a wide scale and is "riddled with risk," said Ed Delgado, a former Wells Fargo executive who leads the Five Star Institute, a mortgage-industry group. "Essentially you're converting the [firms] from providing liquidity to a glorified national landlord for distressed assets."
All these options could boost lending and attack the overhang of foreclosures, but would put more risk on federal agencies and Fannie and Freddie. The mortgage giants have cost taxpayers $138 billion and counting.
They also would require the blessing of the Federal Housing Finance Agency, which is charged with limiting losses at Fannie and Freddie. The FHFA last year refused to go along with an Obama administration initiative to reduce loan balances for certain borrowers who were current on their mortgages but heavily underwater. The agency has typically resisted programs which produce substantial, upfront losses designed to offset potentially larger but harder to quantify long-term losses.
The same skepticism that prompted advisers last year to push for giving the market room to heal on its own could prevail once again. Simply focusing on the broader economy is "one of the best things we can do for the housing market," Mr. Goolsbee said.
Still, the high-level housing discussions are significant because Mr. Obama hasn't put much emphasis on his housing policies over the past year. The administration has taken fire from both sides over its housing-relief plans, with Democrats saying the administration has let banks off too easily while Republicans have said the programs wasted money. The housing market could be a top election issue for voters in swing states such as Florida, Ohio, and Nevada. http://professional.wsj.com/article/SB10001424052702304584404576440033488980192.html
TORONTO (Reuters) - The Bank of Canada will raise interest rates sometime in the fourth quarter as a sturdy, if unspectacular, domestic recovery offsets global headwinds, according to a Reuters survey.
The median forecast of a July Reuters poll of 37 economists and strategists pushed back previous rate hike forecasts of a third-quarter increase projected in a May poll.
The central bank is now seen holding its key policy rate at 1 percent in the third quarter.
Of those still expecting a third-quarter increase, all of them predicted a 25 basis point rise in September . None expect a hike next week at the central bank's July 19 rate decision.
The poll was conducted between July 8 and July 12.
While some recent Canadian economic data has been encouraging, it comes against a bleak global backdrop. Worries have spread about the euro zone debt crisis and there are signs of a stagnating recovery in the United States, Canada's largest trading partner.
U.S. job growth is a key focus, since its impact on U.S. consumer spending spills into the Canadian market.
"The soft patch that we obviously have in the U.S. right now we believe will prove temporary, that we'll get a little bit of a lift in the second half of the year," said Michael Gregory, senior economist with BMO Capital Markets.
"It does seem that Canadian growth continues to chug along, the output gap continues to close. If anything, I think the output gap may be even a little smaller than what the Bank of Canada is even estimating ... so that all points to the need to try and ratchet rates higher. They can't really wait until the Fed starts to go."
Canada was the first Group of Seven country to raise interest rates following the global financial crisis in 2008, lifting its target for the overnight rate three times last year before pausing.
RATE SEEN AT 1.50 PCT AT END OF Q4
The median forecast also showed that the bank would end the fourth quarter with the key rate at 1.50 percent, down from 1.75 in the previous poll. The rate was seen ending 2012 at 2.50 percent, down from 3 percent.
Analysts said a rate increase would likely send the Canadian dollar -- already a point of concern for the central bank -- higher, which could result in another rate hike pause. The currency is currently above parity with the U.S. dollar, trading around $1.04.
The poll, which showed 16 of 37 forecasters expect the central bank to start raising rates in the fourth quarter, echoed the results of a poll of primary dealers conducted on June 29, which found most had pushed back their forecasts as well.
Two primary dealers -- the institutions that deal directly with the central bank as it carries out monetary policy -- have pushed their targets into 2012.
"It's a tough call, but our view is they're likely to wait until early next year and then gradually raise interest rates at that point," said Adrienne Warren, a senior economist at Bank of Nova Scotia.
"Certainly, the path will be contingent on the performance of the U.S. economy ... There's so much uncertainty out there in the economic outlook right now. Sentiment can change quite easily over the next few months in either direction."
In the current poll, five of 11 primary dealers surveyed expected the first rate hike to come in the third quarter, compared with 10 in May's poll. Four predicted a hike in the fourth quarter.
BMO Capital Markets pushed its expectations for the first increase to the fourth quarter from the third. Desjardins Securities was unavailable as it was currently revising its forecasts.
Overnight index swaps, which trade based on expectations for the key central bank policy rate, showed investors see only a slim chance of a rate hike this year.
One concern for the Bank of Canada is recent data that showed inflation rose to 3.7 percent in May, its highest level in more than eight years. That was well above expectations and far above the central bank's 2 percent target.
Citi , one of the forecasters, said it pushed back its expectations of a rate hike to October from July, despite the data.
"Despite the swell in May consumer prices, our change reflects the temporary lull in Canadian economic growth, as well as ongoing uncertainty surrounding the sovereign debt crisis in Greece, and upcoming debt ceiling and budget showdowns in the United States," Citi said. http://ca.finance.yahoo.com/news/Bank-Canada-seen-raising-reuters-1111903773.html

Five costly reno mistakes to avoid

2011-07-15T14:04:00.001-07:00

Shelley White Globe and Mail Update
I recently wrote about my kitchen renovation for Home Cents, detailing how I managed to keep my budget under $25,000 while still ending up with a functional and beautiful room.
There were a lot of comments (thanks for those, by the way) - some people thought I’d paid too much, some thought I’d paid too little. But there did seem to be a consensus that the post demanded some photographic evidence. So, due to popular demand, here are the before and after photos of my kitchen renovation. And please note: I took them myself, so excuse my not-quite-awesome camera skills.
Although I’m enormously pleased with how the renovation turned out, I certainly wouldn’t say the project was free of mistakes. In fact, there are some small things I might do differently if I had to do it all again (you may spot a couple of those in the photos, in fact).
So how can you avoid renovation missteps before they happen? HGTV has put together a useful collection of the 25 Biggest Renovating Mistakes. It’s quite a comprehensive list, but here’s a sampling of some of the factors I could relate to:
Gutting Everything
It can be tempting to want to just tear everything out - including the walls - and start from scratch. But that is where the additional costs can come creeping in. My contractor wisely elected to take a look inside the wall we were going to take down before totally ripping it out. Once we found out that tearing the wall would add challenges and money to the job, we changed the plan and kept the wall.
“I see this time and time again where people just start, and they think they’re going to pull a piece of wallpaper off, and by the time the process is over, they’ve completely gotten themselves into a deep, dark hole that’s very difficult to get out of,” says Mr. Eric Stromer, host of home reno show Over Your Head.
Inaccurate Measurements
I measured once, twice, three times and then again before ordering cabinets. My contractor was also meticulous with his measurements, but I could see how things could go quickly off the rails is someone was sloppy or rushed.
When dealing with countertops, always choose a company that will come and do the measuring for you, preferably using a cardboard template. That way, the onus is on them to ensure it fits correctly. That also allows you can take a look at the template and make sure you’re getting the shape you want. When you’re talking about a slab of stone worth thousands of dollars, you don’t want to take any chances.
Going Too Trendy
“People often make the mistake of wanting to be too hip and trendy in their new home by picking the latest, hottest, coolest things,” says Ms. Carmen De La Paz of HGTV show Hammer Heads. “What they don’t take into consideration is that trendy means that it’s short term.”
Five years ago I had my heart set on aqua-coloured glass tile for my kitchen backsplash. Sure, it would have looked good for a couple of years, but take it from someone who really loved her royal blue and bright yellow kitchen when she painted it 11 years ago – your taste will change. Unless you’ve got the extra cash to redo your kitchen, the best thing to do is keep it classic and simple. I think our choices will stand the test of time, but you can be the judge of that.
Ignoring Lighting
Hammer Heads carpenter Ms. De La Paz put it this way: “Another mistake that homeowners will often make is not taking into consideration the lighting in their home. The lighting in your home can completely change the colors, the feeling, the ambiance.”
In other words, ignore lighting at your peril. When I first planned our new kitchen, I completely forgot about lighting. Our old kitchen had one overhead lamp that cast a lot of shadows. Thanks to our contractor’s suggestions, we’ve got a number of pot lights on a dimmer plus under-cabinet lighting, and the difference is vast.
Failure to Anticipate Chaos
Now that it’s over, I can look back on our renovation experience and think, “It was a piece of cake.” But around week three, our kitchen was an utter mess. For readers that wondered why my family and I spent $2,200 to rent a condo instead of sticking it out at home – that place was a dust pit. Moving out was essential for our sanity and our health - drywall dust is not good for anyone.
Your reno might go smooth as molasses, but just in case, it’s a good idea to assume it will be dustier, messier and more annoyingly inconvenient than you ever could have imagined.
http://www.theglobeandmail.com/globe-investor/personal-finance/home-cents/five-costly-reno-mistakes-to-avoid/article2093436/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Personal Finance&utm_content=2093436

5 Economies That Have Been Downgraded This Year

2011-07-08T13:49:00.001-07:00

Stephen D. Simpson, CFA, July 4, 2011
This has been a rough year on the road to recovery for the global economy. Abnormal weather has led to higher food prices, persistent demand has pushed up energy prices, the U.S. economy remains in a jobless malaise, the Arab and Mideast world has been rocked by citizen unrest, and Europe continues to struggle mightily with sovereign debt and fiscal policy issues.
With that backdrop, it is not surprising that there have been a spate of sovereign downgrades so far this year. While no country has yet defaulted, the risk is arguably as high as it can get without an actual default, and that has ramped up investor anxiety and borrowing costs.
For purposes of convenience for this analysis, only Standard & Poor's ratings actions have been included.
1. A Rough Situation Made Worse in Japan
Japan started the year with sufficient problems just from its own economic situation. S&P downgraded Japan's sovereign rating in January (the first time in nine years) largely on the basis of Japan's huge debt, struggling economy, and decided lack of leadership in addressing either problem. While most of Japan's debt is internally-owned, it is nevertheless a significant economic deadweight.
Matters got even worse in March in the wake of a massive earthquake and tsunami that devastated the Tohoku region and prompted a nuclear emergency. In the wake of this disaster, S&P lowered its credit outlook to negative in April (not the same as a downgrade).
Not only is Japan going to have to finance a massive rebuilding effort that will measure in the hundreds of billions of dollars, but this is on top of an already huge amount of debt; while much is made of the U.S. debt problem, Japan's ratio of debt to GDP is the highest in the world and double that of Singapore (the next-highest country that could be reasonably viewed as "healthy"). Making matters worse are the long-term problems of weak consumer spending and an aging society that is generally opposed to immigration.
2. Ireland Battered by Its Banks
As a charter member of the infamous PIIGS group (Portugal, Italy, Ireland, Greece and Spain) of sovereign debt problem children, Ireland's downgrade in February was not especially surprising. Ireland continues to struggle with unemployment, weaker exports and a broken banking system that the country has struggled to recapitalize. In point of fact, this recapitalization issue has turned into a bone of contention - representatives of the Irish government complained about the S&P downgrade at the time and stated their belief that the S&P's estimates for how much capital the banks would need was too high.
3. Portugal Teeters at the Edge of Junk
With a downgrade in late March, Portugal's sovereign rating now teeters just one notch above junk bond status. Portugal was the third country (after Greece and Ireland) in the Eurozone to get a bailout, and the situation here is a little different. True, Portugal did gorge on cheap debt and fiscal spending got out of hand, but Portugal's growth had been holding up a little better before late 2010 to early 2011. Unfortunately, Portugal's growth has trailed most of the EU in the past decade and these deficiencies have now caught up to the country and its credit rating. Making matters worse, there has been a lot of political and popular pushback against austerity measures and it is unclear whether the country's citizens are willing to commit to the sort of long-term fiscal austerity that may be necessary to fix the company's image in the debt markets.
4. Greece - the Granddaddy of the Sovereign Debt Crisis
Greece was really the straw that broke the sovereign debt market's back, and conditions have really not improved. The austerity measures already taken by the Greek government have slowed the economy even more and made the situation worse in many respects. On top of that, the Greek people do not seem terribly inclined to suffer a prolonged decline in their standard of living so that bankers in France and Germany can come out ok on their debt holdings.
S&P ratings actions have left Greece with a sovereign rating of CCC and a negative outlook. That is the worst rating in all of the world; below the likes of Ecuador, Pakistan, Senegal and Uganda (Zimbabwe isn't rated). Moreover, the general expectation now seems to be that default in Greece is a "when" and "how much" question as opposed to an "if" question.
5. The Arab Spring Comes At a Cost
Political turbulence is one of the biggest fears of foreign bond investors, and the Arab/Mideast world has provided that in spades. While it is hard to argue that the toppling of governments in Egypt and Tunisia was not morally right, the ongoing problems around the region have impacted the economies and the outlook for prompt repayment of debt. As a consequence, countries including Bahrain, Tunisia and Libya have all seen S&P cut their ratings from A- all the way down to BB (junk territory) for Libya and close to junk for Bahrain and Tunisia.
The Bottom Line
Downgrades are not unusual and it is not surprising to some economies face these ratings actions in any given year. What is more unusual, though, is the regional concentration of these moves and the extent of the downgrades. All in all, it has made the sovereign debt world a riskier place and has led to real concerns about the durability of the global economy. With riots and squabbling still distressingly common in many countries, investors should expect a summer of volatility to continue on into the fall and beyond. http://ca.finance.yahoo.com/news/5-Economies-That-Have-Been-investopedia-1005273118.html

Obama calls on party leaders to cut deal that would stave off US debt default

2011-07-08T13:48:00.000-07:00

Obama calls on party leaders to cut deal that would stave off US debt default
By The Associated Press
WASHINGTON - President Barack Obama summoned leaders of both parties to the White House to hammer out a deal to stave off a U.S. debt default with the potential to trigger a major, worldwide financial crisis.
Speaking Tuesday, Obama called for a deal to raise the nation's borrowing limit that not only cuts spending, as opposition Republicans are demanding, but also raises revenues in the form of tax increases — something that they violently oppose.
"We need to come together over the next two weeks to reach a deal that reduces the deficit and upholds the full faith and credit of the United States government and the credit of the American people," Obama said at the White House.
"We've made progress, and I believe that greater progress is within sight, but I don't want to fool anybody — we still have to work through real differences," the president said.
Raising the U.S. debt ceiling, usually little more than a formality in most years, has turned into a game of political brinksmanship ahead of the 2012 presidential elections with Republicans demanding huge spending cuts as the price for their support.
Although not required to raise the debt limit, lawmakers and the administration are seeking deficit cuts in the range of $2.4 trillion over the coming decade to balance a similar increase in the debt limit — enough to keep the government afloat past the November 2012 election. Currently, the debt limit is $14.3 trillion.
It remained unclear where compromise could be found. Democrats are refusing to sign off on cuts of such magnitude without at least some tax increases. Republicans say they won't sign off on any tax hikes at all, including those Obama wants targeting the wealthiest Americans or closing loopholes to corporations.
"We're not dealing just with talking points about corporate jets or other 'loopholes,'" said House Speaker John Boehner, a Republican. "The legislation the president has asked for — which would increase taxes on small businesses and destroy more American jobs — cannot pass the House, as I have stated repeatedly."
Boehner said he'd be happy to join discussions at the White House but predicted they "will be fruitless until the president recognizes economic and legislative reality."
Obama insisted that any deal must include new tax revenue.
The standoff finds both parties playing to their bases, with the Republicans trying to demonstrate their fiscal conservatism and anti-tax bona fides, while Obama's Democrats want the wealthiest Americans and giant corporations to shoulder some of the burden.
Obama spoke as the Aug. 2 deadline for raising the U.S. borrowing limit came closer.
The Obama administration warns that if the debt ceiling is not raised by that date, the U.S. would face its first default, potentially throwing world financial markets into turmoil.
Many congressional Republicans indicate they're unconvinced that such scenarios would occur, and some administration officials worry that it could take a financial calamity before Congress acts.
The ratings agency Standard & Poor's has warned it would give the U.S. government its lowest credit rating if lawmakers fail to raise the borrowing limit and the United States defaults on its debt, but so far markets have remained unfazed, apparently doubting lawmakers would willingly throw the economy into a tailspin.
Still, experts say lawmakers must waste no time in making a deal if they are to have any chance of getting it finalized and passed through both chambers of Congress in time.
Republicans are insisting on at least $2 trillion in spending cuts before they'll agree to increase the debt ceiling. The White House has identified at least $1.3 trillion in spending cuts over 10 years and is proposing up to $400 billion in new tax revenue. http://ca.finance.yahoo.com/news/Obama-calls-party-leaders-cut-capress-1694858717.html?x=0

Value of building permits jumps in May after April decline: Stats Can

2011-07-08T13:26:00.001-07:00

The Canadian Press
OTTAWA - The value of building permits rose 20.9 per cent to $6.4 billion in May after a 21.5 per cent decline in April.
Statistics Canada reports the advance was driven by higher construction intentions, particularly for commercial buildings in Quebec and Alberta and multi-family dwellings in Ontario.
Permits in the non-residential sector rose 50.9 per cent to $2.7 billion after two consecutive monthly declines.
Stats Can says the gain came mainly from higher construction intentions in the commercial component in Quebec, Alberta and Ontario.
The agency reports the value of permits in the residential sector increased 5.3 per cent to $3.7 billion, largely due to advances in the value of multi-family dwellings in Quebec and Ontario.
The total value of building permits increased in every province except Nova Scotia http://ca.finance.yahoo.com/news/Value-building-permits-jumps-capress-2498573867.html

Buffett sees risks in failing to hike debt ceiling

2011-07-08T13:23:00.003-07:00

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OMAHA, Neb. (AP) -- Billionaire investor Warren Buffett said Thursday Congress is playing a dangerous game by considering not raising the U.S. debt ceiling.

The CEO and chairman of the conglomerate Berkshire Hathaway Inc. said on the cable TV network CNBC that there is no way to tell what might happen if the debt limit is not increased, but it's a dangerous idea.

Buffett compared the debate over raising the debt limit to a game of "Russian roulette" with one bullet in a revolver.

He said refusing five times out of six to raise the debt limit might not be dangerous, but the sixth time could have catastrophic consequences.

"You're playing with fire when you don't need to play with fire," he said. Buffett was in Sun Valley, Idaho, attending the annual conference hosted by investment banker Allen & Co. that attracts Wall Street and media moguls.

Congressional leaders from both political parties are scheduled to visit the White House on Thursday to talk about cutting the deficit, so a deal can be made to raise the debt limit and avoid a first-ever default on U.S. financial commitments.

Buffett said Congress raised the debt ceiling seven times during President George W. Bush's administration, so it would be silly not to do so now. If America does run up against its debt ceiling, Buffett said the roughly $4 billion the government spends each day will be missed.

"We don't need to tell the rest of the world that anytime people in Congress start throwing a tantrum that we're not going to pay our bills," Buffett said.

Berkshire Hathaway's top executive said he believes the global economy has continued to improve slowly since the fall of 2009 based on the reports he receives from all of his Omaha-based company's subsidiaries.

"Business has been getting better consistently in nearly every area except construction," Buffett said.

But Buffett said recent efforts to help Greece avoid default have not solved Europe's financial problems. He said it's clear that Europe still has lingering problems because the bonds issued by the 17 countries that use the euro currency offer significantly different yields.

"The Greek situation and the European situation is not solved," Buffett said. "They've got real problems in Europe. That doesn't mean they can't surmount them."

He said there is a lot of work to do to save the euro because a couple countries are dragging down the rest of Europe.

Berkshire owns roughly 80 subsidiaries, including railroad, clothing, furniture and jewelry firms, but its insurance and utility businesses typically account for more than half of the company's net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.

