The upside of higher rates
We all know interest rates are going to go up. Even after reading this the big hit we all know is coming is that variable rate mortgage payments go up right away. The rest mentioned below may come later.
Jason Heath Mar 31, 2012 – 7:00 AM ET | Last Updated: Mar 30, 2012 9:09 AM ET
For three years, the word on the street has been that interest rates have nowhere to go but up. But few Canadian commentators – other than David Rosenberg – got the call on rates right. Although the prime rate has risen since dropping to an all-time low of 2.25% in April 2009, the increase to the current 3% rate that has remained stable since September 2010 has been modest to say the least. Long-term rates, like fixed mortgage rates, have gone up and come back down during that time, such that one can currently lock in fixed rates under 3%.
York University’s Moshe Milevsky did a study in 2001, which he revised in 2007, and determined that borrowers are better off going with a variable rate mortgage instead of a fixed rate mortgage approximately 9 times out of 10. That said, we have to be close to if not already in that 10% sweet spot where fixed beats variable.
Despite the opportunity to lock in low rates today, it could actually be beneficial for the average Canadian for rates to rise. Conditions need to warrant rate increases and the Bank of Canada (which directly governs the prime rate) and the bond market (which indirectly governs fixed mortgage rates) won’t raise rates until the time is right. How soon that time comes depends partially on domestic influences, but also on our neighbours to the south and the current eurozone debt debacle.
Greece is a perfect example of why rates should rise. Greek participation in the European Union gave them access to cheap credit and helped facilitate some of the excess spending that has them where they are today. Despite bond markets demanding higher interest rates on Greek and some other European government bonds, market intervention by the EU has helped keep rates artificially low.
The U.S. Federal Reserve has been doing the same thing, buying up U.S. government treasury bills to keep U.S. rates artificially low as well.
It’s hard to justify how artificially low interest rates for an extended period are good for anything other than delaying the inevitable for some market participants.
Higher rates would have a negative impact on those of us with outstanding debt, as higher interest charges would follow. But Canadian debt levels have moved ever higher in recent years, likely a response to the low rates that have been in place in part to stimulate spending. Higher mortgage rates could protect us from ourselves by making higher debt levels more punitive and less tempting.
Furthermore, fixed income investors could benefit. The emphasis on “could” is key. Rising rates typically hurt those holding bonds because today’s bonds are that much more appealing than yesterday’s as rates go up. How much the hurt hurts is a matter of fact. But those renewing GICs or sitting on cash these days are desperately awaiting higher interest rates to help their savings grow. So higher rates could at least lead to higher returns for fixed income investors in some cases.
Higher rates could benefit stock investors. Once again, the emphasis on “could” is key. Higher rates usually mean the economy is improving and inflation is rising. This could be a good sign that corporate profits and corresponding stock prices are moving higher. That said, one has to wonder if low bond and GIC interest rates and cheap credit have pushed more money into the stock market than should otherwise be there. Rising rates could bring income investors back to the more traditional income investments like bonds and GICs from the blue chip stocks they’ve potentially flocked to in order to obtain yield.
Despite the purported uncertainty above on stocks and bonds, higher rates should at least contribute somewhat to restoring equilibrium to credit, debt and equity markets. Something seems wrong with near zero or negative real interest rates. That is, something seems wrong with a GIC investor earning 2%, paying 1% of that away in tax and 2% inflation resulting in an effective return of -1%. On that basis, something seems right about higher interest rates, whether we like it or not. What happens to mortgage debt, stocks and bonds remains to be seen.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto.
Burgeoning Calgary population to fuel demand in housing market & the West is now bigger than the East!
The migration West continues! Just yesterday Canada Census noted that for the first time in history the West has more people than the East – sure it is only by 0.1% but hey … it’s official.
The migration continues mostly for jobs in energy and all those people need homes to live in. This supports prices and continued demand – but unfortunately fills up the roads and parking lots too.
New home construction and MLS sales on upswing
CALGARY — A burgeoning population will spark another real estate cycle in Calgary with increased demand fuelling more MLS sales and more new home construction.