Average House Prices a Misleading Gauge of the Health of the Canadian Real Estate

2011-07-08T13:23:00.001-07:00

Market: CIBC
Detailed analysis shows a highly segmented market that will see prices drop over time, but preconditions for a market crash don't exist
TORONTO, July 7, 2011 /CNW/ - The Canadian housing market is becoming highly segmented and multi-dimensional which is making traditional measures, like average prices, increasingly irrelevant in gauging the health and state of the sector, finds a new report from CIBC World Markets Inc.
"Glancing at popular metrics such as the price-to-income ratio or the price-to-rent ratio, it is tempting to conclude that the housing market is already in clear bubble territory and a huge crash is inevitable," writes Benjamin Tal, Deputy Chief Economist at CIBC, in his latest Consumer Watch Canada report.
"Tempting, but probably wrong. When it comes to the Canadian real estate market at this stage of the cycle, any statement based on average numbers can be hugely misleading. The truth is buried in the details—and there the picture is still not pretty, but much less alarming."
He notes that while the average house price in Canada rose 8.6 per cent on a year-over-year basis in May, that number slows to 5.6 per cent if you take Vancouver out of the picture. Remove Vancouver and Toronto and the average price increase drops to 3.7 per cent.
By digging into the details on the high profile Vancouver market he found that the gap between average and median prices is reaching an all-time high. While the average house price climbed 25.7 per cent on a year-over-year basis to more than $800,000 in May, he found that by removing properties that sold for more than a $1 million there was a much more moderate price appreciation in the market. It also reduced the average sale price by $220,000 to just over $590,000.
"What makes Vancouver abnormal is the high end of its property market," says Mr. Tal. "And in this context many, including Bank of Canada Governor Mark Carney, point the finger at foreign—mainly Asian wealth—as the main driver here."
Data on the extent of the role that Asian investors have played in Vancouver housing prices is quite limited. Mr. Tal's analysis of data obtained from Landcor Data Corporation suggests that only 10 per cent of the nearly 4,500 transactions involving foreign money over the past five years were above the $1 million mark, with an average purchasing price of just under $600,000.
According to the information provided by Landcor, foreign money accounted for only 2.6 per cent of all sales during the same period. However, Mr. Tal believes that could be a serious underestimate, as it is based on where property tax assessments are mailed, and would exclude offshore buying on behalf of children or other local proxies. "There are many reasons to believe that a significant portion of what is perceived to be buying by offshore investors is, in fact, driven by Chinese immigrants that are integrated into the community but still maintain strong links to mainland China, with many residing and working in China while their family establishes roots in B.C."
"Looking beyond the average price numbers reveals a highly segmented and multi-dimensional market that is probably influenced by different forces," says Mr. Tal. "But even a multi-dimensional market can overshoot—and the likelihood is that prices in the Canadian market and its sub-segments are higher than what can be explained by factors such as income growth, rent and household formation. Given that, the housing market will eventually correct. The only question is what will be the mechanism of that correction."
Mr. Tal feels the price correction in Canada will be gradual as the two key triggers for a price crash - a significant and quick increase in interest rates and/or a high-risk mortgage market that is very sensitive to changes in economic factors - are not at play in Canada.
"In Canada, a sharp and brisk tightening cycle is unlikely. The market expects a gradual increase in short-term rates in the coming years. The rising number of mortgage holders that carry a variable rate mortgage will be the first to feel the pain. But if history is any guide, they will return quickly to the comfort of a five-year fixed rate the minute the Bank of Canada starts hiking."
He also believes that the country is in relatively good shape when assessing the two sub-segments of the mortgage market that traditionally account for most defaults: mortgage holders that carry a debt-service ratio of more than 40 per cent and those with less than 20 per cent equity in their house.
Just over six per cent of households have a debt service ratio of more than 40 per cent—a number that has risen by a full percentage point since 2008. "However, this ratio is still well below the ratio seen in 2003, when the effective interest rate on debt was more than a full percentage point higher, and no correction in house prices ensued," adds Mr. Tal.
"All other things being equal, even a 300-basis-points rate hike by the Bank of Canada would take this ratio to only just over eight per cent. Not surprisingly, Vancouver has the highest ratio of households with high debt-service ratio, followed by Toronto."
A little more than 17 per cent of the Canadian residential real estate pool is in properties with less than a 20 per cent equity position, a number that has been rising over the past few years. More than 80 per cent of households with less than a 20 per cent equity position are first time buyers.
"Digging deeper and looking at the households with both low equity positions and high debt-service ratios, we found that this fragile segment of the market accounts for only 4.6 per cent of total mortgages—a number that has been on an upward trend over the past few years," says Mr. Tal. "Shock the system with a 300-basis-points rate hike and that number would rise to a still-tempered 6.5 per cent. Historically, even in that group, the default rate has been well below one per cent. Thus, short of a huge macro shock, there does not appear to be the risk of large scale forced selling that would typically be the trigger for a precipitous plunge in the national average house price.
"As a result, while house prices are likely to adjust as interest rates eventually climb, the national pace of any correction is likely to be gradual. That could still entail a period in which housing underperforms other assets as an investment class, until rising incomes and a tame price trajectory bring the market back to equilibrium."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/cw-20110707.pdf.

Canadians slid further into debt in first quarter; credit outpaces income growth

2011-06-24T15:11:00.001-07:00

The Canadian Press
TORONTO - Statistics Canada says Canadian households slid deeper into debt in the first quarter as the use of credit outpaced income growth.
The ratio of household debt to disposable income rose to 149.47 per cent from 147.64 a year earlier.
That means Canadians owe $1.49 for every after-tax dollar they earn.
Credit market debt grew by 1.3 per cent in the quarter, while personal disposable income grew by 0.7 per cent.
Mortgage debt grew, as Canadians continued to take advantage of historically low interest rates.
However, the increase in consumer credit debt slowed along with lower household spending.
http://ca.finance.yahoo.com/news/Canadians-slid-further-debt-capress-3742141688.html?x=0

Flaherty says Canada house market shows moderation

2011-06-24T15:10:00.000-07:00

(Reuters) - Canadian Finance Minister Jim Flaherty said on Monday he continues to monitor the country's housing market, which has some "hot spots", but said the situation remained stable.
"We have seen some moderation in the housing market in Canada," Flaherty told reporters after a speech in Toronto. "There are a couple of hot spots in the country, including Vancouver, the condo market in Vancouver, but overall I'm satisfied that there is some moderation in the market."
Last week, housing figures from the Canadian Real Estate Association (CREA) showed home resale prices slipped 0.6 percent in May from April, partly because of the effect of stricter mortgage rules that came into effect in the spring. It was the first full month of data that reflected the new rules.
To try to prevent the housing market problems that led other countries into financial crisis, and to curb rising household debt levels, the government has tightened mortgage rules three times since 2008.
The CREA data showed Vancouver's hot market again had a big influence in May on the average national price, which rose 8.6 percent from a year earlier to C$376,817 ($384,507). The price gain is similar to those of the past several months, due to very high prices in some Vancouver neighborhoods and broad gains in Toronto.
Flaherty said there were no plans to take further action on mortgage rules, having just introduced the latest set, which took aim at mortgage amortization and refinancing. http://ca.finance.yahoo.com/news/Flaherty-says-Canada-house-reuters-3810404722.html

CIBC 3% Cash Back to retire on July 1

2011-06-24T15:09:00.001-07:00

Effective July 1, 2011, the Quick Close Offer's discretionary pricing and cash back for the CIBC Variable Flex Mortgage are changing. These changes allow you to stay competitive in the marketplace with a great rate and help CIBC attract clients from other financial institutions.

- The CIBC Variable Flex Mortgage no longer has a Jumbo category (3% cash back).

- The 2% cash back offer remains in effect:
The discount on the CIBC Variable Flex Mortgage decreases to 25bps off (2.60%) the posted rate from 35 bps off (2.50%) the posted rate
All other terms and conditions of the Quick Close Offer will remain them same.

4 Ways To Value A Real Estate Rental Property

2011-06-24T15:08:00.001-07:00

Stephan Abraham, On Tuesday June 21, 2011
During the first half of the 2000s, investing in real estate became more common for average Americans. With easily available financing and minimal down payment requirements many Americans made handsome profits by flipping homes. Well, as we are all aware of, this couldn't go on forever, and the real estate bubble popped in 2007, leading to The Great Recession. Notwithstanding this fundamental change, real estate investment is certainly not unprofitable. Some economic factors such as high unemployment and very strict lending standards by financial institutions have contributed to low vacancies for rentals across the United States. Perhaps real estate investors should look at rental investments as an alternative to a buy and sell approach. So, how does one go about valuing real estate rentals? Here we will introduce at a high level some ways to value rental property.
Sales Comparison Approach
The sales comparison approach (SCA) is one of the most recognizable forms of valuing residential real estate. This approach is simply a comparison of similar homes that have sold or rented over a given time period. Most investors will want to see an SCA over a significant time frame to glean any potentially emerging trends.
The SCA relies on attributes to assign a relative price value. Price per square foot is a common and easy to understand metric that all investors can use to determine where there property should be valued. If a 2,000 square foot townhome is renting for $1/square foot, investors can reasonably expect a similar rental income based upon similar rentals in the area. Keep in mind that SCA is somewhat generic; that is, every home has a uniqueness that isn't always quantifiable. Buyers and sellers have unique tastes and differences. The SCA is meant to be a baseline or reasonable opinion and not a perfect predictor or valuation tool for real estate. It is also important for investors to use a certified appraiser or real estate agent when requesting a comparative market analysis. This mitigates risk of fraudulent appraisals, which became widespread during the 2007 real estate crisis.

Capital Asset Pricing Model
The capital asset pricing model (CAPM) is a more comprehensive valuation tool for real estate. The CAPM introduces the concepts of risk and opportunity cost as it applies to real estate investing. This model really looks at potential return on investment (ROI) derived from rental income and compares it to other investments that have no risk, such as United States Treasury bonds or alternative forms of real estate investments such as real estate investment trusts (REITs).
In a nutshell, if the expected return on a risk-free or guaranteed investment exceeds potential ROI from rental income, it simply doesn't make financial sense to take the risk of rental property. With respect to risk, the CAPM considers the inherent risks to rent real property. For example, all rental properties are not the same. Location and age of property are key considerations. Renting older property will mean landlords will likely incur higher maintenance expenses. A property for rent in a high crime area will likely require more safety precautions than say a rental in a gated community. This model suggests building in these "risks" before considering your investment or when establishing a rental pricing structure.
Income Approach
The income approach focuses on what the potential income for rental property yields relative to initial investment. The income approach is used frequently for commercial real estate investing. The income approach relies on determining the annual capitalization rate for an investment. This rate is simply the projected annual income from the gross rent multiplier divided by the original cost or current value of the property. So if an office building costs $120,000 to purchase and the expected monthly income from rentals is $1,200, the expected annual capitalization rate is 10%.
This is a very simplified model with few assumptions. More than likely there are interest expenses on the mortgage. Also, future rental income may be less or more valuable five years from now than they are today. Many investors are familiar with the net present value of money. This concept applied to real estate is also known as a discounted cash flow. Dollars received in the future will be subject to inflationary as well as deflationary risk and are presented in discounted terms to account for this.
Cost Approach
The cost approach to valuing real estate states that property is really only worth what it can reasonably be used for. It is estimated by summing the land value and the depreciated value of any improvements. Appraisers from this school often espouse the "highest and best" use to summarize the cost approach to real property. It is frequently used as a basis to value vacant land. For example, if you are an apartment developer looking to purchase three acres of land in a barren area to convert into condominiums, the value of that land will be based upon the best use of that land. If the land is surrounded by oil fields and the nearest person lives 20 miles away, the best use and therefore the highest value of that property is not converting to apartments but possibly expanding drilling rights to find more oil.
Another best use argument has to do with property zoning. If the prospective property is not zoned "residential," its value is reduced since the developer will incur significant costs to get rezoned. It is considered most reliable when used on newer structures, and less reliable for older properties. It is often the only reliable approach when looking at special use properties.
The Bottom Line
Real estate investing isn't out of vogue by any stretch of the imagination. Since the last crash, however, the housing market has changed dramatically. Flipping homes financed with no money down is an artifact of the past and possibly gone forever. But real estate rentals can be a profitable endeavor if investors know how to value real property. Most serious investors will look at components from all of these valuation methods before making a rental decision. Learning these introductory valuation concepts should be a step in the right direction to getting back into the real estate investment game.
http://ca.finance.yahoo.com/news/4-Ways-To-Value-A-Real-Estate-investopedia-3634752025.html?&mod=pf-sp14c

Carney warns of trouble in overheated housing market once interest rates rise Keven Drews, The Canadian Press

2011-06-16T17:38:00.001-07:00

VANCOUVER - Canada's housing market is entering overheated territory and many Canadians could be financially hurt once interest rates begin to rise, Bank of Canada governor Mark Carney is warning.
The central banker on took his case for moderation on Wednesday to Vancouver, the epicentre of Canada's hot housing market where he says home prices are now on par with Hong Kong and Sydney, Australia, as they relate to average incomes.
And some sectors of the market, like condos in big cities, could overshoot because of speculation from foreign investors.
The housing market is still expected to moderate, he said, but recent signals have been mixed.
Carney has been cautioning Canadians for about two year against getting overextended on mortgage borrowing, but Wednesday's speech to the Vancouver Board of Trade suggested some frustration that his words have mostly fallen on deaf ears.
The governor said he has been expecting the housing market to slow, but besides some stuttering signals, it has picked up again of late along with borrowing and mortgage credit.
Once again, Carney repeated his warning to Canadians about becoming overextended.
"It is important that it's emphasized, because it can be forgotten, that we are living in extraordinary times with interest rates that are unusually low, that the outlook for the Canadian economy, the strength of the Canadian economy, the expectations both in the medium term and sooner than the medium term, is that rates are not going to stay at these unusually low levels," he said told a later news conference.
"And so Canadians in taking on debt, or Vancouverites, more specifically, in taking on debt, need to...ensure that they can continue to service those debts comfortably in a higher-rate environment."
Carney' speech came on the day the Canadian Real Estate Association released new data showing that average resale home prices rose 8.6 per cent in May from a year ago, and that in Vancouver prices were up 25.7 per cent to $831,555.
At those levels, Carney said Vancouverites are paying 11 times family household income for a home, a multiple similar to global housing hot spots Hong Kong and Sydney, Australia.
When asked if he had any advice to young people who hope to buy a house in Vancouver, Carney responded, "Well, get a good job. That would probably be a good one. Study hard, stay in school and get a good job. How's that?"
The situation is not as dramatic in the rest of the country, but it's bad enough, he said.
He noted that it took nearly 12 years for real estate investment to regain its peak after the 1990s recession. It has taken a year and a half this time and, in fact, average home prices are now 13 per cent higher than where they stood before the 2008-2009 slump.
Carney takes some of the blame for the unprecedented run-up in prices, since the key difference between the two eras is that he drove interest rates down to historic lows in order to salvage the economy. The policy succeeded, but at a cost of driving investment from more productive outlets of the economy to housing.
But he also lays some blame on home buyers, who he implies should know better. He said some Canadians are taking on mortgages as if they believe current ultra-low rates will last forever. They won't, he warns.
"Rates will not remain at their current levels forever," he said. "(And) the impact of eventual increases is likely to be greater than in previous cycles."
A four per cent real mortgage interest rate would see home affordability in Canada fall to the worst level in 16 years, he said. The current real mortgage interest rate, which excludes inflation, is about 2.4 per cent.
Other than issuing a general alert, Carney gave few hints what he can do about it and implied that the ball is in the federal government's court to tighten borrowing requirements again if necessary.
Carney refused to comment when asked whether the government should restrict home ownership to those with Canadian citizenship.
"Obviously, if one restricts demand and takes an important element of marginal demand out of the equation there's going to be an adjustment to price," he said.
"But those type of decisions are decisions for communities to make, and they're complex decisions, and nothing should be read into our commentary about the current environment and housing, whether it’s in Vancouver or across the country."
"We're not weighing into that issue at all."
Finance Minister Jim Flaherty this week also expressed concern with household debt — now amounting to a record $1.5 trillion in the aggregate — and noted he has tightened mortgage requirements three times in the past three years.
Carney suggested in his speech that he will use monetary policy, or interest rate setting, to impact the inflation rate and not exclusively the housing market. http://ca.finance.yahoo.com/news/Carney-warns-trouble-capress-560228003.html?x=0

Housing 'severely unaffordable' in some cities: Carney

2011-06-16T17:36:00.000-07:00

Bank of Canada Governor Mark Carney used unusually blunt language Wednesday to warn that "excesses" may exist in parts of the Canadian housing market.
Carney made the remarks during a speech to the Vancouver Board of Trade — in a city where the average home price rose by 25.7 per cent to $831,555 between May 2010 and the same month this year, according to data from the Canadian Real Estate Association.
Carney said housing in some cities is "severely unaffordable."
On average, he said, national house prices have risen 31 per cent from their trough in early 2009, and are now 13 per cent above their pre-financial crisis peak.
The central bank governor did not suggest that house prices in general are unsustainable, but he warned of the "possibility of an overshoot," or correction in prices, in the condo markets in some major cities, mainly because of ample development already under way and heavy investor demand, especially from foreign buyers and investors.
The average level of house prices nationally is now nearly 4.5 times average household disposable income, Carney said. This compares with an average ratio of 3.5 over the past quarter-century.

Home ownership costs creating 'financial vulnerabilities'

The cost of home ownership is close to its highest level since records were first kept in 1949, he said, creating 'financial vulnerabilities," should there be an economic downturn.
In fact, the bank estimates that the proportion of Canadian households that would be highly vulnerable to a downturn has risen to its highest level in nine years, despite an improving economy and low interest rates.
Carney suggested some parts of the Canadian housing market risk being dominated not by forces or supply and demand, but by the emotions of greed and fear.
"Greed among speculators and investors — and fear among households that getting a foot on the property ladder is a now-or-never proposition," he said.
Without making any reference to the bank's intentions on interest rates, Carney repeated his previous warnings that, in general, over the life of a mortgage, interest rates will often rise.
At its last meeting on May 31, the bank's monetary policy committee held its benchmark interest rate steady at one per cent, the sixth straight time the bank has opted to stand pat.

Canadians continue to rack up debts

2011-06-10T11:15:00.001-07:00

Tom Fennell, Yahoo Finance Thursday June 9, 2011,
Are rising consumer debt loads the Achilles' heel of the Canadian economy?
Before we tackle that question, let's back up a few months and revisit the lecture Bank of Canada Governor Mark Carney gave the country on rising personal debt levels, and the fact that while money is cheap today, it could get expensive again — and quickly.
"Low interest rates today do not necessarily mean low rates tomorrow," warned Carney. "Risk reversals, when they happen, can be fierce; the greater the complacency, the more brutal the reckoning."
What's happened to consumer debt levels since he scolded Canada's profligate spenders? Well, apparently nobody was paying much attention, and over the first three months of this year a new study suggests consumer debt has continued to climb.
According to the credit rating agency, TransUnion, Canadians now owe an average of almost $26,000 on their credit cards, lines of credit and auto loans.
That's an increase of 4.5 per cent, or another $1,000, over the same period last year.
The picture becomes even bleaker when you factor mortgage debt into the TransUnion report. Currently, Canadians owe just over $1 trillion in mortgage debt, and that pushes the $26,000 figure to just over $100,000 per Canadian family.
Now let's bring that debt picture into line with earned income.
According to the Ottawa-based Vanier Institute, the average Canadian family is now carrying a household debt that amounts to 150 per cent of their personal disposable income. That's the highest level in history. And stated in a starker way, for every $1,000 a Canadian family earns, they have to make about $1,500 in debt payments.
Sadly, according to TransUnion, Canadians persist in carrying large credit card balances at onerous rates. And the amount being carried on plastic only fell $25 to an average of $3,539 over the last year.
At the same time, the national credit card delinquency rate rose 11 per cent.
And despite Carney's hectoring and the rule changes surrounding lines of credit, they are still the most popular lending vehicle. Excluding mortgages, they accounted for more than 41 per cent of outstanding debt at the end of the first quarter at $33,981, up 5.9 per cent from the first quarter of 2010.
It's interesting to note that Canadian indebtedness rose as interest rates came down steadily over the last ten years. And that begs the question: what will happen when interest rates start to rise again as many analysts believe they must?
In fact, speaking earlier in June, Carney warned that while he was holding the core bank rate at one per cent, it would rise from crisis lows at near zero to what many economists believe to be a more normal rate in the six-per-cent range.
That's where broader economic conditions come to bear on debt levels.
If interest rates jump, the impact will be immediate on floating-rate vehicles like lines of credit and variable-rate mortgages. For example, someone with a 3.5 per cent variable-rate mortgage can carry a $400,000 mortgage at around $2000 a month.
If interest rates climb, and the variable rate reaches six per cent, that same mortgage would jump to almost $2,600 a month.
The debt picture also gets complicated when you compare the growth in mortgages to annual wage gains. In its annual report, the Canadian Association of Accredited Mortgage Professionals said that over the last 15 years, the annual growth rate in mortgage debt has been around 7.5 per cent. And yet wages have been increasing at around 2.3 per cent a year.
Why is that important? Simply because if consumers are already stretched to keep up because of flat-lined wage increases that have barely matched the inflation rate, they have very little room in their budgets to accommodate rising costs triggered by a surge in interest rates.
Obviously loan delinquency and home foreclosures would increase. And if you add a job-killing recession to the mix, you have the onset of a perfect storm that could see an increasing number of Canadians fall into personal bankruptcy.
Perhaps that's why Finance Minister Jim Flaherty joined Carney in warning Canadians to cut back on debt. He certainly fears that the world could be faced with another recession, given the sluggishness of the global economy and the inability of the U.S. to get its fiscal house and economy in order. "I am quite worried," said Flaherty in an interview. "We have lived three-and-a-half years now since the credit crisis started in late August, 2007. We are seeing in Europe, in particular, some very difficult situations."
Fortunately, so far the Canadian economy shows little sign of weakness with the Bank of Canada predicting growth in the three-per-cent range for this year.
But with economic stimulus programs being withdrawn in the U.S. and Flaherty vowing to turn off the spending taps in Ottawa, growth could slow sharply as the country enters 2012. If it does, Canada's debt binge could make things even worse as consumers cut back on their spending to reduce their loan balances.
Only time will tell. But for now, Canadians seem determined to ignore the warnings and keep on borrowing. http://ca.finance.yahoo.com/news/Canadians-continue-rack-debts-yahoofinanceca-3206838254.html?x=0

Canada's economy will see 3.2 per cent GDP growth this year: RBC Economics

2011-06-10T11:14:00.002-07:00

Canada's economy will see 3.2 per cent GDP growth this year: RBC Economics
Sunny Freeman, The Canadian Press
TORONTO - Canada's economy will grow by 3.2 per cent this year, helped by high commodity prices and a continued recovery in the United States, according to the latest outlook from RBC Economics.
It expects gross domestic product will grow at a respectable 3.1 per cent pace in 2012.
"Strong demand for commodities and a revival in U.S. demand for autos will drive healthy gains in exports – at an average of nine per cent per annum for the next two years," RBC chief economist Craig Wright said in a report released Thursday.
However, RBC predicts a notable shift in the makeup of domestic growth.
Although consumers were the mainstay of growth coming out of recession, the key driver will switch from households — as consumer spending slows and household debt levels rise —to business-driven growth as corporate investments pick up, the report said.
The positive outlook projects that lingering global economic crises — such as European debt and tensions in North Africa and the Middle East that are driving oil prices higher, and disappointing U.S. economic indicators — will begin to fade in coming months.
RBC’s report suggests that the economy in the United States, Canada's largest trading partner and a key concern for forecasters north of the border, is moving into expansion mode. The bank projects growth in the U.S. economy will increase 2.7 per cent this year and 3.4 per cent in 2012.
Despite current global economic uncertainties, Canada's economy posted a 3.9 per cent gain in the first quarter of the year on the back of higher commodity prices, and growth is expected to moderate just slightly over the rest of the year.
“With more than 50 per cent of Canadian exports linked to natural resources, higher commodity prices have provided a substantive and positive boost to our economy,” said Wright.
“Higher prices mean higher domestic income growth.”
Rising commodity prices also helped buoy the loonie above parity with the U.S. dollar in the five months of 2011, and the bank expects it to remain elevated for the rest of the year, which helps to spur business investment, Wright said.
“The dollar has made a remarkable recovery from the all-time low we saw in 2002, to within six per cent of its all-time high,” he said.
"This improvement has caused a dramatic fall in the price of imported machinery and equipment and will likely drive Canadian companies to purchase imported goods to update their capital stock and improve Canada’s productivity performance.”
The forecast factors in the assumption that Canada’s output gap will be eliminated in the second quarter of 2012 as the headline and core inflation rates are expected to hover close to the Bank of Canada's two per cent target.
“At this point, the level of uncertainty about the global economic outlook — worries about sovereign debt and fiscal balances — is driving the Bank of Canada to hold the policy rate at its current level of one per cent,” Wright said.
“As concerns start to dissipate, attention will turn to domestic fundamentals.”
RBC believes the Bank of Canada will likely raise its key interest rate from the current one per cent this fall, and it will sit at 1.75 per cent by the end of 2011 and three per cent by the end of 2012.
That could put further pressure on Canada's housing market, which is already slowing due to eroding home affordability amid sky high home prices.
“Rising interest rates will largely be balanced by growing income levels and ultimately contribute to a stable home price environment,” Wright said.
“With interest rates heading higher, we anticipate that the volume of home sales will calm and prices will post very modest gains."
At the provincial level, Alberta will lead economic growth with Newfoundland and Labrador following closely behind.
The other Prairie provinces, Saskatchewan and Manitoba, are expected to achieve above-average growth this year, while Ontario will post average growth and British Columbia and the Atlantic provinces fall to the lower end of the pack. http://ca.finance.yahoo.com/news/Canada-economy-see-3-2-per-capress-1243280093.html?x=0

Top 8 House-Hunting Mistakes

2011-06-10T11:14:00.001-07:00

Amy Fontinelle,
Buying a home is a very emotional process, but if you allow those emotions to get the best of you, you may fall prey to a number of common home buyer mistakes. Since buying a home has many far-reaching implications - ranging from where you will live to how hard it will be to make ends meet - it's important to keep your emotions in check and make the most rational decision possible.

There are eight common emotional mistakes that people make when buying a home. Avoiding these pitfalls will help you find the best home-sweet-home.
Mistake 1: Falling in Love With a House You Can't Afford
Once you've fallen in love with a particular home, it's hard to go back. You start dreaming about how great your life would be if you had all the wonderful things it offered - the lovely, tree-lined streets, the jetted bathtub, the spacious kitchen with professional-grade appliances. However, if you can't or won't be able to afford that house, you're just hurting yourself by imagining yourself in it. To avoid the temptation to get in over your head financially, or the disappointment of feeling like you're settling for less than you deserve, it's best to only look at homes in your price range.
Start your search at the low end of your price range - if what you find there satisfies you, there's no need to go higher. Remember, when you buy another $10,000 worth of house, you're not just paying an extra $10,000 - you're paying an extra $10,000 plus interest, which might come out to double that amount or more over the life of your loan. You may be better off putting that money toward another purpose.
Mistake 2: Assuming There's Nothing Better Out There
Unless you are a high-end buyer looking at custom homes, chances are that for any home you find that you like, there are quite a few others that are nearly identical to it. Most neighbourhoods have multiple homes that are the same model. Further, most neighbourhoods are full of homes that were all constructed by the same builder, so even if you can't find an identical model for sale, you can probably find a house with many of the same features. If you're considering a condo or townhouse, the odds are also in your favour.
Even when you have a long list of must-haves, there are probably several homes out there that can meet your needs. If there are snags with the home you've decided you like - such as major repair issues, an inflexible asking price or a difficult possession date - consider moving on. Being open to keep looking will save you from making rash decisions you might regret later.
Mistake 3: Being Desperate
When you've been looking for a while and you're not seeing anything you like - or worse, you're getting outbid on the houses you do want - it's easy to get desperate to get into your new house now. However, if you move into a house you'll end up hating, the transaction costs to get rid of it will be costly. You'll have to pay an agent's commission (up to 5-6% of the sale price) and you'll have to pay closing costs for the mortgage on your new house. You'll also deal with the hassle and expense of moving yet again. If you decide not to move but to try to make the best of what you have, remember that alterations and renovations are expensive, time-consuming and stressful. If you have time on your side, it's OK to wait until something that suits you comes along - as long as your demands are realistic for your budget, you are bound to find something you live with.
Mistake 4: Overlooking Important Flaws
For any of the three reasons we just discussed, you might be tempted to ignore major problems with the house that will be difficult, expensive or impossible to change. Carefully consider your options before you make a commitment, and consider waiting until something better comes along. New houses come on the market every day.

Mistake 5: Overestimating Your Handyman Skills
Don't buy a fixer-upper that's more than you can handle in terms of time, money or ability. For example, if you think you can do the work yourself then realize you can't once you get started, any repairs or upgrades you were planning to make will probably cost twice as much once you factor in the labour - and that may not be in your budget. Not to mention the costs involved to fix anything you may have started and the fees to replace the materials you wasted. Honestly evaluate your abilities, your budget and how soon you need to move before purchasing a property that isn't move-in ready.
Mistake 6: Rushing to Put In an Offer
In a hot market, it may be necessary to pull the trigger very quickly if you find a home you like. However, you have to balance the need to make a quick decision with the need to make sure the home will be right for you. Don't neglect important steps like making sure the neighbourhood feels safe at night as well as during the day and investigating possible noise issues like a nearby train. Ideally, you'll be able to take at least a night to sleep on the decision. How well you sleep that night and how you feel about the home in the morning will tell you a lot about whether the decision you're about to make is the right one. Taking the time to consider the decision also gives you a chance to research how much the property is really worth and offer an appropriate price.
Mistake 7: Dragging Your Feet
It's a tough balancing act to make sure you make a careful decision, but don't take too long to make it. Losing out on a property that you were almost ready to make an offer on because someone beat you to it can be heartbreaking. It can also have economic consequences. Let's say you are self-employed. Perhaps for you more than anyone else, time is money. The more time and energy you have to take out of your normal activities to search for a house, the less time and energy you have available to work. Not dragging out the homebuying process unnecessarily may be the best thing for your business, and the continued success of your business will be essential to paying the mortgage. If you don't pull the trigger quickly, someone else might, and you'll have to keep looking. Don't underestimate how time-consuming and routine-disrupting house shopping can be.
Mistake 8: Offering Too Much
If there's a lot of competition in your market and you find a place you really like, it's all too easy to get sucked into a bidding war - or to try to pre-empt a bidding war by offering a high price in the first place. There are a couple of potential problems with this. First, if the house doesn't appraise at or above the amount of your offer, the bank won't give you the loan unless the seller reduces the price or you pay cash for the difference. If this happens, the shortfall on your bid as opposed to your mortgage will have to be paid out of pocket. Second, when you go to sell the house, if market conditions are similar to or worse than they were when you purchased, you may find yourself upside down on the mortgage and unable to sell. Make sure the purchase price for the home you buy is reasonable for both the house and the location by examining comparable sales and getting your agent's opinion before making an offer.

Conclusion
It's natural for emotion to come into play in the home-buying process. Buying a house is a big decision, but this is exactly why you need to ensure you are making rational choices, rather than getting wrapped up in the notion of a dream home. Slow down, overcome your emotions and, ultimately, make a home-purchase decision that's good for both your feelings and your finances. http://ca.finance.yahoo.com/news/Top-8-HouseHunting-investopedia-617819117.html?&mod=pf-sp14e

Bank of Canada maintains overnight rate target at 1 per cent

2011-05-31T16:22:00.001-07:00

OTTAWA, May 31, 2011 /CNW/ - The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
The global economic recovery is proceeding broadly as expected in the Bank's April Monetary Policy Report (MPR). The U.S. economy continues to grow at a modest pace, limited by the consolidation of household balance sheets. Growth in Europe is maintaining momentum, although the risks related to peripheral economies have increased. The disasters that struck Japan in March are severely affecting its economic activity and causing temporary supply chain disruptions in advanced economies. Commodity prices have declined recently but are expected to remain at elevated levels, supported by tight global supply and very strong demand from emerging markets. These high prices, combined with persistent excess demand conditions in major emerging-market economies, are contributing to broader global inflationary pressures. Despite the challenges that weigh on the global outlook, financial conditions remain very stimulative.
In Canada, the economic expansion is proceeding largely as expected in the April MPR. The economy grew at an annual rate of 3.9 per cent in the first quarter, reflecting continued strong business investment, smaller contributions from household and government spending, and a modest drag from net exports. Although temporary supply chain disruptions are expected to restrain growth sharply in the current quarter, this is expected to be unwound in subsequent quarters.
While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.
The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.
Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered. http://www.newswire.ca/en/releases/archive/May2011/31/c9084.html

Banks face lending squeeze

2011-05-27T10:23:00.001-07:00

John Greenwood, Financial Post •
Economic uncertainty and rising concern about consumer debt levels are shaking up the cozy world of Canadian banking, forcing players to compete ever more fiercely on rates just to preserve market share.
Canadian Imperial Bank of Commerce and TorontoDominion Bank, which reported lower-than-expected second-quarter results Thursday, both acknowledged that intense competition in their core business has resulted in lower net interest margins -the difference between what it costs them to borrow funds and what they charge customers.
Speaking on an analyst conference call, Tim Hockey, head of TD's Canadian banking operation, said he expects the market "to continue to be quite competitive" and that will "keep up the pressure on margins."
TD posted second-quarter profit of $1.3-billion, or $1.46 a share, up 13% on the back of higher loan volumes and lower credit provisions. The main driver was the domestic retail operation which posted income of $847-million, up 11% from the same period last year on higher loan volumes.
Meanwhile, the U.S. business had a profit of US$315million, about flat with the previous quarter but 31% higher than the same period in 2010.
The main reason for the stronger results was a drop in provisions for bad loans as Canada's second-largest bank set aside $343-million of provisions for credit losses in the three months ended April 30, compared to $414-million in the previous quarter and $365-million in the same period last year.
CIBC's results reflected a similar theme as the country's fifth-largest bank reported a profit of $678-million, or $1.60 a share, up 3% on falling credit loss provisions.
The retail lending business had net income of $553-million, up $66-million as the bank benefited from higher loan volumes.
CIBC set aside $194-million in provisions for bad loans in the second quarter, compared to $316-million last year.
Since the end of the financial crisis in 2009 the banks have been steadily lowering credit provisions to the point that they are now close to the level they were at before the turmoil began. Analysts said the problem is that players are left with less room to lower provisions in the future, taking away what has been an important earnings driver.
At the same time banks are competing harder than ever for business and that's forcing them to accept lower rates on loans and other products in order to hold onto their place in the market.
TD's net interest margin in the second quarter was 2.78%, down 14 basis points from last year. By comparison, the net interest margin at CIBC Retail Markets fell to 2.79%, the lowest since the second quarter of 2009.
In the aftermath of the crisis the economy recovered and consumers started spending again, and the impact on real estate -and bank's mortgage portfolios -was dramatic. But in the face of growing uncertainty about the economy and the realization on the part of consumers that they need to pay down debt consumers are borrowing less and at the same time businesses have yet to take up the slack. That's putting pressure on lenders, forcing them to cut prices to hold onto marketshare.
At first, conventional wisdom was that the price competition would be transitory and that the industry would return to more normal conditions but players have come to "the realization that this is going to be a more competitive market for banks than it has been historically," said Brad Smith, an analyst at Stonecap Securities.
Shares in CIBC fell $3.30, to $81.15. TD slipped $1.27, closing at $84.02.
Analysts said pressure on lenders is set get even tighter as consumers respond to tougher mortgage rules by buying fewer homes and cranking back on credit card debt.
Bank of Montreal kicked off earnings season on Wednesday, posting income of $800million, ahead of analysts estimates. National Bank of Canada, which came out Thursday, also exceeded expectations.
The pressure on lenders is exacerbated by declining activity in capital markets. A key driver in the aftermath of the crisis, the banks' capital markets operations have run into trouble in recent quarters amid a slump in trading opportunities and renewed sovereign debt concerns.
Next to report results is Royal Bank of Canada -the country's largest bank and most valuable corporation -which comes out Friday. http://www.financialpost.com/news/Banks+face+lending+squeeze/4846849/story.html

BoC rate hike on hold until September: RBC

2011-05-25T12:10:00.001-07:00

Eric Lam Financial Post May 24, 2011
The Bank of Canada’s plan to raise interest rates and exit its stimulus program has been delayed to September due to renewed uncertainty about the fiscal crunch in Europe and its potential spillover effects into Canada, the team at RBC Economics said Tuesday.
Dawn Desjardins, assistant chief economist with RBC, expects the BoC to maintain its 1.00% rate until September, and has cut the forecast rate to 1.75% by the end of 2011 from 2.00%. RBC maintains expectations for the overnight rate to hit 2.5% in mid-2012, and forecast GDP growth of 3.2% in 2011 and 3.1% in 2012.
RBC had originally forecasted rate hikes in July, September, October and December this year. The bank now only expects hikes in September, October and December, Ms. Desjardins said in an e-mail.
“Combined with already-present downside risks to domestic growth in the second quarter, the Bank of Canada is likely to remain on the sidelines longer than we previously thought,” she said in a note to clients. “Complicating the outlook are global developments with the European sovereign debt crisis bringing fiscal and debt rating concerns to the forefront for investors. In the United States, economic surprises have been to the downside.”
So far, the Canadian economy looks to be holding steady with data suggesting 0.3% growth in March after a dip in February. Monthly growth figures put the economy on pace for 3.7% growth with risks on the upside.
Persistent strength in housing and growth in household credit, however, means the BoC cannot wait too long before taking action to avoid inflationary pressure.
“On balance we remain comfortable with our forecast of real GDP growth of 2.8% annualized in the second quarter although unlike in the first quarter where the risks are to the upside, the risks to our Q2 forecast are to the downside,” she said. http://business.financialpost.com/2011/05/24/boc-rate-hike-on-hold-until-september-rbc/

ATLANTIC CANADA REMAINS AN AFFORDABLE HOUSING MARKET DESPITE HIGHER HOME PRICES: RBC ECONOMICS

2011-05-20T15:25:00.001-07:00

Friday, May 20, 2011

TORONTO, May 20 /CNW/ - Atlantic Canada's housing affordability advantage diminished slightly in the first quarter of 2011, according to the latest Housing Trends and Affordability report issued today by RBC Economics.

"A continued rebound in housing market activity in the region has heated up property values a few degrees in the early part of 2011," said Robert Hogue, senior economist, RBC.

Increased demand for homes helped to restore some pricing power to sellers in Atlantic Canada and led to home prices rising between 2.0 per cent and 3.8 per cent, depending on the housing type. Brisk home resale activity was led by sizeable gains in St. John's, which further reversed some of the notable declines that occurred in the middle of 2010.

"The rise in property values in Atlantic Canada in the first quarter contributed to eroding this region's long-standing affordability advantage relative to most other Canadian markets," added Hogue. "Even still, the region's affordability levels remain among the most attractive in the country."

RBC's fourth quarter housing affordability measures for Atlantic Canada, which capture the region's proportion of pre-tax household income needed to service the costs of owning a home, increased for all housing types in the latest period. Detached bungalows showed the most significant rise, moving to 32.2 per cent (up 0.9 of a percentage point), while standard two-storey homes and condominiums were close behind, rising by 0.7 and 0.6 of a percentage point, respectively, to 37.1 and 26.3 per cent.

The majority of Canadian markets experienced weakened affordability in the first quarter of 2011. Most notable was the sizeable deterioration in British Columbia. More specifically, Vancouver saw significant gains in property values, which drove the already elevated cost of homeownership even higher. Quebec's homebuyers also faced noticeable rises in ownership costs, while those in Atlantic Canada saw their affordability advantage somewhat diminish. The picture remained mixed in other areas of the country, with Ontario, Alberta and Saskatchewan experiencing ups and downs in ownership costs, depending on the housing type.

"Despite the latest erosion in affordability, provincial levels generally continue to stand near their long-term averages, suggesting that owning a home remains affordable or, at worst, slightly unaffordable across Canada - with Vancouver being a notable exception," said Hogue.

RBC's housing affordability measure for a detached bungalow in Canada's largest cities is as follows: Vancouver 72.1 per cent (up 3.4 percentage points from the last quarter), Toronto 47.5 per cent (up 0.8 of a percentage point), Montreal 43.1 per cent (up 2.0 percentage points), Ottawa 39.0 per cent (up 0.4 of a percentage point), Calgary 35.9 per cent (up 0.9 of a percentage point) and Edmonton 31.5 per cent (up 0.5 of a percentage point).

The RBC housing affordability measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.

Highlights from across Canada:
British Columbia: Strong home price increases reduced affordability in the province in the first quarter. The RBC measures for British Columbia rose between 0.8 of a percentage point and 1.8 percentage points, the most significant increases of all the provinces. The lack of affordability will continue to weigh on local demand and could potentially cause painful market disruptions in the period ahead.
Vancouver affordability continued to wane, as measures climbed between 1.0 percentage point and 3.4 percentage points, and moved closer to all-time highs.

Alberta: Stable or slightly declining prices, contributed to substantial improvements in affordability in Alberta last year. While market conditions have become more balanced in recent months, there remains very little pricing momentum in the province. The RBC measures for all housing categories in Alberta stood below their long-term average in the first quarter.
There are tentative signs that the Calgary market is finally firming up. Area homebuyers are benefiting from attractive affordability, which remained the best among Canada's major cities.

Saskatchewan: Following solid performance in the second half of last year, some softening in property values in the early months of 2011 led to a further decrease in the cost of owning a home in Saskatchewan. The RBC measures for bungalows and two-storey homes fell by 0.7 of a percentage point in the first quarter, representing a third consecutive quarterly improvement in affordability. Condominium apartments bucked this trend and saw their affordability modestly deteriorate in the face of higher prices.

Manitoba: Housing affordability continues to be attractive in Manitoba, with little change registered in the first quarter. Measures rose by 0.1 of a percentage point for detached bungalows, declined by 0.2 of a percentage point for condominium apartments and stayed even for two-storey homes. Manitoba is still one of only two provincial markets (alongside Alberta) where affordability measures stand below long-term averages for all housing categories.