But industry experts don’t expect the next cycle to mirror the boom of a couple of years ago which experienced a frenzy of activity and fast-rising house prices due to a lack of supply.
Instead, a stable, steady growth is expected in Calgary’s real estate market.
On Wednesday, Statistics Canada reported the Calgary census metropolitan area had the highest rate of population growth in the country at 12.6 per cent between 2006 and 2011 and is now more than 1.2 million for the region.
Tim Logel, president and partner of home builder Cardel Lifestyles in Calgary, said the population data supports what the industry believes is happening in the market.
“What’s positive about it is that as more people move to Calgary then more of the inventory or the supply that we’ve been working on reducing gets absorbed,” said Logel. “And it gets absorbed quicker and gets us closer to being in a higher demand environment where we’re being asked to produce more new housing products of all types for the market … Over the next year with this in-migration, the extra supply will be absorbed.”
Logel said a new real estate cycle has been started in the city. The last one finished in the spring of 2007 in the Calgary market.
Ann-Marie Lurie, chief economist for the Calgary Real Estate Board, said the growing population will help support increased demand for housing in the resale market as well.
“In the resale market, especially moving forward, we think this will also help really take up some of that inventory that is in the market because we had some out-migration in the past few years. 2010 in particular, in-migration levels were extremely slow and so that impacted our housing market as well,” said Lurie.
CREB is forecasting single-family MLS sales activity to increase by 12.2 per cent this year from 2011 levels and condo transactions to jump by 5.9 per cent. Its forecast is also for average sale prices of single-family homes to rise by 2.1 per cent and by 1.7 per cent for condos.
“It’s much more of a stable growth than it was during the last boom. I just don’t see us moving there,” said Lurie. “We’re not moving into that scenario. It’s a much more stable growth and we have a good supply of inventory right now in the resale market and frankly on the new home market they do have some room to improve in some of their construction.
“They’ve got some room to grow and build more to help meet with those household formation numbers.”
Already in January some real estate data, released Wednesday, is indicating support for increased activity in the market as housing starts and residential building permits showed impressive increases compared with a year ago.
According to Canada Mortgage and Housing Corp., housing starts in the Calgary census metropolitan area totalled 786 units in January, up 52 per cent from 518 units a year ago.
In the region, 336 single-detached units broke ground in January, up 14.7 per cent from the 293 units started in January 2011.
“This represents the sixth consecutive month where starts have increased on a year-over-year basis,” said Richard Cho, senior market analyst in Calgary for the CMHC.
Multi-family starts, which include semi-detached units, rows and apartments, increased to 450 units in January, up from 225 units a year earlier.
“As was the case in the last several months, apartment construction continues to be elevated, averaging more than 340 starts per month since August 2011,” said Cho.
Also, the estimated construction value of building permit applications for the residential sector in Calgary rose by 42 per cent in January compared with a year ago.
In releasing its latest data on Wednesday, the City said residential values increased to $153 million compared with $108 million in January 2011. This represents 651 new residential units, a 73 per cent increase compared with the January 2011 total of 376.
“The overall gain in residential value and number of new residential units can be attributed to increases in the apartment and townhouse sectors,” said Kevin Griffiths, chief building official with the city’s department of development and building approvals.
“For the month of January we accepted six apartment applications for 193 new units compared to zero last year, and 20 townhouse applications for 122 new units, compared to only seven townhouse applications totalling 44 units for the same period last year.”
© Copyright (c) The Calgary Herald
Rates, spreads and all the rest
This is an article that was sent to me. It is totally technical and I love it. This is the real reason behind what are the lowest rates we have ever seen.
It also explains why the days of Prime -.95% are GONE for what looks like a long time.
In between the lines is says rates are going to go up quickly as soon as there is a sniff of recovery.
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In the last few days, RBC and Scotiabank have eliminated their advertised variable-rate discounts.
They’re now promoting variable mortgages at prime + 0.10%, twenty basis points more than their previous “special offers.”
Prime + 0.10% (i.e., 3.10%) is an interesting number. A few months ago consumers thought that fat variable-rate discounts were here to stay. Variables above prime will now come as a shock to some people.