World debt will impact Canada as well, says Carney

2011-05-20T15:17:00.000-07:00

OTTAWA — Canada’s fiscal advantage will only go so far in protecting the country against a debt crisis growing in the world’s advanced nations and Asia’s emerging economic powerhouses, Bank of Canada governor Mark Carney warns.
Trying out a theme he will likely take to Washington later this week, Carney told the Canadian Club of Ottawa on Monday that the world is in the midst of a major economic power shift and governments must prepare by getting their fiscal houses in order.
Advanced economies face a protracted period of slow growth as they struggle to come out from under a mountain of debt, while emerging economies such as China will face the opposite challenge of restraining inflation.
“In this environment, domestic macro stability is paramount,” he said in notes from the speech released prior to his address.
“Sustained fiscal adjustment is now required in most advanced economies. Debt-to-GDP (gross domestic product) in G7 countries is now the highest since the Second World War. The age of austerity is not a slogan but a timetable.”
The issue of debt in Europe and increasingly in the United States has become one of the key challenges for the global economy, both in the long and short terms.
Last week, Finance Minister Jim Flaherty took his concern about the U.S. debt situation to Washington, since what happens there has direct implications for Canada on everything from exports, to interest rates to the value of the loonie.
Carney said experience suggests when debt exceeds 90 per cent of GDP, economic growth will slow, and that is a situation facing most of Canada’s major trading partners, particularly the U.S.
Canada is one of the few advanced economies that is not in that position — debt to GDP is projected to start falling as both Ottawa and the provinces move to balanced budgets. But that doesn’t mean Canada won’t be sideswiped, as it was in the 2008 recession when a financial meltdown among other countries submarined Canadian exports, Carney said.
“Fiscal slippage by some major countries may increase interest rates for all,” he said. Moreover, if growth in the U.S. and Europe is slowed, Canadian exports will again feel the pain.
The governor gave no hint about his own long-term plans for interest rates in Canada, suggesting that he will not hike the policy rate on May 31.
The transformation in the world, with three quarters of growth coming from emerging markets, does present an opportunity for Canadians, Carney added, but so far the corporate sector has not taken full advantage of it. Emerging market growth has boosted demand for commodities, leading to higher prices that have stimulated production and investment in the Canadian sector, he notes.
But the corollary is that only 10 per cent of Canada’s exports go into these fast-expanding markets and taking commodities out of the equation, Canada’s exports share into these markets has been almost halved in the last decade.
“Increasing market share in emerging markets will require sustained efforts to develop trade, technical and academic partnerships,” he said. “In tandem, Canadian business needs to improve its competitiveness, source new suppliers and prepare to manage in a more volatile environment.” http://www.therecord.com/news/business/article/533033--high-debt-in-u-s-and-other-countries-will-impact-canada-as-well-says-carney
Have a great day! Here are the MERIX rate specials for your reference.

Gas prices keep inflation high at 3.3%

2011-05-20T15:16:00.000-07:00

Higher prices at the gas pumps kept Canada's annual inflation rate at a near three-year high of 3.3 per cent in April, Statistics Canada reported Friday.

Gasoline prices jumped more than six per cent over the month and 26.4 per cent in the past year, the agency said.

It's the second straight month that soaring energy costs have driven the inflation rate above the range of one to three per cent that the Bank of Canada is comfortable with. Most economists had actually expected the rate to come in a bit higher, at 3.4 per cent, because of huge gas price increases.

Earlier this week, Bank of Canada governor Mark Carney said he expected energy prices would keep total inflation above three per cent "in the short term," but he predicted a return to the central bank's two per cent target by the middle of 2012.

The core inflation rate, which excludes such volatile components as fuel and fresh fruit and vegetables, eased a tenth of a percentage point, to 1.6 per cent in April — further evidence that underlying inflation remains relatively subdued.

"The modest pullback in the annual rate after last month’s pop and seeing some impact from the strong loonie is encouraging," BMO chief economist Sherry Cooper said.

On a month-to-month basis, prices rose 0.3 per cent in April. That was a big drop from the 1.1 per cent monthly increase recorded in March.

Overall inflation pressure also came from food prices, which have risen 3.3 per cent in the past year. and in shelter costs, which rose 2.3 per cent.

Alcohol and cigarette prices also rose, partly because of provincial tax increases on tobacco in New Brunswick and Prince Edward Island.

The only notable price drops came in clothing and footwear.

"This month’s inflation report provided evidence that retailers are passing currency appreciations onto consumers," TD economist Diana Petramata said.

For the fourth straight month, Nova Scotia had the country's highest annual inflation rate — 4.2 per cent — while Iqaluit's 1.3 per cent was the lowest regional rate.

Nine signs you can't afford a mortgage

2011-05-03T12:31:00.001-07:00

Michele Lerner Investopedia.com
While plenty of individuals live from paycheque to paycheque, most consumers know they should be saving money and reducing debt. The recession has drummed that concept into everyone's head as people have watched their neighbours and friends lose jobs and sometimes their home.
Many people say that money worries keep them awake at night, but that doesn't necessarily translate to imminent bankruptcy. How do you know when you are truly teetering on the edge of a financial disaster versus simply needing to do a little belt-tightening?
Here are nine signs that indicate you are heading for trouble and may be unable to pay your mortgage in upcoming months:
1. Late Fees
If you missed a payment or let your bill go past due because you didn't have the money to pay your mortgage or another bill on time, you need to re-evaluate your budget. Not only does this indicate an imbalance between your income and expenditures, but it will also ruin your credit score, potentially causing your creditors to increase your interest rate.
2. You Can't Pay All of Your Bills
Every month, you are forced to decide which bills to pay and which bills to ignore. A lot of people opt to pay their credit card bill to stop harassment from the credit card company and to make sure they have available credit. But it is far more important to pay the bills that protect your home first. Always pay your mortgage first so that you will have a place to live. Next, pay for your car so that you can get to work and keep your job.
3. Making Minimum Payments on Credit Cards
In your mind, paying the minimum due on each bill may mean you are keeping up with your financial commitments, but financial experts know that minimum-only payments are a key indicator of financial distress. While this may mean that you carry too much debt, this also means that all your income is barely covering your spending. Take a careful look at your mortgage payment, other debts and your income to get back on track. Paying only the minimum on credit cards will extend your debt for years and amass expensive interest payments.
4. No Emergency Savings
While amassing six to 12 months of funds to cover you expenses, as many financial planners now recommend, may be a monumental task, every homeowner should have at least one month's worth of expenses in the bank. At the very least, you need to have enough money in a savings account or a money market fund to pay your mortgage for one month if your income drops or disappears. If you cannot save that much money you need to seriously evaluate your overall household budget.
5. You Can't Afford Maintenance
Your home needs to be painted and your dishwasher broke two months ago. If you are ignoring basic maintenance because you cannot afford to buy paint or call a repairman, this is a significant indication that you are in financial trouble. Not only does this show that you don't have any emergency savings or a home maintenance budget, but this will also reduce the value of your home.
6. Reduced Income
Money is already tight and now your work hours have been reduced or you have been laid off. If meeting your monthly budget depends on every dime you earn, then even a small reduction in income can be a disaster. Search for a new job or a second job and, at the same time, start slashing your budget as much as you can.
7. Using Credit or Cash Advances to Pay Bills
You are using your credit cards or, even worse, cash advances on credit cards to pay other bills such as a utility bill or to buy groceries or just to have cash in your pocket. This is a strong indication that your spending is outpacing your income and it is extremely expensive. You need to put yourself on a debt management program or perhaps meet with a credit counselor to straighten out your finances.
8. Using Your Retirement Fund
You have borrowed money from your retirement account for your mortgage payment or other debt. This could seriously jeopardize your future financial security.
9. You're Maxed Out
One or more of your credit card balances has reached or, worse, gone over the limit. If you are transferring your balances to new accounts in order to avoid paying the debt, this is a sign of a financial imbalance. If you are applying for new credit cards because your other cards have reached their limit, you are in serious danger of a financial meltdown. While you may be making your mortgage payments just fine, if you cannot control your use of credit cards it can be an indication that housing payments are too high.
While these financial woes can mean that you cannot afford your home, they may also be a sign that your spending is out of control. For most people, the mortgage payment is the largest monthly bill, so they often assume that the size of their mortgage is the problem. If your housing payment fits into that budget but you are having difficulty making your payment, then the issue may be that you have taken on too much other debt. Whether the problem is your mortgage or your other debt, you need to find a way to reduce your spending and/or boost your income before the situation gets worse.
The Bottom Line
Handling financial problems is never easy, but the first step is always to know what you owe. Solutions can only become clear once you have every bill written down with the amount owed, the monthly payment and the interest rate you are being charged. Pencil and paper work just fine, or you can create a spreadsheet or invest in some personal finance software. The important thing is to know where you stand so you can create a plan that will get your money under control. http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/nine-signs-you-cant-afford-a-mortgage/article2003996/page2/

Inflation rate highest since before recession

2011-04-28T13:53:00.001-07:00

Canada's inflation rate rose to 3.3 per cent in the 12 months ending in March, the highest it has been since before the recession.

Economists polled by Bloomberg were expecting the figure to come in closer to 2.8 per cent.

Energy prices increased 12.8 per cent during the period, with gasoline prices specifically increasing by 18.9 per cent.

But prices increased on all eight components the agency tracks. Food increased 3.3 per cent as the price for fresh vegetables rose by 18.6 per cent.

Province March rate (%) February rate (%)
Newfoundland and Labrador 3.2 2.9
Prince Edward Island 2.4 1.9
Nova Scotia 3.9 3.4
New Brunswick 3.1 2.2
Quebec 3.3 2.2
Ontario 3.6 2.5
Manitoba 2.8 2.1
Saskatchewan 3.0 2.2
Alberta 2.0 1.2
B.C. 3.1 1.8
Whitehorse, Yukon 3.2 1.3
Yellowknife, N.W.T. 3.1 1.5
Iqaluit, Nunavut 1.7 1.1
"Alongside higher prices of food and energy, the 'Olympics' effect from the prior year strongly contributed to the headline gain," Scotiabank economist Derek Holt said in a note. Prices jumped temporarily in February 2010 in response to the Vancouver Winter Olympics, reversing course the following month.

Recreation, household operations, health and personal care, alcohol and tobacco, even clothing and footwear, which normally are downward contributors to inflation, all posted modest gains compared to their levels last year.

On an annual basis, consumer prices rose at a faster rate in every province in March compared with February. Nova Scotia led the way with a 3.9 per cent increase.

Excluding energy, the Consumer Price Index was 2.4 per cent higher in the 12 months ending March.

The Bank of Canada's core index, which strips out more volatile sectors, was 1.7 per cent higher in the 12 months to March, following a 0.9 per cent rise in February.

That's the index the bank pays closer attention to in setting its interest rate decisions. Last week, the central bank held its target for the overnight rate steady at one per cent, and most economists don't expect a hike to come until July at the earliest.

"We remain of the view that the Bank of Canada is in no danger of breaching its inflation target of two per cent," Holt said.

Bank of Canada maintains overnight rate target at 1 per cent

2011-04-15T09:04:00.002-07:00

Bank of Canada maintains overnight rate target at 1 per cent
OTTAWA –The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

As anticipated in the January Monetary Policy Report (MPR), the global economic recovery is becoming more firmly entrenched and is expected to continue at a steady pace. In the United States, growth is solidifying, although consolidation of household and ultimately government balance sheets will limit the pace of the expansion. European growth has strengthened, despite ongoing sovereign debt and banking challenges in the periphery. The disasters that struck Japan in March will severely affect its economic activity in the first half of this year and create short-term disruptions to supply chains in advanced economies. Robust demand from emerging-market economies is driving the underlying strength in commodity prices, which is being further reinforced by supply shocks arising from recent geopolitical events. These price increases, combined with persistent excess demand conditions in major emerging-market economies, are contributing to the emergence of broader global inflationary pressures. Despite the significant challenges that weigh on the global outlook, global financial conditions remain very stimulative and investors have become noticeably less risk averse.

Although recent economic activity in Canada has been stronger than the Bank had anticipated, the profile is largely consistent with the underlying dynamics outlined in the January MPR. Aggregate demand is rebalancing toward business investment and net exports, and away from government and household expenditures. As in January, the Bank expects business investment to continue to rise rapidly and the growth of consumer spending to evolve broadly in line with that of personal disposable income, although higher terms of trade and wealth are likely to support a slightly stronger profile for household expenditures than previously projected. In contrast, the improvement in net exports is expected to be further restrained by ongoing competitiveness challenges, which have been reinforced by the recent strength of the Canadian dollar.

Overall, the Bank projects that the economy will expand by 2.9 per cent in 2011 and 2.6 per cent in 2012. Growth in 2013 is expected to equal that of potential output, at 2.1 per cent. The Bank expects that the economy will return to capacity in the middle of 2012, two quarters earlier than had been projected in the January MPR.

While underlying inflation is subdued, a number of temporary factors will boost total CPI inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges to the 2 per cent target by the middle of 2012. This short-term volatility reflects the impact of recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes. Core inflation has fallen further in recent months, in part due to temporary factors. It is expected to rise gradually to 2 per cent by the middle of 2012 as excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.

Information note:

A full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 13 April 2011. The next scheduled date for announcing the overnight rate target is 31 May 2011.

After temporary growth spurt, Canadian economy is slowing, says Bank of Canada

2011-04-15T09:04:00.001-07:00

OTTAWA – The Canadian economy likely expanded by a surprisingly strong 4.2 per cent in the first three months of the year, but it was a temporary burst of activity that is already over, the Bank of Canada says in its new outlook.
The central bank’s new quarterly outlook paints a picture of an economy that is settling down to a protracted period of slow growth, being held back by a high loonie, a tapped-out consumer and government spending restraint.
The bank says the current second quarter will see growth brake to two per cent, less than half what it was in the first, in part because of supply disruptions to Canada’s auto sector caused by the Japanese earthquake and tsunami. The disruption will lessen going forward, however.
On an annual basis, the economy is forecast to slow from 2.9 per cent this year, to 2.6 per cent next year and 2.1 per cent in 2013.
The overall take from the document is that the bank appears in no hurry to start raising interest rates to slow the economy because other factors are doing the job.
The bank doesn’t appear to be overly worried that high oil and food prices might trigger inflation. It briefly notes that inflation may hit three per cent, at the upper end of the bank’s acceptable range, in the next few months, but appears unconcerned.
“The combination of modest growth in labour compensation (wages) and higher productivity is expected to continue to dampen inflationary pressures, with the higher assumed value of the Canadian dollar providing further restraint,” the bank said.
Economists had been pointing to either May or July as the most likely dates for the bank to start raising its policy rate from the current one per cent, which would have the effect of also raising short-term interest rates for such things as variable mortgages.
But the dovish tone of the latest outlook suggests interest rates could remain low longer, especially amid fears that moving aggressively in advance of the United States likely would have the undesired effect of lifting the loonie even higher.
The bank does concede that it has been taken by surprise by the 3.3 per cent expansion in the fourth quarter of 2010, and the likely even stronger 4.2 per cent spurt in the first three months of this year.
That means Canada’s economy will likely return to full capacity by the middle of next year, earlier than previously expected.
But it stresses temporary factors were responsible, including stronger exports and domestic consumption, and that there is still plenty of slack in the economy.
The exports surge is already over, the bank says, and the persistently strong dollar averaging $1.03 US will continue to restrain exports going forward.
“The bank continues to project ... that the recovery in exports will be subdued relative to earlier global recoveries, with the higher level of the Canadian dollar assumed in this projection adding to long-standing competitive challenges,” it said.
Consumption may remain moderately stronger than would be assumed, the bank says, in part because high commodity prices are increasing household purchasing power through gains in the terms of trade, the difference between export and import prices. It estimates the country’s gross domestic income will rise by 4.7 this year.
Still, it believes the housing market will continue to cool and that government spending restraint will be a net drag on the economy this year.
The biggest engine of growth remains business investment, it says, in part because the higher Canadian dollar makes investment in foreign-made machinery and equipment less expensive.
Globally, the bank sees little change in the economic outlook, although it continues to stress risk factors such as high debt both among households and governments in the advanced economies, the Japanese crisis, turmoil in the Middle East and high commodity prices, especially oil.
Despite the risks, it says the global recovery is becoming more rooted and that even growth in troubled Europe is strengthening.
“The global economic recovery is projected to proceed at a steady pace over 2011-13,” the bank says, projecting growth of 4.1 per cent this year and 3.9 per cent next.
The bank has slightly lowered its forecast for U.S. growth this year to three per cent, from its previous 3.3 per cent call four months ago.
The Canadian Press http://www.therecord.com/news/business/article/516268--after-temporary-growth-spurt-canadian-economy-is-slowing-says-bank-of-canada

Credit Picture Improving, Says Tal

2011-04-01T08:27:00.000-07:00

Debt-to-income may be at 148%, but CIBC economist Benjamin Tal says the mortgage picture isn’t as bleak as some have portrayed it.

Here are snippets of his statements from a BNN interview Tuesday:

"We cannot talk about the quantity of debt without talking about the quality of debt."
"The quality of debt in Canada is totally different (than in the US before the crisis)."
"Subprime in Canada was less than 5% (of overall mortgage volume). In the U.S. it was 33%."

The number of Canadians vulnerable "in terms of very low equity on their house and very high debt service ratio" is 4%.
Canadian credit quality has been “improving” for the past few years.
Canadian credit growth is now at a “9-year low.”
The "Canadian real estate market is stagnating," which will lead to slower credit growth (because people won’t borrow as much if their homes stop appreciating).
Canadians have become more sensitive to a rise in interest rates.
When rates rise, “of course you will see some increase in defaults.” However, rates rise for a reason, Tal says—because the “economy is doing better.” When the economy improves, unemployment falls.
“The unemployment rate, not interest rates, is the number one factor impacting defaults.”
Higher rates will reduce consumption because people are forced to service more expensive debt.
There’s a silver lining to that last point. Some economists believe that higher rates (and lower consumption) will exert a drag on the Canadian economy and self-regulate interest rates somewhat—i.e. keep rates lower than they otherwise would be if Canadians were not in so much debt.

Lower inflation in February likely to keep interest rates low

2011-03-21T10:03:00.000-07:00

Canada’s annual inflation rate fell slightly in February, giving the Bank of Canada room to keep interest rates low over the next few months, economists say.
Statistics Canada said Friday its consumer price index edged down one-tenth of a point to 2.2 per cent in February, with rising energy and gas prices keeping inflation just above the Bank of Canada’s ideal two per cent target.
The core inflation rate, which excludes volatile items such as gas and food, fell to 0.9 per cent — its lowest level since the government started keeping records in 1984. Economists had predicted an annual core rate of 1.1 per cent and annual inflation to remain at the January level of 2.3 per cent.
It all means the country’s central bank might take its time when it comes to raising interest rates, said CIBC World Markets economist Emanuella Enenajor.
“These (inflation) numbers certainly make it less likely that a May rate hike could happen, we do have to admit,” she said.
“Such a soft core number suggests there’s less pressure for the Bank of Canada to really start hiking rates aggressively so it gives it a little more leeway.”
She said CIBC is for now sticking with its prediction that Canadians will see rates go above the current one per cent in May and that they will end up at two per cent by the end of the year.
Canada’s economic growth surpassed expectations in the last half of 2010 and the Bank of Canada may want to get ahead of any resulting spike in prices by raising interest rates and cooling lending conditions, she said.
Doug Porter, deputy chief economist at BMO Capital Markets said he believes the central bank is likely to stick with lower rates for the short term.
“Both headline and core inflation have eased since the start of the year, at least partly thanks to the lofty loonie,” he wrote in a note to investors, pointing out that Canada’s core inflation rate is lower than that of the U.S. and rest of the world.
“This is set to reverse next month, as Canada gets with the global program, but the low starting point is very favourable. Suffice it to say that this keeps the pressure well off the Bank of Canada to get back in tightening mode any time soon.”
Enenajor said the March inflation rate will likely depend on oil price movement during the rest of the month.
“However, expect both the annual headline and core rate to move higher in March on a year-on-year basis,” she said.
Prices were higher in February in six of the eight major categories tracked by the agency, but items like women’s clothing, footwear and travel tours cost less than a year earlier.
On a month-to-month basis, consumer goods were 0.3 per cent more expensive last month than in January, mostly due to higher energy and gasoline prices. Canadians paid 10.6 per cent more for energy during the year leading up to February, after posting a nine per cent increase in January.
Gas prices soared 15.7 per cent last month, on top of the already recorded 13 per cent increase in the 12 months leading up to January.
On a regional basis, Nova Scotia remained the province with the highest inflation rate at 3.4 per cent. Many people in that province use oil and other fuel to heat their homes.
Alberta continued to enjoy the most stable prices, with an inflation rate of 1.2 per cent.
Drivers in every province except Manitoba faced double-digit price increases for gasoline on a year-over-year basis. The price at the pumps was up 15.7 per cent from a year earlier.
The Canadian Press

http://www.therecord.com/news/business/article/503435--lower-inflation-in-february-likely-to-keep-interest-rates-low

Canadian economic growth will pick up despite crisis in Japan

2011-03-17T16:40:00.000-07:00

OTTAWA – Canada’s economy will register a strong start to 2011 despite the growing risks from crises in Japan and the Middle East, predicts a major Canadian bank.
The TD Bank’s new forecast has the Canadian economy advancing a robust 3.5 per cent in the first half of this year, before slowing slightly in the second half.
For the year, the chartered bank expects the economy will expand by three per cent, half a point more than its previous estimate and 0.6 percentage points higher than the Bank of Canada’s official projection. The 2012 growth estimate remains unchanged at 2.5 per cent.
The bank expects the economy will create about 350,000 new jobs this year, more than last year’s total, with the unemployment rate dropping to 7.5 per cent by year’s end.
The new forecast is not a big surprise — more and more of Canada’s financial institutions have been upgrading their outlooks. The economist consensus given to the Finance Department on Friday in preparation for the March 22 budget has moved to 2.9 per cent from 2.4 per cent in January.
But it is the first major revision since last Friday, when a massive earthquake and tsunami rocked the world’s third largest economy, setting off a chain of events that points to a nuclear catastrophe at Japan’s nuclear plants.
TD chief economist Craig Alexander said the outlook took events in Japan into consideration, but the bank has determined the impact on the Canadian and global economies will be minor.
While there might be supply-chain disruptions in some sectors, particularly the auto sector, it notes that Japan represents on two per cent of Canadian exports.
“You don’t want to minimize what’s happening in Japan and if the worst fears come true then Japan’s economy is going to do a whole lot worse,” said Alexander.
“But the risks are risks, they aren’t the most likely outcome. It’s still the case that the economic climate in the world is quite good. For Canada, we’re going to have moderate growth, low inflation, solid profit growth, low albeit rising interest rates ... this is actually a pretty benign economic environment.”
As devastating as the disaster in Japan is in human terms, the macro-economic impacts are small since global supply chains will find substitute sources for output to replace the affected region, Alexander explained.
Longer term, Japan’s need for materials to help in the reconstruction could help the Canadian economy, although the overall impact will also be small.
Alexander said the strengths of the Canadian economy going forward are business investment, which he expects to keep growing, exports and consumer spending.
Government restraint, higher interest rates from the Bank of Canada moving to a tighter monetary posture, and housing will be key drags.
While it predates the Japanese natural disaster, Statistics Canada released fresh data Wednesday showing that Canada’s still depressed manufacturing sector had a banner January, with activity picking up by a massive 5.5 per cent in volume terms.
The data adds credence to December’s trade surge, which even after a downward revision showed exports rising about eight per cent.
“Without a doubt, the manufacturing data shows that underlying economic growth is improving,” said David Madani of Capital Economics, although he wondered if the momentum can be sustained.
TD’s sunnier outlook, as with other major institutions that have revised upwards, stems from the strong 3.3 per cent growth recorded in the fourth quarter, a more optimistic outlook for Canada’s biggest trading partner — the United States — and higher demand for commodities.
TD suggested that growth will be particularly prominent in the Prairies and Newfoundland and Labrador, helped by stronger financial positions from the governments in those regions, and strength in commodity prices.
But even manufacturing-heavy Ontario saw its growth profile rise from 2.4 per cent to 2.9 per cent in the TD outlook.
The Canadian Press

http://www.therecord.com/news/business/article/502523--canadian-economic-growth-will-pick-up-despite-crisis-in-japan-td-says

Japan’s crisis response likely to drive up U.S. interest rates

2011-03-17T16:18:00.001-07:00

The Federal Reserve’s policy committee said nothing about Japan in the statement on its latest meeting Tuesday. But the situation must have been discussed because Japan’s response to the crisis likely will push U.S. interest rates higher.
The yen rose to its highest against the dollar since the Second World War on Wednesday. Analysts attribute much of the increase to the anticipation that Japanese insurance companies and other agencies will cash in overseas assets to pay for reconstruction.
According to Stéfane Marion, chief economist at Montreal-based National Bank Financial, most of those assets are held in the United States in the form of fixed-income securities.
Japan is the second largest holder of U.S. Treasury securities, accounting for $885.9-billion (U.S.) of a total $4.45-trillion in January, according to the Treasury Department’s latest data. (China is the biggest holder of Treasuries at $1.15-trillion. The third-largest holder is Britain at $278.4-billion, mainly because so many hedge funds are based in London.)
Mr. Marion is an economist who is immune to hype – he correctly predicted in the early days of the financial crisis that Canada’s recession would last about three quarters while many of his counterparts on Bay Street were declaring the worst.
In a note Wednesday, Mr. Marion didn’t discount reports that suggest it will cost in excess of $100-billion to rebuild from the physical damage caused by successive earthquakes and last week’s tsunami. After the Kobe earthquake in 1995, Japanese sold U.S. Treasury securities worth $30-billion in the months that followed. That was a record selloff.
A repeat of history would be felt in U.S. Treasury markets, Mr. Marion said. The Japanese selloff could be as much as 2 per cent of U.S. gross domestic product. Such a loss in demand for Treasuries would coincide with the expected end of the Fed’s asset-purchase program in June, and come at a time when the U.S. government is trying to finance a deficit that is 10 per cent of GDP. Mr. Marion estimates the result could be a half- percentage-point increase in U.S. 10-year Treasury yields.
“The U.S. Treasury market would not be immune to a large wave of capital repatriation,” Mr. Marion said.

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/daily-mix/japans-crisis-response-likely-to-drive-up-us-interest-rates/article1944768/ .

Why the BoC won’t raise rates until October

2011-03-14T07:54:00.000-07:00

Paul Vieira Financial Post March 7, 2011
OTTAWA — The improving economic backdrop has strengthened some economists’ view that the Bank of Canada will begin raising its benchmark rate in the – either in April or May – or at the very least in July, once the U.S. Federal Reserve is scheduled to end its US$600-billion asset purchase plan.
Not so the Bank of Nova Scotia. It is among the few research houses on Bay Street that believe the Bank of Canada, led by governor Mark Carney, will wait much longer – to October to be more precise. (Meanwhile, analysts at Capital Economics have reiterated their view the central bank remains on hold for all of 2010.) The main culprit: A weak U.S. dollar which could drive the loonie to US$1.08 by the end of the year.
Scotiabank economists Derek Holt and Gorica Djeric offered a detailed explanation of its view in a note to clients. Here is a summary of Scotiabank’s arguments:
• THE GREENBACK WILL KEEP SLIDING
Scotiabank is just plain bearish on the U.S. currency, as the Federal Reserve continues to pump cash into the system and keep its benchmark rate near zero. But the bank also believes there is a chance the White House further extends stimulus measures agreed upon late last year as opposed to allowing them expire – likely earning a rebuke from bond raters and fixed-income investors as Washington’s fiscal status would deteriorate further. That, in turn, would make the U.S. dollar even less favourable and likely adds to the loonie’s strength.
That could drive the loonie to as high as US1.08¢ by the end of 2011 — a full 12 cents above the most dovish view on the loonie, Scotia admits.
“This type of CAD strength imposes net tightening on the Canadian economy that we believe will do the Bank of Canada’s tightening for them. It is difficult to envision further Bank of Canada tightening when our expectation is that Canadian dollar will be lit up apart from what the Bank of Canada does.”
• GLOBAL UNCERTAINTY WILL CONTINUE
Turmoil in North Africa and the Middle East, and the impact that is having on energy prices, justifies the central bank keeping its powder dry for now. “No one has a clue as to how various geopolitical developments … will fully unfold,” Scotiabank said.
Also lurking in the background is Europe’s sovereign debt worries, and what policy makers will eventually agree to at a summit late this month.
• ECONOMIC SLACK REMAINS WIDE
Despite the better-than-expected fourth-quarter growth data, it likely didn’t have much of an impact on the country’s output gap that according to the last Bank of Canada estimate stood at 1.9% of the economy, Scotiabank said. It added it foresees risks to demand growth from government spending cuts, high commodity prices and new mortgage rules.
Furthermore, recent historical evidence would suggest there is a weak link between a narrowing output gap and inflationary pressure, especially since the Bank of Canada adopted an inflation-targeting regime about 20 years ago.
• TIGHTENING ALREADY UNDERWAY
There are developments underway which have the same impact as a rate hike, from a higher Canadian dollar; tougher mortgage financing rules which begin to take effect this month; the withdrawal of government stimulus; and, eventually, higher bond yields which will translate into higher rates on consumer loans.
• DOVISH FED
Fed chairman Ben Bernanke continues to signal a cautious, dovish approach, with expectations rate hikes begin sometime next year. Raising rates in Canada now would just push an already strong loonie higher.
• INFLATION TARGETING REGIME
It is still not clear what the Bank of Canada’s inflation-targeting regime will look like once it is renewed at the end of the year. “Therefore, it’s not clear to us if the Bank of Canada hikes the minute its operational core target gets to 2% in this cycle or is expected to do so,” Scotiabank said.
• FEDERAL & PROVINCIAL ELECTIONS
It remains unclear about whether the federal parties go on an election campaign this year once the federal budget is tabled on March 22. Still, Scotiabank said the central bank has raised rates only once during an election campaign in the last 20 years – in 2006, when the strong economy justified a hike – and will likely show caution again. Compounding matters are a series of provincial elections due in 2011, including Ontario where incumbent Premier Dalton McGuinty has repeatedly voiced concern about rate hikes and the upward push it provides to the Canadian dollar.

http://business.financialpost.com/2011/03/07/why-the-boc-wont-raise-rates-until-october/

GDP jumps, signs point to a stronger than expected Canadian economy in 2011

2011-03-07T09:12:00.001-08:00

Julian Beltrame, The Canadian Press

OTTAWA - Canada's economy ended the year with a bang in 2010, setting the stage to a strong start this year that likely bodes well for jobs, corporate profits and government finances.
Statistics Canada said Monday the economy expanded a surprisingly sprightly 3.3 per cent in the last three months last year, a full point more than the Bank of Canada had predicted and ahead of the U.S. pace. Adding to the good news, the agency revised upwards the results of the third quarter to 1.8 per cent from one per cent, enabling the country to finish the year with an overall 3.1 per cent increase in gross domestic product.
And December's 0.5 per cent growth compared with November provided a strong hand-off to Q1 performance this year, economists noted.
"On balance, this report stands up to careful scrutiny in signalling greater than expected breadth of growth in the Canadian economy," said Derek Holt, vice-president of economics with Scotia Capital.
Commenting in the House of Commons, junior finance minister Ted Menzies noted that Canada had topped the G7 in the fourth quarter, and used the occasion to attack the Opposition.
"The last thing we want is for a Liberal increase of $6 billion on (corporate) taxes that will kill jobs, that will slow growth," Menzies said.
No economists mentioned corporate tax cuts, either those that have occurred or next year's scheduled additional 1.5 percentage point trim, as a reason for the strong quarter.
Instead, analysts pointed to the 17 per cent annualized surge in exports to the world, and especially to the United States, as the key contributor. Also helping out was a 4.9 per cent jump in consumer spending.
Meanwhile corporate profits rocketed up 41 per cent in the fourth quarter.
Bank of Montreal economist Douglas Porter said the strong hand-off points to the first quarter of this year coming in even better, at around 3.5 per cent. The CIBC was more optimistic, expecting a four per cent growth rate.
Porter and his forecasting group have now joined the Royal Bank and Merrill Lynch in projecting growth for 2011 above three per cent, well above the Bank of Canada's 2.4 per cent call.
That might get Bank of Canada governor Mark Carney thinking about hiking key rates sooner rather than later, analysts said. The central bank's target overnight lending rate has been at one per cent since September, but still remains below historical norms.
The bank lowered its overnight target rate to an all-time low of 0.25 per cent in April 2009 in order to stimulate borrowing and economic activity in the wake of a deep credit crisis that began six months earlier.
The bank started edging up the rate in three quarter-point increments that began last June but paused in the monetary tightening after Canada's economy slowed last summer.
"We had been looking for the bank to wait until their July meeting before restarting the rate-hike process ... but if there is a surprise to our rate call, it now looks like the bank would go earlier, rather than wait longer," Porter said.
The flashing red light confronting Carney is that any rate increases while the U.S. Federal Reserves stays on the sidelines will likely light a fire under the already hot loonie. And that could snuff out the strongest performer in the economy —exports to countries with falling currencies like the United States.
The dollar has traded over par with the greenback almost constantly since the beginning of 2011 and got another boost Monday from the GDP data. It closed Monday at 102.94 cents US, up about three-quarters of a cent and the highest since mid-November 2007.
Carney's reaction to the strong numbers will be known Tuesday morning when the bank delivers a short analysis along with its decision on interest rates. Economists and the markets expect the central bank to keep its trendsetting overnight rate at one per cent. Of interest is whether Tuesday's bank statement includes a rosier economic outlook and a hint of when rates will start rising.
Monday's output data was also good news for the federal government as nominal growth — which is most directly tied to tax revenues, particularly on the corporate side — jumped by 7.2 per cent on the wealth effects of high commodity prices. Wages and salaries, which also impact government revenues, grew a strong 5.7 per cent in the quarter.
While encouraging, TD Bank chief economist Craig Alexander said he doubted that the momentum could be sustained for long.
"I think the 4.9 per cent growth in consumer spending was the last gasp before moderation, and I also believe export growth is not going to be as strong," Alexander explained. "If you take the third and fourth quarter and average them together, you get about two-and-a-half (per cent), and that's what we expect in 2011 for the year. That's a decent pace of growth."
There were some downside surprises in Monday's data as well. Inventory buildup fell, unusual during a recovery, and business investment in new machinery and equipment was basically flat, although the previous three quarters had been strong. http://ca.finance.yahoo.com/news/GDP-jumps-signs-point-capress-1092036072.html?x=0

Bank of Canada leaves key rate unchanged

2011-03-07T09:10:00.000-08:00

Malcolm Morrison, The Canadian Press
The Canadian dollar gave up early gains and moved lower after the Bank of Canada's announced it was leaving interest rates unchanged and warned of the negative effects of a rising currency.
The loonie was 0.12 of a cent lower to 102.82 cents US after the central bank announced its decision to keep the key interest rate at one per cent.
The bank observed that the economic recovery in Canada is proceeding slightly faster than expected and that "while consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes."
But the bank also warned that "the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance."
The currency is riding at a three-year high.

http://www.winnipegfreepress.com/business/breakingnews/canadian-dollar-up-traders-await-bank-of-canada-rate-announcement-117145598.html

Getting the Best Mortgage Rate

2011-02-24T17:35:00.001-08:00

What’s the trick to a better mortgage rate?

That’s what folks at the Bank of Canada (BoC) wanted to know.

It led them to undertake an extensive study on mortgage discounting. A draft of that study was released this month and below are its conclusions.

All quotes that follow originate from the paper’s authors: Jason Allen, Robert Clark and Jean-François Houde.

According to their research, the Canadians who get the best mortgage rates are those who:

1. Bargain

Research proves that bank profits “are significantly higher in haggle environments.” As a result, banks prefer not to put all of their cards on the table.
This leads to “price discrimination” whereby banks give better deals to skilled negotiators and well-informed borrowers, and stick it to people who don’t watch out for themselves.
2. Have larger mortgages

“…since few negotiate the renewal of their mortgage…(this) provides lenders with an incentive to attract consumers with larger loans who have large outstanding balances at the time of renewal.”
3. Use a broker

The report states that brokers lower the “search costs” of getting multiple quotes. Multiple quotes (lower search costs) are strongly correlated with lower rates.
“Over the full sample the average impact of a mortgage broker is to reduce rates by 17.5 basis points.” That’s ~$1,670 of interest savings on a typical $200,000 mortgage over five years.
Bank “mortgage specialists offer convenience to consumers, although they do not reduce search costs. This is because they work for one lender only.”
4. Do significant non-mortgage business with a lender.

“Branch managers have an incentive to offer larger discounts to consumers…that are, or will be, more profitable to the bank.”
5. Have more equity

Those who put the minimum down (e.g., 5%) “pay higher rates than other borrowers—about 12 basis points more” than those with LTVs below 85%.
6. Are new clients

“…new clients receive larger discounts than existing clients, on the order of 10 basis points.”
The authors state that research by Oxford professor, Paul Klemperer, suggests that “consumer switching costs” (i.e., the time, uncertainty and expense of changing lenders) provide banks with “market power” over existing customers.
7. Use smaller lenders

“We conclude that the larger a bank’s market share, the higher are the rates that it can charge to borrowers.”
“…Borrowers who are new clients at one of the Big 8 banks receive less of a discount than borrowers who are new clients elsewhere.”
8. Are financially capable

BoC: “…poorer borrowers may face greater levels of price discrimination when bargaining in person at the branch than they do when transacting through a broker.”
9. Have better credit

“Financial institutions…offer better rates to high credit score consumers.”
There are, of course, other factors that impact one’s mortgage rate. Moreover, there are exceptions to the findings above. As one example, not all bank reps are uncompetitive. We know some excellent mortgage specialists that are highly competitive—meaning they’re within 10 basis points of the best industry rate most of the time. (Mind you, as this Bank of Canada report concludes, that is not typical.)

If you’d like to read more, here’s the full study: Discounting in Mortgage Markets. (The BoC has published it as research in progress to invite technical feedback before journal publication.)

--------------------------------------------------------------------------------

Average Canadian family debt hits $100,000

2011-02-17T12:19:00.001-08:00

, says Vanier Institute By The Canadian Press

OTTAWA - A new report suggests the average family debt in Canada has now hit the $100,000 mark.
In addition, says the Vanier Institute of the Family, the debt-to-income ratio measuring household debt against income, is a record 150 per cent. This means that for every $1,000 in after-tax income, Canadian families owe $1,500. The Institute says in 1990, average family debt stood at $56,800, with a debt-to-income ratio of 93 per cent.
Just as the debt ratio has climbed, the savings rate has slid downward.
In 1990, says the Institute, Canadian families managed to put away $8,000 for a savings rate of 13 per cent. Last year, the savings rate had fallen to 4.2 per cent, averaging just $2,500 per household.
Other data compiled by the Institute shows the number of households behind in mortgage payments by three or more months climbed to 17,400 in the fall of 2010, up nearly 50 per cent since the recession began.
http://ca.finance.yahoo.com/news/Average-Canadian-family-debt-capress-2855603359.html?x=0

Bank Of Canada Qualifying rate increassed to 5.44%

2011-02-14T14:50:00.000-08:00

Qualifying Rate
Mortgages with variable rates or fixed terms under five years typically require that you qualify at a higher rate (called the “qualifying rate.”).

For example, if you apply for a 2.25%, 5-year variable mortgage, the lender might make you qualify at their posted 5-year rate (5.39% for example).

Qualifying rates are used to ensure borrowers can handle their payments if rates go up.

In practice, lenders use the qualifying rate to calculate your debt service ratios. Lenders then check to ensure your debt ratios are low enough to meet their guidelines.

Here are a few things to keep in mind:

Your payments are typically based on the contract rate (i.e., the regular rate you are quoted), not the qualifying rate.
As of April 19, 2010, all insured variable and 1- to 4-year fixed mortgages over 80% loan-to-value must be qualified using the posted 5-year fixed rate, as published every Wednesday by the Bank of Canada.
Some lenders also apply the Bank of Canada qualifying rate to uninsured mortgages, and mortgages with a loan-to-value of 80% or less.
Other lenders allow lower qualifying rates if the loan-to-value is 80% or less (e.g. they use a 3-year discounted fixed rate instead of the posted 5-year fixed rate).