The banks are well aware of that. They know that pricing above prime impacts consumer psychology.
They could have priced at prime. Spreads are not that horrendous. But pricing above prime makes more of an impact. It makes higher-profit fixed rates more appealing and it mentally prepares consumers for potentially higher VRM premiums down the road.
That said, banks are not just arbitrarily sticking it to borrowers. Far and away, the main reason variable rates are worsening is that banks’ costs are rising.
At the moment, there are multiple factors at play:
• Higher risk premiums are compressing margins.
O We have Europe to thank for the that.
O The TED spread, a measure of interbank credit risk, just made a new 2½ year high. As volatility increases, banks have to factor that into their funding models.
O Another reflection of risk is the most recent floating rate Canada Mortgage Bond (which some lenders use to fund variable-rate mortgages). It was issued at a 15 basis point premium over the prior issue in August.
• Margin balancing is an underlying bank motive.
O Banks have publicly stated their desire to even out margins between profitable fixed rates and low-margin variables, and they’re slowly doing just that.
O Back in September, RBC Bank exec David McKay put it this way: “…Given the dislocation between fixed and variable, the very, very thin margins (of variables), we felt we needed to move prices up in our variable rate book.”
• New regulations (e.g., IFRS) have boosted the amount of capital required for mortgage lending.
O That has lowered the return on capital for mortgages, and thus influenced rates higher.
• Status Quo for prime rate doesn’t help margins.
O Lenders partly rely on deposits (that money rotting in your chequing and savings accounts) to fund VRMs.
O Demand deposit rates rise slower than prime rate. So, when prime goes up, some lenders get wider margins temporarily.
O When expectations changed three months ago to suggest that prime rate will fall or stay flat (instead of rise like expected), it was bad news for some deposit-taking lenders. That’s because they now have no spread improvement to look forward to in the near-to-medium term.
O MBABC President Geoff Parkin says that until recently, “lenders have been prepared to accept low (VRM) profit margins with the knowledge that, as the prime rate inevitably rises, so too will their profit on variable mortgages.” As it turns out, the inevitable is taking longer than the market expected.
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Alberta leads North America in economic freedom: Fraser Institute report
This is great news for those of us in Alberta – we already knew we are booming. The rest of Canada is finding out as there were 26,000 new people added to Calgary this year. Almost the same as the boom in 2006. That means more people looking for homes or to rent and that demand will take up the housing slack.
Alberta leads North America in economic freedom: report
FILE – An oilsands mine facility seen from the air near Fort McMurray, Alta., Monday, Sept. 19, 2011. THE CANADIAN PRESS/Jeff McIntosh
CTVNews.ca Staff
Date: Tuesday Nov. 22, 2011 2:02 PM ET
Quebec and Ontario lag far behind their Western cousin Alberta and many U.S. states when it comes to economic freedom in North America, according to a new report.
While Alberta finished first of all Canadian provinces and U.S. states, Ontario finished fifth among the provinces and a dismal 49th when U.S. states were factored in.
Quebec finished eighth among the provinces — ahead of only Nova Scotia and P.E.I. — and a sluggish 58th overall in the analysis by the Fraser Institute titled Economic Freedom of North America 2011.
The report measures the economic freedom of 50 states and 10 provinces based on indicators such as size of government, taxation levels, and labour market freedom.
It found a direct connection between the states and provinces with the most economic freedom, and those where residents earned the most.
“The 12 Canadian and American jurisdictions with the highest levels of economic freedom had an average per-capita GDP of $54,435 in 2009, compared to the 12 lowest-ranked jurisdictions in North America, where average per-capita GDP in 2009 was $40,229,” the report stated.
Following are the top five finishers:
- 1. Alberta
- 2. Delaware
- 3. Texas
- 4. Nevada
- 5. Colorado
After Alberta, Saskatchewan was the second-highest Canadian finisher, but came in at only 32nd overall. Newfoundland and Labrador followed as the third-place overall Canadian finisher at 37th place.
B.C. came in 43rd overall, Ontario finished in 49th, and the bottom five spots on the entire list were dominated by the following Canadian provinces:
- 56. Manitoba
- 57. New Brunswick
- 58. Quebec
- 59. Nova Scotia
- 60. P.E.I.
Improvements in Canada
But the news wasn’t all bad for Canada. On average, the report found that levels of economic freedom increased in Canada between 2000 and 2009.
And in Newfoundland and Labrador and Saskatchewan, levels of economic freedom rose significantly in that same period.
Though less dramatic, B.C. and Alberta have also shown signs of improvement, which has allowed them to surpass several U.S. states in the rankings.
“It’s no coincidence that the provinces showing increased levels of economic freedom are also the provinces whose economies have been the most vibrant and shown the most growth in recent years,” said Fred McMahon, Fraser Institute vice-president of international research and the co-author of the report, in a statement.
“A common theme among provinces with high levels of economic freedom is a commitment to low taxes, small government, and flexible labour markets. These conditions foster job creation and greater opportunities for economic growth.”
Conversely, he said, provinces with low levels of economic freedom result in lower standards of living and reduced opportunities for families.
The report states that Quebec, Ontario, Manitoba, Nova Scotia and New Brunswick have all shown declines in economic freedom between 2000 and 2009.
Particularly troubling, McMahon said, is the fact Canada’s two most populous provinces, Ontario and Quebec, have fared so poorly.
“If governments in these two provinces want to boost prosperity and improve the standard of living for their residents, they should look to the successful policies of provinces where economic freedom has increased,” McMahon said.
How do we (mortgage brokers) know rates are going up?
Hi All – many people ask how we know that rates are going to change ahead of time. Below is a sample of the data that we read on a daily basis. If you were motivated enough to read things like this every day – or figure them out for yourself – then you would know too. Or, just let a mortgage broker do it.
MARKET COMMENTS
Bond yields today are roughly where they were a week ago but there has been plenty of volatility over the intervening period.
Last week yields were pushed higher by in-line or better than expected economic data in Canada (Manufacturing Sales Growth, Trade Balance) and the US (Retail Sales Growth, Initial and Continuing Jobless Claims, Trade Balance), together with a sense of optimism that the European debt crisis will be resolved and/or that concerted steps there would be taken to protect the banking system.
Generally speaking, “good” economic news tends to push bond yields higher as market participants are less interested in the safety bonds provide.
Notwithstanding last week’s developments, yields have come back down today as worse than expected economic data in the US and a clarification from Germany that a once-and-for-all solution to Europe’s debt crisis will not be forthcoming and that markets should expect such crisis to extend into next year.
In all, these developments present the global economy in better shape than what we thought at the start of the week, and the rise in rates reflects that change.
Calgary house prices and sales rise in September
Calgary is showing solid numbers are the in-migration continues. Almost 40% of people moving to Alberta move to Calgary.
CALGARY — Calgary house prices and sales rose in September compared with a year ago, according to the Canadian Real Estate Association.
In releasing its monthly data on Monday, CREA said MLS residential sales in Calgary reached 1,789 units in September, up 11.4 per cent from September 2010 while the average sale price rose by 1.3 per cent on an annual basis to $406,252.
Year-over-year in Alberta, sales rose by 9.7 per cent to 4,316 units while the average price increased by 3.0 per cent to $359,637.
Nationally, MLS sales of 37,760 were up 11.0 per cent from September 2010 and the average price rose by 6.5 per cent to $352,581.
“Canada’s housing market remains stable amid continuing financial market volatility, contributing to Canadians’ confidence in the economy and providing support for Canadian economic growth,” said Gregory Klump, CREA’s chief economist, in a statement. “Interest rates are expected to remain low for longer, and evidence suggests that recent changes to mortgage regulations are preventing the kind of excesses they were designed to avert. Both of these developments are good news for the housing market.”
© Copyright (c) The Calgary Herald
Calgary resale homes top $400,000 average
CALGARY — The average price of resale homes in Calgary topped $400,000 in August, according to a report released Friday by the Conference Board of Canada.
The board said all residential property sales in the city hit an average of $404,755 during the month, up from $391,497 a year ago.