Secondary credit card user a nobody

2011-02-14T14:49:00.001-08:00

Garry Marr, Financial Post • It was a bit of a shock to Brenda Harfield when she tried to order something on her Sears card and was told to get her husband, if she wanted to complete the transaction.
“I cut that card up and told them that everything that comes from them goes into the garbage,” says the Sydney, B.C., resident.
Her wrath was wrongly directed at the retailer but you can’t blame her. She handles all the paperwork in the household but the credit cards were in her husband’s name. Or at least they used to be.
She discovered like many woman do that being an authorized user on a card has its limitations. It’s not just a lack of access to the account for certain transactions, the account also doesn’t exist in terms of your credit history.
“Since all this happened I am the primary card holder on all of them” says. Ms. Harfied.
Smart move. My wife found this out the hard way when she applied for a card and was turned down. She came home fuming and blaming me. She immediately switched about half our credit cards to her name as the primary card holder, in an attempt to improve her credit rating.
It worked. TransUnion LLC — one of two companies providing credit ratings in Canada, the other being Equifax Inc. — agreed to let her check her rating for free after doing the same for me last month and she scored 783 out of 900, just below the 786 I received. She also discovered the credit issuer considers her hyphenated married name an alias, but that’s another column.
“If you are a secondary credit user, that doesn’t give any credit data. If you are contractual borrower or a co-signer then you could get a credit report in your own name,” says Tom Reid, director of consumer solutions for TransUnion.ca.
He says about half of the consumers that are checking on their credit report with the company are women. “You see more and more women trying to get access to credit and they want to understand more about it,” says Mr. Reid.
There are some serious risks for women who hand off responsibility for their credit to their husbands, says Robert McLister, editor of Canadian Mortgage Trends.
“If it’s a joint card, creditors will report that card’s repayment history to the credit bureaus for both co-applicants,” he says.
“Women who are joint cardholders sometimes relinquish payment responsibility to their husband, which can backfire if the husband doesn’t pay responsibly. We’ve seen cases where a wife separates from her husband but forgets to cancel her name off a joint account. The husband then racked up the card or missed payments, without the wife ever knowing. In those types of cases, the wife typically finds out after it’s too late and/or after the file has gone to collections.”
Certified financial planner Jeanette Brox said she recently met a client whose mother had never had a credit card until five years ago and then found herself in trouble when her husband landed in hospital.
“I think I heard about this in the dark ages but it’s hard to believe it exists,” says Mr. Brox.
She’s actually been dealing more with debt consolidation the last few years and one good thing about those spenders, they always make sure they have their own credit card in their own name.
“I have also seen a real determination of the woman to have her own card,” says Ms. Brox, adding she still has her share of clients where the man is listed as a primary card holder or the only person on the mortgage.
The ultimate irony might be where the woman is running the financial household but in her husband’s name. “The wives are usually the generals running things,” the financial planner says. Ms. Brox adds, however, that’s not good enough when you consider the percentage of marriages that end in divorce. It really makes sense for women to establish their credit.
“I like to have the woman have her own name on things,” she says.
So do the credit rating agencies.

http://www.financialpost.com/personal-finance/Secondary+credit+card+user+nobody/4266297/story.html#ixzz1Dt51fxe8

Think Outside the Bun - Other mortgage products 1-5 years Fix

2011-02-14T14:48:00.000-08:00

Rob McLister, CMT
That is Taco Bell’s slogan. It’s meant to remind us that fast food doesn’t end with hamburgers. Tacos are pretty tasty in their own right.
In the lending world, the closest equivalent to “the bun” is the 5-year fixed mortgage. Like hamburgers are to fast food, the 5-year fixed is to mortgages. It’s been the most popular term in Canada for years.
Yet, despite its prevalence, qualified borrowers owe it to themselves to think outside the 5-year fixed. A little extra risk can sometimes yield a lot more reward.
Fixed 5-year mortgages are especially popular in uncertain/rising rate markets (like today’s). People who can’t afford rate risk, and those who cannot qualify for shorter terms, often choose a 5-year fixed by default.
Even individuals with rock-solid financial resources frequently gravitate to 5-year terms. Much of the time that’s because they don’t want to overthink the safety of a longer-term mortgage. In other cases, it’s because no one has ever shown them how much 5-year fixed terms really cost over the long run.
No matter how popular 5-year terms are, however, mortgages are not a one-size-fits-all proposition. For those who can stomach the chance of higher rates at renewal, various compelling alternatives exist. One happens to be the 3-year fixed.
Lenders like Merix Financial, HSBC, and others still have three-year rates in the 3.35% range or better. That’s 59+ basis points below current 5-year pricing.
At those rates, (from a purely mathematical and hypothetical perspective) the 3-year fixed performs better in our internal simulations than any other term, be it a variable or a 1, 2, 4, 5, 7 or 10-year fixed.1
With major banks forecasting a 2% rate hike in 24 months, 3-year fixed mortgages model even better than variable-rate mortgages (primarily because of the 3-year’s low rate and its 36 months of rate-hike protection).
This doesn’t mean a 3-year will definitely save you more money than any other term. It just means they offer very good value with decent odds of interest savings.
On a $300,000 mortgage with a 25-year amortization, a 3.35% three-year will save you about $5,130 over a 3.94% five-year fixed. That’s over 36 months.
After 36 months, you can move into any other term you want (e.g., a 1-year fixed, variable, or another 3-year fixed). As long as your rate at renewal is about 5% or less, you’ll come out ahead of today’s 5-year fixed.
A few other points about 3-year terms:
• You can make your 3-year fixed payment equal to a 5-year fixed payment, thus shrinking your amortization even faster.
• People tend to refinance 5-year terms roughly every 3.5 years on average. Three-year terms let people out without a penalty just before many of them are getting ready to renegotiate their mortgage.
The “optimal term” (if there is such a thing) changes as rates fluctuate and as borrowers’ finances change.
All things considered, however, the three-year fixed is the sweet spot of the mortgage market at this particular point in time.

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/02/think-outside-the-bun.html

Sidebar: Economist rate forecasts are subject to error so they are only a rough guide. Your financial resources and risk sensitivity are paramount when choosing a term. Always consult a mortgage professional for advice specific to your circumstances.1 Based on amortization comparisons using major Canadian economists’ published 2- and 5-year rate forecasts, historical rate spreads, and deeply-discounted rates for all fixed and variable terms.

Housing market will be stable next two years: RBC

2011-02-11T08:49:00.000-08:00

A stronger economy will offset the effects of higher mortgage rates and keep Canadian house prices stable over the next two years, according to the Royal Bank of Canada.
In a market update that has the bank forecasting price gains of 0.5 per cent in 2011 and 1.3 per cent in 2012, economist Robert Hogue said that after two years of “gyrating wildly,” the Going forward, we see nearly perfectly offsetting forces driving Canada’s housing market,” he said. “On the upside, the economic recovery will gather strength in 2011, continuing to boost employment and family incomes. On the downside, interest rates are expected to rise.”
The Bank of Canada will likely raise interest rates by 100 basis points this year and another 150 basis points in 2012, he said, making mortgage payments more expensive for the majority of homeowners. But real gross domestic product is expected to increase to 3.2 per cent in 2011 from 2.9 per cent in 2010.
“The net effect of these forces is expected to be close to nil, thereby leaving resale activity largely flat,” he said.
There have been a flurry of forecasts issued in the last week, as the market starts the year stronger than expected
Canadian housing market is likely to be a much less interesting place for the next several years. Capital Economics issued a cautious report that suggested higher interest rates could drive prices down as much as 25 per cent over the next three years, while the Canadian Real Estate Association raised its sales forecast for the next two years as it suggested that a stronger economic recovery and continued low interest rates would keep the market balanced.
“Even though mortgage rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity,” CREA chief economist Gregory Klump said. “Strengthening economic fundamentals will keep the housing market in balance, which will keep prices stable.”
Capital Economics economist David Madani said too many optimistic forecasts are based on too short a time frame to be useful, because many mortgages won’t reset until rates rise much higher than they are today.
“Let’s balance this discussion a bit and think longer term,” he said in a recent interview. “As far as housing prices are concerned, we think they’re overvalued and we don’t see income growth closing that gap.”

http://www.theglobeandmail.com/report-on-business/economy/housing/housing-market-will-be-stable-next-two-years-rbc/article1901168/

Rate hikes could spark house price collapse, economist warns

2011-02-04T09:30:00.000-08:00

Steve Ladurantaye Globe and Mail Blog
Any move by the Bank of Canada could “easily” cause house prices to collapse, Capital Economics warns in a bleak report that suggests the Canadian housing market is likely to suffer the same sort of crash that has plagued countries such as the United States.
The report released Thursday suggests that house prices in Canada have climbed at the same pace as that in the United States, but have not fallen at the same rate. In the United States, some markets have seen prices fall as much as 50 per cent through the recession.
As the central bank raises interest rates, mortgages will become more expensive for Canadians. Add inflation to the mix, and Capital Economics predicts prices could fall 25 per cent over the next few years.
“Even small rises in official interest rates have been shown to have a big effect on homeowner confidence in other countries under similar circumstances as they can change perceptions towards the housing market very quickly,” said economist David Madani. “If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.”
Other market watchers expect higher rates to hinder price gains, but few are calling for as sharp a drop. The Canadian Real Estate Association expects sales to fall 9 per cent this year, for example, but prices are only expected to drop 1.3 per cent. It hasn’t issued a forecast beyond 2011.
The country’s bank economists have varied short-term forecasts, but there are no expectations among the largest forecasters that a crash is even likely.
Some have suggested drops of 10 per cent may be in order next year as mortgage rates move higher and households struggle to service record debt loads, and the Bank of Canada specifically mentioned the prospect of “a more pronounced correction in the Canadian housing market” as one of three key risks to the country's economy.
However, sales data from the fall market showed that fewer houses have been listed and prices were largely unchanged from a year ago.
Capital Economics' chief concern is that as the central bank raises rates, variable rate mortgages become more expensive and homeowners could find themselves priced out of their homes.
Fixed rate mortgages are tied to government bond yields, but would move in the same general direction. If a homeowner is already stretched financially, any hike could prove problematic.
However, a survey released by the Canadian Association of Mortgage Professionals released late last year showed that Canadians are confident they could shoulder higher mortgage payments without too much difficulty, with 84 per cent saying a $300 monthly increase was no problem.
If prices do fall as far as he predicts, “the knock-on effects to consumer spending and housing investment could be significant and perhaps even strong enough to push the economy into another recession.”
In January, the federal government shortened the maximum amortization period for mortgages to 30 years from 35 to help Canadians take on less debt at a time when it is at record highs.
While most private sector watchers expect the market to pull back in the second half of this year after a strong two-year run, the Capital Economics call for a 25 per cent drop is the harshest.
After hitting record highs in May, the Canadian market did slow across most of the country through the summer. Recent data from the Canadian Real Estate Association has many economists predicting a “soft landing,” however, with activity returning at a lower level and prices holding steady rather than rocketing higher each month as they have through the recovery.

http://www.theglobeandmail.com/report-on-business/economy/economy-lab/daily-mix/rate-hikes-could-spark-house-price-collapse-economist-warns/article1893062/

Top 10 Effects Of The New Mortgage Rules

2011-01-24T17:11:00.000-08:00

1.Lower purchase and refinance demand will depress mortgage volumes, sparking greater rate competition as lenders battle for less business
2.A small portion of home buyers will sprint to buy homes with a 35-year amortization before March 18, followed by downward pressure on home prices after March 18 as the amortization reduction removes market liquidity
3.Negative personal consumption and wealth will result thanks to equity take-out restrictions, rising rates and softening home prices
4.Unsecured debt usage will increase as homeowners are restricted from accessing as much of their equity, leading to even greater bank profits in unsecured lending
5.Default rates will see no material improvement
6.No significant improvement will occur in the number of risky borrowers, due to no change in TDS limits or Beacon score requirements
7.HELOC rate discounts will be less frequent as some non-bank offerings disappear and HELOC funding costs inch higher
8.Banks will pick up mortgage market share
9.More private lenders will offer high-interest uninsured 2nd mortgages to 90% LTV
10.If amortization restrictions accelerate falling home prices, we’ll see somewhat greater default risk and more negative equity situations among low-equity homeowners

Tighter mortgage rules may yet save us from ourselves

2011-01-24T17:00:00.001-08:00

By Ray Turchansky, Freelance Edmonton Journal

People who remember the days when there was only one type of mortgage -- with interest fixed at five per cent annually for the entire 25 years -- will also remember the cartoon character Pogo saying: "I have met the enemy, and he is us."
Indeed, there are times when we need to be saved from ourselves.
Two years ago, when Trevor Hamon was branch manager with Dundee Private Investors, he warned of serious peril by banks offering home-equity lines of credit and by people taking debt into retirement. I've since seen people go $100,000 into their HELOC, lose it investing on penny stocks and essentially wind up paying for their home twice.
In fact, Canadians currently owe $1.48 for every dollar of their disposable income, which is more household debt per capita than in the United States. And the argument that household debt is immaterial as long as the value of the house increases is no longer comforting. TD Economics expects existing home sales in Canada to drop about eight per cent in 2011 and prices to slip one per cent.
So the government faced two options -- raise Bank of Canada interest rates, which would soon increase mortgage rates, or tighten mortgage lending rules, which was wisely done for the third time since 2008.
Effective March 18, the maximum amortization period is reduced from 35 to 30 years for government-backed mortgages with loan-to-value ratios greater than 80 per cent; and the maximum Canadians can borrow to refinance their mortgage falls from 90 to 85 per cent of the value of their homes.
In addition, effective April 18, the government will no longer insure lines of credit with homes as collateral, such as home-equity lines of credit.
The Canadian Association of Accredited Mortgage Professionals said in a news release that it "supports measures that strengthen owners' equity in their homes and encourages the reduction of their mortgages. CAAMP is also pleased that there was no change made to the down-payment requirement as it recommended."
Less enthusiastic was Randall McCauley, vice-president of government relations at the Canadian Real Estate Association, who said in a release: "We're not sure the government needed to take this step now."
Much has been made about how reducing amortization periods from 35 to 30 years on a $300,000 mortgage at four-per-cent interest will cause monthly payments to go up $105. Instead, people should be thankful that the change will save them $42,288 in interest.
Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver, has shown that paying off a $240,000 mortgage at 5.75 per cent costs you $65,165 in interest if paid off in 10 years, but $313,410 in interest if paid off over 35 years.
Said Mastracci after the latest mortgage changes were announced: "The repayment of debt is a best investment for many, particularly in jittery times, and it's risk free."
Two rules of thumb are not to go into debt for consumer purchases using either home equity because the value of the home could drop, or retirement savings because you might not be able to fund living expenses once employment income ends. The exception is when you combine the two by taking out the $25,000 allowed from your registered retirement savings account under the Home Buyers Plan, which makes sense because you have to pay it back or be taxed on the withdrawal, and because you're not paying interest on the loan.
The concept of home ownership is often founded on three beliefs: that interest rates won't spike, making payments unbearable to maintain; that the homebuyer will remain employed; and that property value will continue to rise and build up equity.
But in the U.S., after prolonged near-zero interest rates lured people to buy houses, interest rates rose, the financial crisis boosted unemployment and people used their homes as automatic-teller machines, refinancing them to buy depreciating assets like gas-guzzling cars and flat-screen TVs. The result was a deluge of houses for sale, which lowered prices and in many cases wiped out home equity completely.
The Canadian government saw housing become a sinkhole in the U.S. and has decided to Sherpa us around that crevasse.
In 2006, mortgage insurers, including Canada Mortgage and Housing Corp., began extending amortization periods from 25 to 30 years, then 35 and even 40. There was even talk of 50-year mortgages. At the same time they began insuring interest-only loans that essentially required no down payment.
When more than half the mortgages taken out during the first six months of 2008 had 40-year amortization periods, the federal government started putting speed bumps on the road to ruin. It reduced mortgage maximums to 35 years and eliminated interest-only loans by requiring a minimum five-per-cent down payment.
Last year came a second round of changes, making borrowers meet the standards for five-year interest rates, lowering maximum mortgage refinancing from 95 to 90 per cent of home value and requiring a 20-percent down payment for government-backed mortgage insurance on rental or investment properties not lived in by the owner.
And now, a third wave of changes, to save us from ourselves.
Read more: http://www.edmontonjournal.com/business/Tighter+mortgage+rules+save+from+ourselves/4142963/story.html#ixzz1Bh9tE9rF

Prime Rate Remains at 3%

2011-01-19T15:38:00.000-08:00

The Bank of Canada left its key lending rate unchanged today, in keeping with widespread expectations.
This implies the prime rate will remain at 3%, where it’s held since September.
Here are highlights from the BoC’s statement this morning:
• “The global economic recovery is proceeding at a somewhat faster pace than the Bank had anticipated.”
• “Stretched household balance sheets are expected to restrain the pace of consumption growth and residential investment.”
• “…business investment will likely continue to rebound strongly.”
• “…the economy will return to full capacity by the end of 2012.”
The Bank also lifted its 2011 growth estimate from 2.3% to 2.4%.
The next BoC rate meeting is 42 days from now on March 1. The price of assets based on the overnight target rate suggests there’s just a 17% chance of a rate hike at this meeting. Before today's announcement, the probability was near 30%.
"The BoC appears to have gone to lengths not to sound hawkish," said TD Senior Economist, Pascal Gauthier. "In the wake of this announcement, we maintain our call that the BoC is more likely to wait until July to raise the overnight rate."
The Bank’s Monetary Policy Update comes out tomorrow. This should give us a more detailed picture of the BoC’s expectations for inflation.

Changes to the Mortgage Industry Jan 15, 2011

2011-01-17T12:04:00.000-08:00

• Maximum Mortgage amortization periods have been reduced to 30 years from 35 years.
• The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from the current 90 per cent.
• The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

The changes will be implemented in stages, with adjustments on amortization and refinancing limits coming into force on March 18. Government backing on HELOCs will be removed as of April 18.

Flaherty tightens mortgage rules

2011-01-17T12:03:00.000-08:00

Paul Vieira, Financial Post • Monday, Jan. 17, 2011

OTTAWA — Finance Minister Jim Flaherty unveiled changes Monday morning to mortgage lending rules that would see Ottawa stop backing home loans greater than 30 years and make it more difficult for households to use their property to access financing.
The changes, as reported by the National Post on Sunday, emerged as worries escalate among Bay Street leaders and the Bank of Canada about the record levels of household indebtedness, and how conditions could deteriorate unless pre-emptive action was taken.
The key change announced is that mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20% down payment on a home. The previous limit was 35 years.
Also, Mr. Flaherty lowered the maximum amount Canadians can borrow against the value of their homes, to 85% from 90%, on a refinancing; and removed federal government backing for home equity lines of credit, or so-called HELOCs, whose popularity soared in the past decade with growth double that of mortgage debt.
"Canada's well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries," Mr. Flaherty said at a media conference. "The prudent measures announced [Monday] build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future."
Executives at Bank of Montreal applauded the government's move.
“The actions announced are prudent, measured, responsible and timely,” said Frank Techar, president of personal and commercial banking at Bank of Montreal.
The changes will be implemented in stages, with adjustments on amortization and refinancing limits coming into force on March 18. Government backing on HELOCs will be removed as of April 18.
The government said exceptions would be allowed after the new measures come into force when needed to satisfy a home purchase or sale and financing agreement struck before the March and April in-force dates.
The minimum down payment, at 5%, will remain as is. Further, there are no plans to target condominium purchases by requiring monthly condo fees be added to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage.
Analysts at Scotia Capital said in a morning note the changes had been anticipated for some time. “We remain of our long-held belief that Canada is tapped out on housing and household finance variables that are all at cycle tops, in contrast to the U.S. that has already moved well off cycle tops and may be creating some pent-up demand,” said economists Derek Holt and Gorica Djeric.
The changes to the country’s mortgage rules -- the second in as many years -- emerge amid rising concern about the record levels of household debt, which measured as a ratio of money owed to disposable income nears a startling 150% as of the third quarter of last year. That surpasses the level of debt held by American households, whose appetite for borrowing helped stoke the financial crisis of a few years ago.
The Bank of Canada recently warned debt levels are growing faster than income, and the risk posed by consumer indebtedness to the domestic economy would continue to escalate without a “significant change” in how consumers borrow and banks lend.
Bank of Canada governor Mark Carney said policymakers have a “responsibility” to look at the benefits of pre-emptive action. Joining the chorus have been chief executives at the big banks, most notably Ed Clark at Toronto-Dominion Bank, in publicly advocating for tougher mortgage standards.
Last Friday, Prime Minister Stephen Harper acknowledged his government was considering changes to the rules governing mortgages.
In February of 2010, Mr. Flaherty moved to toughen up the mortgage rules amid worries that Canada was in the midst of a housing market bubble. The reforms, since introduced, compelled borrowers to meet standards for a five-year fixed-rate mortgage, even if the buyer wanted a shorter-term, variable rate loan; reduced the amount Canadian can borrow against their home, to 90% of the property value from 95%; and require purchasers of rental properties to issue a 20% down payment as opposed to 5%. The moves played a role, observers say, in slowing down real estate activity.
The Scotia Capital analysts suggested government regulation was the way to go in terms of curbing household appetite for credit as opposed to the Bank of Canada raising interest rates, which they said would be “imprudent” at this time.
The central bank issues its latest rate statement on Tuesday and it is expected to hold its benchmark rate at its present 1% level as signs indicate the economy may be benefiting from renewed business and consumer confidence in the United States.
Stewart Hall, economist at HSBC Securities Canada, said the extraordinarily low-rate environment “provides all the incentive to consumers to borrow and spend and none of the incentive to save. You can try to [regulate] that away but that is apt to be fraught with significant frustration.”
Read more: http://www.financialpost.com/personal-finance/Flaherty+tightens+mortgage+rules/4119505/story.html#ixzz1BIhkDuhh

Debt Growth is Moderating, BOC Deputy Says

2011-01-13T13:15:00.001-08:00

Debt Growth is Moderating, BOC Deputy Says

Higher mortgage rates and stricter mortgage rules are starting to take effect, though Canadians’ debt levels are still too high for comfort.
That was the message from Agathe Cote in her first public speech as a deputy Bank of Canada governor on Monday.
Here’s a sampling of key points from her address yesterday in Kingston, Ontario:
• The Bank of Canada’s rate hikes and government’s new mortgage restrictions, including more stringent qualifying conditions, higher down payment requirements on rental properties, and lower LTVs on refinances, are “beginning to have an impact” in moderating debt risk.
• Since the trough of the recession, household credit has grown about twice as fast as personal disposable income. By the third quarter of 2010, the debt of Canadian households had reached 148% of disposable income.
• Cote spoke of the financial accelerator effect, whereby increases in home prices increase household spending. The basic premise is that when house prices rise, so too does the amount the owner can borrow against the increased equity (via HELOCs, home equity loans, etc.). The money can be used on home renos or other goods and services that can accelerate the rise in house prices, which in turn creates access to additional borrowing and boosting household spending.
• Cote cautioned that this can also work in reverse: falling house prices reduce household borrowing capacity and amplify the decline in spending. BOC research suggests the financial accelerator effect is “economically significant,” Cote said, noting that the finding is consistent with evidence of a correlation between consumer spending and housing wealth.
• Over the last decade, the volume of home-equity lines of credit and loans has risen by upwards of 170% – about double the pace of mortgage debt – and accounts for 12 per cent of overall household debt, Cote said.
• A sudden weakening in the housing sector would have a “sizable” spill over effect on other parts of the economy.
• “Credit continues to grow faster than income”
• A hypothetical 3-percentage-point increase in the unemployment rate would double the proportion of loans that are in arrears three months or more.
A side note: If this were extrapolated to mortgage debt, the arrears rate would jump from 0.43% today to 0.86%. The highest that our records show was 1.02% in 1983 (source: CMHC).
• Cote said it is the responsibility of financial institutions to ensure their clients don’t take on debt loads beyond their means.
• The Bank of Canada recognizes that low interest rates are necessary to achieve its inflation target, but that they also present their own set of risks.

Thought this one was interesting too.

Lower Posted Rates - More Than Meets The Eye

Last November the banks decided not to raise their 5-year posted mortgage rates, despite raising their discounted rates.
Their stated reasoning was to bring posted rates more in line with discounted rates. In that way, their posted rates would appear more competitive.
As we wrote before, however, the decision had far greater implications than that. Among other things, it affected qualification rates, penalty calculations, and cash-back down payment mortgages.
Here’s a deeper look at the impact…

Qualification Rates

Lenders use the qualification rate (currently 5.19%) to determine if you can afford a higher payment in the event that rates rise.
The government mandates that the qualification rate be used when approving all high-ratio mortgages with a variable-rate or a 1- to 4-year term.
Had the banks raised posted rates along with discounted rates (as they normally do), posted rates would be 45 basis points higher today—5.64% instead of 5.19%.
At 5.64% it would have taken about 5% more income to qualify for a high-ratio variable-rate mortgage. Granted, five percent doesn’t sound like much, but if posted rates were suppressed another 1-2% the qualification rate would lose much more effectiveness.
It will be interesting to see how long banks keep posted rates at 5.19% in the face of further rate increases. As noted, doing so would handicap the government’s qualification rules…..unless, of course, something were done to offset lower posted rates—like implementation of a new qualification formula or a lower amortization limit.
One would have to imagine that the Finance Department is fully aware of the banks’ posted rate intentions at this point.
Penalty Calculations
As posted rates go up, interest rate differential (IRD) penalties often go down.
It was therefore disappointing to many potential refinancers to see banks hold down their posted rates. The move has cost some people literally thousands of dollars.
Mortgage broker Steve Garganis recently ran some numbers on how penalties were affected by the banks’ actions (you can read them here). Garganis used TD’s IRD formula in his example but TD is not alone. Other lenders (e.g., RBC, BMO, etc.) also use posted rates in their penalty calculations.
Banks definitely had the penalty effect in mind when deciding to hold down posted rates. On the other hand, today’s 5-year posted-bond spread is still wider than its average prior to the credit crisis.* Therefore, one might say the banks are bringing posted spreads more in line with historical norms. In turn, the higher penalties people are paying today are due more to fatter discounts off of posted rates than to historically small spreads.
While current fixed-rate mortgage holders may not be thrilled by all this, future borrowers might be largely unaffected. That’s because, going forward, spreads and posted rate discounts will likely change at the same pace. In that case, future borrowers shouldn’t have to endure IRD penalty calculations that are significantly worse than today.

Cash-back Down Payment Mortgages

Cash-back down payment mortgages are basically the equivalent of 100% financing, with a few more strings.
First off, the rate is higher. Today’s cash-back down payment mortgages generally sell at posted rates.
Insured 100% financing was usually offered at or near a lender’s best rates.
Secondly, cash-back mortgages have a clawback on the “free” downpayment. This means the bank takes back a pro-rata share of their cash if you break your mortgage before maturity.
Insured 100% financing ended in Canada on October 15, 2008 (see Goodbye to 100%/40-year Mortgages). Since then, cash-back down payment mortgages have been the only real option for those wanting a mortgage with zero down.
Essentially, the lender “gives” you 5% to use as your down payment, and you then mortgage the other 95% LTV at posted rates.
Therein lies the interesting part: banks have effectively “discounted” posted rates by 45 basis points in the last 7 weeks. That means cash-back down payment mortgages have actually become cheaper since November, relative to 95% financing.
In fact, if you factor in the 5% to 5.5% down payment that the bank is giving you “free,” the effective rate of a cash-back down payment mortgage is roughly 4.09% to 4.20% depending on the lender.
Compared to the banks’ current “special offer” rate of 4.24%, 4.09% seems like a steal. Even compared to a deeply-discounted 3.79% rate, a 40 bps premium for zero down seems reasonable.
Mind you, unless you are relatively debt free, have emergency savings, are well-employed, expect good income growth, and absolutely must own a home now, cash-back downpayment mortgages are a bad idea.
Rent and scrounge up a down payment instead.

Bankruptcies, proposals rise in September, but well down from 2009

2010-12-06T10:41:00.003-08:00

THE CANADIAN PRESS, 2010 OTTAWA - The federal bankruptcy office says more Canadian households and businesses became insolvent in September than in the month before. The office says bankruptcies rose 9.6 per cent — 9.9 per cent for consumers — in September from the August numbers.
Insolvencies, which combine bankruptcies and proposals to refinance debt, rose 7.6 per cent overall.
The increases reverse a trend toward declining insolvencies since the recession, but the Office of the Superintendent of Bankruptcy says it's not unusual to see an increase in the month of September.
Insolvencies for the third quarter overall are down 9.2 per cent, the office says, and bankruptcies are 11.4 per cent lower. From last year, September's insolvencies dipped 26.5 per cent and bankruptcies fell 36.6 per cent. http://news.therecord.com/article/823732

Bank of Canada seen hiking rates in first half of 2011

2010-12-06T10:41:00.001-08:00

Bank of Canada seen hiking rates in first half of 2011

Claire Sibonney, Reuters •
TORONTO - The Bank of Canada is unanimously expected to keep interest rates on hold next week, but the uneven economic recovery has primary dealers and global forecasters divided on the timing of the next hike in 2011.
The Reuters poll, released on Thursday, showed 93% median probability that the Bank of Canada will keep its key rate at 1% at its next policy announcement date on Dec. 7, with all 44 forecasters polled predicting no move.
Among the 42 that forecast the central bank’s next hike, the majority saw it happening in the first half. The median forecast for the May 31 policy date has the rate rising to 1.25%.
But among the 12 Canadian primary dealers — the institutions that deal directly with the central bank to help it carry out monetary policy — the majority forecast rate hikes in the second half with a median prediction of a first hike in July.
When compared with a similar poll taken in October, the more recent survey showed rate hike forecasts had been moved deeper into 2011.
Thirty of the 44 forecasters surveyed say the central bank will still be at 1 percent after March 1, a more pessimistic view than the last poll.
“Given that the Bank of Canada had indicated that they didn’t want to see that great a divergence with U.S. rates and the Fed was actually doing quantitative easing, it made sense to push out the Canadian rate hike as well as opposed to adamantly defending a Q1 move,” said David Watt, senior fixed income and currency strategist at RBC Capital Markets.
“We’ve had a lot of recovery and we’re seeing some fade at the present time, so you get that caution that maybe the domestic side of the economy is not strong enough to offset the still sizable trade hit and currency strength.”
A report out on Tuesday showed Canada’s economy disappointed in the third quarter with the weakest growth rate in a year, while the economy shrank outright in September, adding pressure on policy makers to safeguard the patchy recovery.
Bank of Canada Governor Mark Carney in October gave a blunt assessment of the global and Canadian economic recoveries, saying the central bank would plot its next move with extreme caution.
Massive new monetary stimulus by the U.S. Federal Reserve to support a flagging U.S. economy also prolongs low rates south of the border, and Canada is seen not wanting to race too far ahead of its largest trading partner.
Mr. Watt noted that a concern for the central bank has been a Canadian dollar strengthening near parity without having seen a strong rebound in oil and natural gas prices.
“Sluggish Canadian growth and an elevated exchange rate will keep the Bank of Canada on hold until well into 2011 if, as we expect, core inflation readings return to their more muted earlier monthly trend,” said Avery Shenfeld, chief economist at CIBC World Markets.
“The U.S. Fed should still be on hold at a near-zero funds rate in early 2012, and wider interest-rate differentials would push the (Canadian dollar) to levels that would be too damaging to Canada’s export prospects.”
Estimates of the central bank’s target for the overnight rate by the end of 2011 range between 1% and 2.5%.
Next on the domestic data front, analysts will keep a close eye on the monthly jobs report on Friday and inflation figures later in the month.

Read more: http://www.financialpost.com/news/Bank+Canada+rate+hike+seen+first+half+2011/3916924/story.html#ixzz1707v8WNk

TD CEO Supports 25-year Amortization Maximum

2010-12-02T18:37:00.000-08:00

TD Bank CEO, Ed Clark, says the government should cut the maximum mortgage amortization from 35 years to 25 years. (FP Story)

“We see a world in which low interest rates and excess liquidity has created asset bubbles all over the world,” Clark told reporters last week.

“We don’t have a problem here, but why are we not making sure we don’t create a problem?”

Clark says Canadians have been following a policy of: “Don’t save. Take a longer period to spread out your payments.”

“I don’t think that’s good public policy,” Clark feels.

The idea of reducing amortizations has been floated before, most recently this year when it was speculated that the Finance Department might cut the maximum amortization to 25 years.

The government last changed amortizations two years ago. At that time, they were cut back from 40-years to 35-years on high-ratio mortgages.

Despite all the debate, no one has ever provided public data (that we’re aware of) to show that 35-year amortizations create undue risk in the market. Insurers charge just a 0.40% higher premium on a 35-year amortization. That means something, because insurers are actuarial experts. They know default ratios better than anyone in Canada. None of them have indicated any public concern for extended ams.

Restricting choices for intelligent highly-qualified Canadian borrowers doesn’t make much sense. (See: Extended amortizations do have a place.) People with great credit and solid employment need the right to manage their cash-flow without government intervention (within reason of course). So do highly qualified borrowers in high-priced locations, or those buying investment properties.

In almost all cases, people who take 35-year amortizations plan to pay off their mortgage much quicker. In fact, the average Canadian gets rid of their mortgage in 1/2 to 2/3 of their original amortization, according to insurer sources. In other words, due to pre-payments, people pay off their 35-year mortgages in far less than 35 years.

Amount Canadians owe continues to increase, but growth rate of debt slows

2010-11-30T09:50:00.001-08:00

By The Canadian Press TORONTO - Credit agency TransUnion says the amount Canadians owe continues to increase but that the rate at which consumers are piling on debt is beginning to slow down. TransUnion says overall debt, excluding mortgages, was up 4.3 per cent in the third quarter compared with a year ago.
Quebec posted the largest increase at 6.6 per cent, while Manitoba had the lowest increase at 2.6 per cent.
However, TransUnion says that is still an improvement over the double-digit increases that have been going on since before the recession.
Meanwhile, TransUnion says that despite high debt loads, delinquency rates and past due balances have dropped across Canada. It says the national credit card delinquency rate was down nearly 10 per cent in the third quarter from a year ago.

HOUSING AFFORDABILITY IMPROVES IN THIRD QUARTER: RBC ECONOMICS

2010-11-30T09:49:00.002-08:00

TORONTO, Nov. 29 /CNW/ - After four consecutive quarterly increases, the cost of homeownership in Ontario declined in the third quarter as a result of lower mortgage rates and some softening in property values, according to the latest Housing Trends and Affordability report released today by RBC Economics Research.
Existing home sales ended their earlier precipitous slide by sustaining three straight gains, on a seasonally adjusted basis, from August to October.
"This recovery confirmed our earlier expectation that the slowdown in activity through the spring and summer largely reflected various transitory factors - such as the HST and changes in mortgage lending rules - bringing demand forward at the start of the year," said Robert Hogue, senior economist, RBC. "With the market now back in balance, recent softness in home prices will prove to be a healthy recalibration following a strong rally."
Ontario's housing fundamentals have taken a positive turn with RBC Measures falling between 1.3 and 2.4 percentage points, fully reversing the increase in the second quarter.
The RBC Housing Affordability Measures for Ontario, which capture the province's proportion of pre-tax household income needed to service the costs of owning a home, declined across all three housing types in the third quarter of 2010. The measure for the benchmark detached bungalow moved down to 38.9 per cent (a drop of 2.2 percentage points from the previous quarter), the standard condominium to 27.4 per cent (down 1.3 percentage points) and the standard two-storey home to 44.9 per cent (down 2.4 percentage points).
The RBC report notes that Toronto's recovery since August confirmed the city's housing market gyrations were more a reaction to activity surrounding transitory factors like the HST and new mortgage lending rules, rather than disappearing demand. The influence of these factors largely dissipated by the end of the summer as the Toronto-area market moved towards more sustainable levels of activity. Following four consecutive quarters of increases, the RBC Housing Affordability Measures fell appreciably between 1.2 and 3.8 percentage points in the third quarter. These measures are now close to long-term averages, consistent with moderate tensions being exerted on homebuyers.
"Although it triggered a fair amount of anxiety while unfolding, the Toronto area market's return to earth this spring was a mostly benign affair in retrospect," said Hogue. "The fears were that the payback for the clearly unsustainable record high levels of existing home sales at the start of this year would be an all-out defeat."
After reaching all-time highs early this year, Ottawa's home resales plummeted in May, as homebuyers opted to sit out the traditionally strong spring season. While market movements were somewhat more dramatic than other areas of the province, they were largely driven by transitory factors. RBC's third quarter measures for Ottawa dropped between 2.0 and 2.9 percentage points helping to reduce some accumulated stress in the market.
"Once again, the Ottawa-area housing market demonstrated its ability to move past soft patches with minimal damage. It wasn't surprising to see Ottawa's homebuyers cautiously return to the market early this fall as they adjusted to changes in the housing market," added Hogue. "Weak demand in the spring and summer in tandem with strong availability of homes applied downward pressure on prices and improved affordability in the third quarter."
All provinces saw improvements in affordability in the third quarter, particularly in British Columbia where elevated property values amplified the effect of the decline in mortgage rates on monthly mortgage charges. Alberta and Manitoba are the only two provinces where the RBC Measures stand below their long-term average in all housing categories, indicating little stress in these markets.
RBC's Housing Affordability Measure for a detached bungalow in Canada's largest cities is as follows: Vancouver 68.8 per cent (down 5.4 percentage points from the last quarter), Toronto 47.2 per cent (down 3.0 percentage points), Montreal 41.7 per cent (down 1.3 percentage points), Ottawa 38.2 per cent (down 2.9 percentage points), Calgary 37.1 per cent (down 2.0 percentage points) and Edmonton 32.7 per cent (down 2.0 percentage points).
The RBC Housing Trends and Affordability Measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.
Highlights from across Canada:
• British Columbia: Lower home prices and declining mortgage rates brought the B.C. housing market some welcomed reprieve in the third quarter from the significant deterioration in affordability recorded since the middle of 2009. Amid much cooler resale activity through the spring and summer and greater availability of properties for sale, home prices either fell, particularly for bungalows, or remained stable in the case of condominium apartments. The RBC Housing Affordability Measures for B.C. dropped between 1.8 and 5.0 percentage points, representing the largest declines since the first quarter of 2009; however, all remained significantly above long-term averages. Poor affordability is likely to continue to weigh on housing demand in the province in the period ahead.
• Alberta: Despite recording substantial affordability improvements since early 2008, housing demand in Alberta is still a shadow of its former self from just a few years ago and there are few signs that it is picking up meaningfully. The RBC Measures eased between 0.8 and 1.8 percentage points, more than reversing modest rises in the second quarter. Homeownership is among the most affordable in Canada both in absolute terms and relative to historical averages. RBC notes such a high degree of affordability bodes well for a strengthening housing demand once the provincial job market sustains more substantial gains.
• Saskatchewan: Saskatchewan home resales rebounded since August and reversed most of their slide in the first half of this year; however, the earlier softening of activity had a lingering effect on home prices which fell across all housing types relative to the second quarter. RBC's Affordability Measures dropped between 1.8 and 2.2 percentage points, the most since early 2009 but still modestly above their long-term average, suggesting that current market conditions might be stretching Saskatchewan homebuyers' budgets to a degree.
• Manitoba: Manitoba's housing resales picked up smartly in September and October, swiftly turning the page on a particularly weak summer period, with provincial homebuyers taking advantage of improving affordability. RBC's Measures fell between 0.9 and 2.3 percentage points, reversing one-half to three-quarters of the increase that occurred since the spring of 2009. Manitoba is one of only two provinces, with Alberta, where the measures for all housing types are currently below their long-term averages, which will be a supportive factor for demand going forward.
• Quebec: The Quebec housing market is making its way towards more stable activity levels after plummeting to six-year lows at the end of 2008 and then surging to all-time highs at the start of 2010. Supporting this trend in the near term is an improvement in affordability in the third quarter. Following four consecutive increases, the RBC Measures for the province fell 1.4 to 1.8 percentage points depending on the housing type, but still remain close to the pre-downturn peaks and above their long-term average, which will likely restrain growth in demand in the period ahead.
• Atlantic Canada: The East Coast housing market picked up some steam early this fall following a marked cooling in activity in the spring when resales fell back to the lows reached at the end of 2008. Modest price declines and a drop in mortgage rates contributed to lower third quarter homeownership costs with RBC's Measures moving down between 1.0 and 1.5 percentage points in the third quarter and returning roughly to the levels experienced in mid- to late-2009. Overall, housing affordability remains attractive in Atlantic Canada.

Dream of home ownership gets easier in B.C., RBC report says

2010-11-30T09:49:00.001-08:00

By Brian Morton, Vancouver Sun November 30, 2010 6:33 AM
B.C. homebuyers have won a temporary reprieve from the sharp drop in affordability since the middle of 2009, according to a national report released Monday by RBC Economics Research.
"It was a combination of a drop in interest rates and some softening of pricing that lowered monthly mortgage payments," RBC senior economist Robert Hogue said in an interview about the RBC Housing Affordability Measures, which looked at the third quarter of 2010.
"[It] had a particularly powerful impact on B.C.
"But B.C., and Vancouver in particular, remains an expensive market. And it's unlikely to change the trend over the next year or two of an increasing cost of home ownership."
According to the report, much cooler resale activity during the spring and summer, and greater availability of properties for sale, caused B.C. home prices to either fall -most notably for detached bungalows -- or remain stable, mainly in the case of condominiums .Richard and Stephanie Michel took advantage of the price drop to move up from their Pitt Meadows rancher to a larger split-level Maple Ridge house with a larger lot.
"We figured now would be a good time to upgrade due to the low interest rates and the fact that prices could potentially go higher," Richard Michel said in an interview.
"We bought it at the end of October and moved in two weeks ago," added Michel, who is a PepsiCo delivery truck driver.
"We needed more space. We're planning on having another child."
The Michels paid $495,000 for their new home, down from an asking price of $524,900, he noted.
Third quarter affordability measures for B.C. dropped between 1.8 and 5.0 percentage points -the largest declines since the first quarter of 2009.
Still, it concluded, very poor affordability is likely to weigh on provincial housing demand in the period ahead.
Tsur Somerville, director of the Centre for Urban Economics and Real Estate at the University of B.C.'s Sauder School of Business, said in an interview that B.C. has seen house prices "flatten out, if not decline slightly, from earlier this yearRichard and Stephanie Michel took advantage of the price drop to move up from their Pitt Meadows rancher to a larger split-level Maple Ridge house with a larger lot.
"We figured now would be a good time to upgrade due to the low interest rates and the fact that prices could potentially go higher," Richard Michel said in an interview.
"We bought it at the end of October and moved in two weeks ago," added Michel, who is a PepsiCo delivery truck driver.
"We needed more space. We're planning on having another child."
The Michels paid $495,000 for their new home, down from an asking price of $524,900, he noted.
Third quarter affordability measures for B.C. dropped between 1.8 and 5.0 percentage points -the largest declines since the first quarter of 2009.
Still, it concluded, very poor affordability is likely to weigh on provincial housing demand in the period ahead.
Tsur Somerville, director of the Centre for Urban Economics and Real Estate at the University of B.C.'s Sauder School of Business, said in an interview that B.C. has seen house prices "flatten out, if not decline slightly, from earlier this year
"A weak economic recovery has continued and that means rising incomes. At the same time, interest rates are more favourable than last year. So if incomes go up and interest rates come down and house prices are flat, then affordability improves."
However, Somerville noted that B.C. remains "a very, very expensive place to live. So governments need to think about what they can do to create varied housing options."
The report also cited third quarter relief for Vancouver, although that's unlikely to change the perception that the city is an expensive market to enter because affordability remains very poor.
An affordability reading of 50 per cent means that home ownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.
While the affordability measure for a detached bungalow in Vancouver stood at 68.8 per cent, Toronto was at 47.2 per cent and Montreal at 41.7 per cent.
The report concluded that the cost of a detached bungalow in B.C. stood at $544,700 in the third quarter, an 8.5-per-cent increase over the third quarter of 2009, and that the amount required a qualifying income of $108,800.
That compared with Canada at $325,000, up 6.8 per cent over 2009, and a qualifying income of $72,500.
bmorton@vancouversun.com
Read more: http://www.vancouversun.com/business/Dream+home+ownership+gets+easier+report+says/3903920/story.html#ixzz16mTMghtx