The seasonally-adjusted annualized rate of sales also jumped to 22,092 from 18,816 in August 2010.
And the annualized rate for new listings has also increased to 44,940 from 43,536.
The board said the sales to new listings ratio in Calgary increased to 0.466 in August from 0.410 a year ago.
The board also forecasts short-term year-over-year price growth of between five to seven per cent for Calgary.
According to the Calgary Real Estate Board, month-to-date up to and including Thursday, there were 740 single-family MLS sales for an average price of $466,754 and 307 condo sales for an average of $302,460.
For the same period in 2010 up to Sept. 22, there were 682 single-family transactions at an average of $467,486 and 258 condo sales for an average price of $280,790.
© Copyright (c) The Calgary Herald
Canadian debt levels no cause for alarm, economist says
Her comments below are right on.
Globe and Mail Blog
Posted on Monday, September 19, 2011 6:40PM EDT
A report that showed Canadian household debt levels have topped U.S. ones should be taken with a grain of salt, according to one economist.
In a note released Monday, National Bank of Canada’s Matthieu Arseneau says the Canadian government’s indicator on household debt “does not lend itself well to such an international comparison owing to the considerable differences between the social safety nets of the two countries.”
At first glance, personal disposable income levels appear much lower in Canada than in the United States. Mr. Arseneau attributes that to higher tax levels in Canada that are used, in part, to fund our national health care system.
Americans, meanwhile, must allocate nearly 20 per cent of their personal disposable income to paying for health care, he says. “If we adjust for this factor, the debt ratio of U.S. households exceeds that of their Canadian counterparts by 12 per cent.”
A report released last week showed that Canadian household debt rose to a record high in the second quarter, surpassing levels seen in the United States since the start of the year.
Statistics Canada said last Tuesday that the ratio of household credit-market debt – which includes mortgages, consumer credit and loans – to personal disposable income climbed to 149 per cent from 147 per cent in the first quarter. That’s the highest level since Statscan started gathering figures in this category in 1990.
The government agency attributed the growing debt to higher mortgages and increased consumer credit borrowing.
With interest rates slated to remain at low levels for the foreseeable future, Canadians are taking on both mortgages and consumer loans. Policy makers have expressed concerns about high household debt levels and warned against what could happen if rates were to rise.
In his note, Mr. Arseneau also noted that the Statscan ratio represents only one facet of the financial health of households.
“If we consider the ratio of debt to net worth, which is still markedly higher in the United States, we understand why household deleveraging is ongoing south of the border whereas nothing of the sort is happening in Canada,” he said.
Mr. Arseneau concluded his note by warning of the need to be vigilant, because excessive household debt levels “could represent a risk factor for Canada’s economic stability down the road.”
Calgary MLS sales jump 22% in August
CALGARY — MLS sales in Calgary rose by 22.1 per cent in August compared with a year ago — a greater year-over-year rate of growth than the rest of the country.
The Canadian Real Estate Association said Thursday that Calgary recorded 1,907 MLS sales for all residential properties during the month for an average price of $394,251, up 2.2 per cent from last year.
New listings in Calgary rose by 11.7 per cent in August to 3,819 and the sales as a percentage of new listings jumped by 4.2 per cent to 49.9 per cent.
In Canada, sales of 39,542 were 15.8 per cent higher than August 2010 and the average sale price of $349,916 was up 7.7 per cent.
New listings in Canada rose by 13.4 per cent to 73,125 and the sales as a percentage of new listings jumped by 1.1 per cent to 54.1 per cent.
“The housing market in Canada remained on a firm footing in August when compared to volatile financial markets,” said Gary Morse, president of CREA. “Through their actions, homebuyers are showing that they remain confident about the stability of the Canadian housing market, and recognize that the continuation of low interest rates represents an excellent opportunity to buy their first home or trade up.”
Gregory Klump, CREA’s chief economist, said economic and financial market headwinds outside Canada are keeping interest rates lower for longer.
“Those headwinds will likely persist until, and indeed after, fiscal quagmires in the U.S. and Europe are resolved,” he said. “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.”
© Copyright (c) The Calgary Herald