Global troubles bring some good news for Canada: low interest rates

2010-11-23T10:04:00.001-08:00

JULIAN BELTRAME
OTTAWA — Canadians could be enjoying historically low interest rates on loans for cars and homes for quite a long time, economists believe.
Since June, the Bank of Canada has been attempting to “normalize” interest rates, hiking its policy rate by one point.
But recent developments in the global economy — and to a lesser extent in Canada — have not to been positive, nor supportive of monetary tightening, regardless of what central bankers want.
The slowing global recovery and the re-emergence of the European debt crisis has caused the TD Bank to revise its outlook on when Bank of Canada governor Mark Carney can safely resume pushing the policy rate, now at one per cent, back to the three to 3.5 per cent range analysts believe is ideal for a balanced economy.
In a note released Friday, TD says Carney is unlikely to start hiking rates until at least next July, when U.S. Federal Reserve chair Ben Bernanke is scheduled to stop pumping billions of dollars into the economy under his controversial quantitative easing initiative.
That is good news for Canadians, both consumers and corporations, looking to borrow cheaply.
But, overall, super-low interest rates are reminders the economy is on life-support and that central bankers are more concerned about sending the economy crashing in the near term than worrying about setting up conditions for a reckoning later on.
Carl Weinberg of U.S.-based High Frequency Economics notes that Bernanke’s much criticized $600 billion US injection and zero interest policy has done nothing to stoke inflation, which this week came in at 0.6 per cent in the United States.
Nor are price pressures building despite stimulative policies in Canada, where core inflation remains a tame 1.5 per cent, or in other advanced economies such as Japan and Germany.
“With employment slack everywhere, and with abundant excess capacity everywhere, the G7 economies are all experiencing historic or near-historic lows in core price increases,” Weinberg notes. “This tells us that the G7 economies all remain depressed, and there is plenty of scope for monetary stimulus.”
The Organization for Economic Co-operation and Development also this week urged Carney to hold tight until at least the spring.
Being the first in the G7 to tighten, it’s unlikely Carney will go so far as reverse course on rates, failing signs of a second downturn.
But TD chief economist Craig Alexander thinks Carney’s fear that Canadians may be induced to take on debt beyond their means is not as great as the fear that raising rates could slow consumption, raise the dollar and crash the economy.
“I think the Bank of Canada would like to have higher rates from a domestic point of view,” he said. “But there is so much slack out there. It does not suggest double-dip recession, but people have to come to terms with the fact that growth of 1.5 to two per cent is now normal and the labour market is not going to recover quickly.”
The often missed fact about two per cent growth, adds Alexander, is not that it is modest, but that it barely keeps up with the trend rate of the economy. That means it will likely take another two years just to return to full capacity.
Evidence of just how profoundly Canada’s economy has slowed since the quick reboot that began a year ago is mounting.
This week, Canadians learned factory shipments shrank 1.4 per cent in volume terms in September — an important indicator because with consumer spending receding, the economy needs a boost from exports to make up the difference.
The most visible sign of braking is in Canada’s much-ballyhooed employment record. While still better than the U.S., job growth has virtually ground to a halt since June, gaining about 5,000 a month when about 15,000 is needed just to keep up with Canada’s population growth.
As little as the Bank of Canada is counting on exports to bolster growth, it may be overbanking on its expectations, says Sal Guatieri of BMO Capital Markets. Europe’s woes, along with those in the U.S., and China’s tighter monetary policy, all point to global markets drying up further.
Not everything argues against a rate hike, says Guatieri, but most things do.
The Canadian Press http://news.therecord.com/article/816401

Yields Bounce From the Depths

2010-10-29T14:36:00.001-07:00

Source: www.CanadianMortgageTrends.com

The world’s most prominent fixed income investor, Bill Gross, has predicted the end of the 30-year bull market in bonds.

His call may be early and he is but one man, but bond traders took note as they sold off treasuries.

From a mortgage perspective, events that impact bonds can be viewed in two separate timeframes: the short term and the long-term.

The long-term impact is near-impossible to judge because random events often intervene. Currently, the bond market is worried about the ballooning U.S. debt burden, as well as a U.S. Fed that’s printing hundreds of billions of inflationary dollars to kickstart the American economy. (Gross called U.S. debt and monetary policy a “Ponzi Scheme” earlier today.) But that doesn’t mean something else—like weak output—won’t counterbalance this inflationary phenomenon. See BMO's take.

The above ties in with Canadian mortgages because of how tightly-correlated US yields are to Canadian yields. As bonds sell off south of the border, Canadian yields typically rise, as least for a while. This lifts fixed mortgage rates.

In the short-term, technical factors will drive trading to a large degree. Market technicians believe bonds are “overbought” and displaying a reversal pattern. The long-term concerns mentioned above, and better-than-expected economic numbers (like consumer confidence), have been a catalyst for this reversal.

Whether the climb in yields continues is yet to be seen. The 5-year yield hit a 1-month high today. It’s up 22 basis points from last Wednesday’s low. If it jumps another 10 basis points or so, deep-discount fixed rates could reverse higher.

This reversal is immediately relevant to people that need to lock in a rate in the next 30-60 days. Barring another Greek-style default panic (which is making renewed headlines again in case you haven’t seen) the odds are fairly good that yields won’t drop much lower in the near term.

For that reason, if you need a fixed rate approval in the next 1-2 months, it would be logical to get a rate guarantee sooner, rather than later.

Rate Uncertainty & Ben Tal’s Call

2010-10-29T14:34:00.000-07:00

October 21, 2010 Source from CanadianMortgageTrends.com

Choosing between a fixed or variable mortgage can seem like throwing darts with your eyes closed.

Borrowers today are seeing headlines like this:

Economists want BoC to keep raising interest rates

Then they turn the page and see this:

Could the Bank of Canada be forced to cut rates again?

Even the Bank of Canada’s Mark Carney isn’t too sure of the future.

On CBC yesterday Carney said, “Upside risks are balanced by downside risks…The upside is as likely as the downside.”

At a FirstLine Mortgages event yesterday, CIBC economist Benjamin Tal translated that. “What Carney is telling us,” Tal said, “is (the Bank of Canada) has no clue what is going to happen.”

Tal added:

•“The bond market is pricing in inflation below 1.50% for the next ten years.” (But he believes “the bond market is mispricing inflation.”)
•The Bank of Canada now predicts the economy won’t reach its full potential until year-end 2012, one year later than previously expected.
•The BoC doesn’t need to raise rates to slow consumer credit because “it’s already happening.”
•Consumers’ spending capability is at a “30-year low.” It won’t take many rate hikes to slow the economy from here.
As a result, Tal asserted: “I don’t expect (variable or fixed) mortgage rates to rise in any significant way in the next 12 months.” There is “no rush to make a mortgage decision.”

When someone in the audience asked him which mortgage he’d take today (fixed or variable), Tal replied:

“I’m almost convinced that over the next 2-3 years variable will be better. In the last two years fixed will be better. But, the gap (between fixed and variable) will not be significant over five years.”

That said, if he had to choose today, he feels that “mathematically speaking,” variable-rate mortgages will "probably” outperform fixed rates.

Fixed vs. Variable Rate Mortgage ...

2010-10-19T13:57:00.000-07:00

If you had to pick one rate for the rest of your mortgage life, and your only two choices were a 5-year fixed or a 5-year variable, which would you take?
Fixed Rate
Fixed rate mortgage is a mortgage in which the rate and payments of the mortgage are constant and do not change for the life of the mortgage or its term. The 5 year fix rate is set based on the 5 year bond rate of government of Canada.
Pros:
- Equal monthly payments over the term of the mortgage
Cons:
- Usually higher rate and payments comparing to variable rate
- You usually end up paying higher interest over the term of mortgage
- The penalty is calculated as IRD (Interest Rate Differential) or 3 Months interest on the balance of the mortgage whichever is higher. Usually the IRD is more expensive penalty.

Variable Rate
Variable rate mortgage is a mortgage in which the rate and also the payments will change depending on the Prime rate of lending in Canada over the term of the mortgage.
Pros:
- Lower rate and monthly payments
- Historically lower interest paid over the term of the mortgage
- Always the penalty is calculated as 3 months interest so lower penalty
- Since the penalty is lower you may refinance to lower rate in the middle of the term

Cons:
- Your rate and payments changes along with Prime over the term – higher risk tolerance needed

Historically Analysis:
Based on data from 1950 to 2007, the average Canadian could expect to save interest 90.1% of the time by choosing a variable-rate mortgage instead of a fixed. The average savings was $20,630 over 15 years per $100,000 borrowed. Those who can negotiate big discounts (0.75% off Prime) save money 77.1% of the time by going variable.

In the above chart, at any given point, the white line shows what variable rates would have averaged over the following five years. This enables a comparison of fixed and variable rates at specific points in time.
The chart shows various times when fixed rates might have performed better than variable rates. That is true even in cases where the fixed rate was notably higher than the variable rate to start. This seems to happen most often just as prime rate starts increasing from a low point in a rate cycle.
Fix rate mortgage Forecast:
Banks foresee 5-year bond yields climbing to 3.59% by the end of next year. Assuming a typical 1.2 spread above yields, this suggests discounted 5-year fixed rates could rise to roughly 4.79% by year-end 2011.
Variable rate mortgage Forecast:
Big bank economists expect 4.50% prime rate by end of 2011. Based on a .70 average discount from prime, this suggests 5-year variable rates in the 3.8% range by year-end 2011.
Conclusion:
Most mortgage professionals would take the variable, but that doesn’t mean 5-year fixed rates are irrational. On the contrary, longer-term fixed rates are quite suitable for borrowers who can’t withstand interest rate shocks.
Long story short, variables are still a great bet for many. But, if you:
• Have a tight budget
• Are nervous that prime rate could exceed analyst rate
• Find an amazing deal on a 5-year fixed
…then no one can blame you for paying more for the insurance of a fixed rate.

Bank of Canada maintains overnight rate target at 1 per cent

2010-10-19T12:13:00.000-07:00

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is entering a new phase. In advanced economies, temporary factors supporting growth in 2010 - such as the inventory cycle and pent-up demand - have largely run their course and fiscal stimulus will shift to fiscal consolidation over the projection horizon. While the Bank expects that private demand in advanced economies will become sufficiently entrenched to sustain the recovery, the combination of difficult labour market dynamics and ongoing deleveraging in many advanced economies is expected to moderate the pace of growth relative to prior expectations. These factors will contribute to a weaker-than-projected recovery in the United States in particular. Growth in emerging-market economies is expected to ease to a more sustainable pace as fiscal and monetary policies are tightened. Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery.

The economic outlook for Canada has changed. The Bank expects the economic recovery to be more gradual than it had projected in its July Monetary Policy Report, with growth of 3.0 per cent in 2010, 2.3 per cent in 2011, and 2.6 per cent in 2012. This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending. With housing activity declining markedly as anticipated and household debt considerations becoming more important, the Bank expects household expenditures to decelerate to a pace closer to the rate of income growth over the projection horizon. Overall, the composition of demand in Canada is expected to shift away from government and household expenditures towards business investment and net exports. The strength of net exports will be sensitive to currency movements, the expected recovery in productivity growth, and the prospects for external demand.

Inflation in Canada has been slightly below the Bank’s July projection. The recent moderation in core inflation is consistent with the persistence of significant excess supply and a deceleration in the growth of unit labour costs. The Bank judges that the output gap is slightly larger and that the economy will return to full capacity by the end of 2012 rather than the beginning of that year, as had been anticipated in July. The inflation outlook has been revised down and both total CPI and core inflation are now expected to converge to 2 per cent by the end of 2012, as excess supply in the economy is gradually absorbed and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada.

At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered.

Bank of Canada expected to hold interest rate

2010-10-19T10:36:00.000-07:00

BY SUNNY FREEMAN
TORONTO — The Bank of Canada is being urged to hold the line on interest rates Tuesday as economists warn that another hike in borrowing costs could push the loonie higher, hurting exporters, and could also make it more costly for Canadians mired in rising debtloads.
“We believe the Bank of Canada will keep rates unchanged until next spring, although officials will not acknowledge this publicly,” the Moodys bond rating agency said in a report Monday.
“Since the summer, Canada’s domestic recovery has hit some speed bumps, inflation has been soft, and the unemployment rate has been stuck near eight per cent,” wrote Moodys economist Jimmy Jean.
“The U.S. picture has meanwhile grown more worrisome, with private sector hiring not strong enough to dent its near 10 per cent unemployment rate.”
Other economists also expect the central bank’s governor, Mark Carney, to take a break from three straight increases to the key lending rate, which affects mortgage and other short-term borrowing rates.
Shrinking inflation and consumer confidence levels, as well as downbeat employment data from September and a rising loonie all provide incentives to leave the bank’s policy rate at one per cent when the Bank of Canada makes its next interest rate announcement today.
On the other hand, Canadians encouraged by historically low interest rates continue to borrow heavily, sending debt loads to a record 146 per cent of income. Some economists say a rate hike would help curb overborrowing and help prevent a future crisis.
Carney has been particularly stark in his warnings about consumer debt and is expected to take the cautious route on further increases.
At a speech in Windsor last month, he warned that Canada’s economic recovery has relied heavily on unsustainable levels of demand for housing and personal goods.
While consumers are weighed down with record debt, income growth will be modest and house values won’t rise enough to boost household wealth, he said.
Future months will see the rate of growth slowing to a modest pace as the economy comes under pressure from low demand for Canadian exports — mainly from the United States — and the “limits of household balance sheets,” he added.
The Bank of Canada began raising borrowing costs in June to fight inflationary pressures in the economy, following a 14-month period of falling rates.
Since June, there have been three increases of one-quarter point as the central bank reduces the amount of monetary stimulus in the system. Meanwhile, inflation is expected to continue to hover at a benign two per cent.
Douglas Porter, deputy chief economist at the Bank of Montreal, said holding interest rates at one per cent would be wise, given the weakness of economic data since Carney’s last interest rate announcement in September.
The Canadian Press

TD Mortgages To Become Collateral Charges

2010-10-08T15:27:00.000-07:00

October 07, 2010

TD is making a big change with respect to how it registers its mortgages.
Effective October 18, all new TD mortgages will be registered as “collateral charges.”
A collateral charge is a different way to secure a home loan than a standard mortgage. "The terms of a collateral mortgage are outlined in a loan agreement that's not registered," says Invis's Gary Siegle. "With a regular mortgage, the terms are in a 'registered document'."
Effectively, collateral charges allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing, without involving a lawyer.* That saves the borrower legal costs if he/she needs to withdraw equity from their home.
In TD’s case, customers will now be able to register their mortgage for up to 125% of the value at closing. Hence, if one’s property value goes from $200,000 to $250,000, qualified borrowers will be able to withdraw most of that new equity without refinancing.
"If I'm a consumer and I'm told that I can get more money in the next few years without extra cost, I would think most consumers would find that appealing," says Siegle.
The downside comes at renewal. For consumers who want to keep their options open at maturity, this is an unfriendly change. That’s because TD customers will now have to pay legal fees to switch lenders.
Obviously, people switch lenders for many reasons, not the least of which is better rates or features. And, with most other lenders, you can switch your mortgage for free, save for the discharge fee or other minor charges.
From our own informal polls, many industry observers we’ve spoken with view this change largely as a strategy to retain customers at renewal. If this is TD’s intention, they’re definitely not the first lender to think this way. There are various credit unions, for example, that register all of their mortgages as collateral charges. There are also banks that push readvanceable mortgages (which also use collateral charges), for similar reasons. TD itself has used collateral charges with its variable and HELOC products for a while.
For now, it’s difficult to assess the impact of this change. Everyone needs to renew, but not everyone needs to refinance. So TD’s move will benefit some while hurting others.
On the other hand, most mortgagors renew with their existing lender anyway, so the number of TD customers who refinance may be higher than the number of people leaving TD at renewal.
That depends on the term, of course. Someone in 1-year fixed has a low probability of refinancing. So, other things being equal, TD will now be a less attractive option for standard 1- to 3-year terms.
In any event, TD customers need to be aware of both the pros and cons of this move.
One thing we’re not certain of at this time, is how existing TD mortgages will be affected. TD spokesperson Kelly Hechler said TD would release a clarification on this soon.
We’ll post more information in the comments section as it becomes available.
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* A collateral charge generally doesn’t allow a lender to change a fixed rate or the discount on a variable-rate mortgage. However, it does allow the lender to change the rate if you ask for more money later, or if you have a line of credit portion with a floating rate.

The advantages of renegotiating your mortgage

2010-10-05T12:12:00.000-07:00

Recently, interest rates dropped to the lowest levels in decades. With rates on the rise again, you may be wondering whether renegotiating your mortgage for a lower interest rate is a smart thing to do. As your MCC Mortgage Agent/Broker, I can help you with that decision and help you weigh the potential savings versus the cost associated with renegotiating your mortgage.

Can I minimize my interest rate?
Because your mortgage was tailored to your individual needs, we can look at your current situation to decide if you'll be able to minimize your interest rate in today's climate. Whether you have a fixed or flexible rate, we can investigate whether current rates can be leveraged to save you money.
Of course renegotiating your mortgage may mean some added costs (such as a bank penalty and legal fees). I can sit down with you to determine what those costs will be and if the potential savings in interest make renegotiating worthwhile for your specific situation. Keep in mind that even a savings of only $20 with each payment can add up over the life of your mortgage!

Can I maximize this opportunity?
If renegotiating makes sense for your mortgage, you can make it happen. In some cases the bank penalty and legal fees can be added to your renegotiated mortgage, so even if you don't have the cash on-hand, you may be able to make the move to a lower rate. When you do, you'll offset your potential costs with your new savings.

As your MCC Mortgage Agent/Broker, I'm always here for your mortgage needs. Don't hesitate to give me a call anytime you have questions that you need answered.
Sincerely,
Sean Manoochehri

The Mortgage Centre - Elder Mortgage Corp.

Real estate group reaches tentative agreement on MLS listings

2010-10-01T12:22:00.001-07:00

JOHN IBBITSON AND STEVE LADURANTAYE
Globe and Mail

It will become easier and cheaper for Canadians to sell their homes after peace was declared on Thursday in the war between the Competition Bureau and the organization representing Canada’s real estate agents.
The bureau and the Canadian Real Estate Association (CREA) reached a tentative agreement that will allow sellers to hire an agent to post their property on the all-important Multiple Listing Service and then conduct the rest of the sale on their own, if they choose.
39% 189 votes
Yes
61% 296 votes
No
“It’s better to negotiate something than go to court,” Don Lawby, chief executive officer of Century 21, said in reaction to the agreement. “Bad press is bad press, and whatever the fee structure, people will always think it’s unfair.”
News of the agreement caught industry leaders flat-footed. The heads of several of the country’s largest brokerage firms were unaware of it until contacted by The Globe and Mail.
If ratified by CREA’s membership at the end of October, the agreement will end a challenge from the bureau in which the two sides are scheduled to appear before the Competition Tribunal in April. Once ratified, the new rules will take effect immediately and be in effect for 10 years.
Traditionally, sellers hire an agent in an all-or-nothing agreement, in which the agent lists their homes on the Multiple Listing Service – on which about 90 per cent of residential properties are bought and sold – negotiates the sale with the buyer and handles much of the paperwork. In return, the agent receives a commission that is typically a percentage of the sale price.
Energized by a new commissioner, Melanie Aitken, and an expanded mandate, the Competition Bureau went to the Competition Tribunal in February demanding that CREA allow consumers more choice on what services to use.
The association, which represents nearly 100,000 real estate agents across Canada, loosened some of its rules in the spring. Nonetheless, the bureau decided the measures were insufficient.
But while both sides appeared intransigent in public, negotiations quietly paved the way to Thursday’s agreement after association representatives approached the bureau earlier this month.
The agreement is a major victory for the Competition Bureau, which was determined to force the real estate industry to become more competitive.
“The agreement is welcome news for Canadians,” Ms. Aitken said in an interview. “Consumers are going to have the ability to choose what services they want from a real estate agent, and pay only for those services, and at the same time, it gives much-needed flexibility for the agents to offer the variety of services and prices that meet the needs of consumers.”
CREA president Georges Pahud said in a statement that that the agreement “would avoid unnecessary and expensive litigation proceedings.”
The long-term impact on the country’s real-estate market is far from certain. The cost of buying or selling a home could come down as competitors seek to offer different packages and undercut each others’ prices.
But agents have warned that changes could lead to shoddy service or fraud. The agreement seeks to strike a balance, increasing consumer choice while leaving agents as the only portal to the MLS.
http://www.theglobeandmail.com/report-on-business/economy/housing/real-estate-group-reaches-tentative-agreement-on-mls-listings/article1736411