For the 2nd time in 50 years the “Yield Curve” has inverted – meaning that long term rates are now lower than short term rates. This can signal a recession is on the way.
This Means …
- Alberta will look better comparatively to Canada’s hot housing markets which should finally cool down.
- Canada’s Prime rate increases look to be on hold until Spring. This makes the variable rates now look MUCH Better. There were 3 rate increases expected and these may not materialize – making the VARIABLE rate look better.
- Broker lender’s have VARIABLE rates that range between .1% and .65% BETTER than the banks do. If you are looking at variable rates we should look further into this in more detail.
DATA BELOW …
- More on the predictions on rate increases
- WTF is an inverted Yield Curve – lifted from “the Hustle”
Predictions on Prime
Three interest rate hikes in 2019 — that’s what economists have been predicting for months, as part of the Bank of Canada’s ongoing strategy to keep the country’s inflation levels in check. But, according to one economist, that plan may have changed.
The BoC held the overnight rate at 1.75 percent yesterday, and released a statement a senior economist at TD, believes hints that the next hike may not come until next spring.
“We no longer expect the Bank of Canada to hike its policy interest rate in January,” he writes, in a recent note examining the BoC’s decision. “Spring 2019 now appears to be the more likely timing.”
Meanwhile the Canadian rates and macro strategist at BMO, puts the odds of a rate hike in January at 50 percent.
“While the Bank reiterated its desire to get policy rates to neutral, the path to neutral is clearly more uncertain than just a couple of months ago,” he writes, in his most recent note. “Looking ahead to January, the BoC will likely need to be convinced to hike (rather than not).”
A VIDEO ON WHY VARIABLE RATE MAY BE THE WAY TO GO FOR YOUR PLANS
- This video is from my colleague Dustin Woodhouse and he perfectly presents the story on the variable. He also ONLY works in the BC Lower Mainland; if you live there HE should be doing your mortgage, if you don’t WE should be.
2. WTF is an ‘inverted yield curve,’ and what does it mean for the economy?
For the first time since 2007, the 2- to 5-year US Treasury yield curve has inverted. Historically, this has served as a somewhat reliable indicator of economic downturn, which means people are freaking out, which means…
OK, hold up: What exactly is a yield curve, and why is it inverting?
‘Lend long and prosper’ (so say the banks)
In short, a yield curve is a way to gauge the difference between interest rates and the return investors will get from buying shorter- or longer-term debt. Most of the time, banks demand higher interest for longer periods of time (cuz who knows when they’re gonna see that money again?!).
A yield curve goes flat when the premium for longer-term bonds drops to zero. If the spread turns negative (meaning shorter-term yields are higher than longer maturity debt), the curve is inverted…
Which is what is happening now
So what caused this? It’s hard to say — but we prefer this explanation: Since December 2015, the Fed has implemented a series of 6 interest rate hikes and simultaneously cut its balance sheet by $50B a month.
According to Forbes, the Fed has played a major part in suppressing long-term interest rates while raising short-term interest rates.
Yield curve + inversion = economic downturn (sometimes)
The data don’t lie. A yield curve inversion preceded both the first tech bubble and the 2008 market crash.
Though, this theory has had some notable “false positives” in its lifetime — so it’s not exactly a foolproof fortune teller.
Heck, IBM found the size of high heels tends to spike during hard times. As of now, the experts who believe the sky to be falling remain in the minority.
There is lots to digest in the data above. Please feel free to contact me to discuss in more detail.
Mark Herman, 403-681-4376
Top Calgary Alberta Mortgage Broker
The Bank of Canada (BoC) and the Economist say that Canadian housing is over valued 10% – 20%
Just days after the BoC’s highly qualified pronouncements Moody’s Analytics – an organization that some people find less than credible than the BoC – said maybe current prices can be justified by ‘structural changes’ in the market.
Here’s the constant:
- The central bank continues to caution that high household debt to income ratios are the biggest domestic threat to the Canadian economy.
- The Bank also says that the danger of that risk becoming reality, due to a jump in interest rates or a sharp downturn in the economy, is low!
That is good news says Mark Herman, Calgary Alberta mortgage broker.
The Bank of Canada has updated when they plan to increase rates again … about a year from now – so next October? Expect rates to go up 1% then.
Mark Herman, top Calgary, Alberta mortgage broker
The central bank further pushed back the time frame for when it reckoned the economy would reach full capacity, to the second half of 2016 from the mid-2016 estimate in July. It also delayed by one quarter to the fourth quarter of 2016 the time when it expects total and core inflation to settle at its 2 percent target.
Here is the link: http://ca.reuters.com/article/businessNews/idCAKCN0IB1NY20141022
Have a look at this TD report about the price of oil and the Canadian economy.
Highlight: TD expects the Bank of Canada to keep rates the same until mid-2015.
Link to the TD report, outlining the various outcomes of the recent fall in the price of oil.
Here is the news release from the Canadian Association of Accredited Mortgage Professionals (CAAMP):
The Federal Finance Minister announced further changes to Canada’s mortgage insurance rules. Four measures were announced:
1. Amortizations reduced to 25 years
2. Refinancing limited to 80%
3. Properties purchased at over $1 million no longer eligible for mortgage insurance
4. GDS and TDS set at 39% and 44%
5. Line of Credits – LOCs – will soon be limited to 65% of the home value or LTV (Loan to Value.)
How the changes will be applied…
So we have until July 9th to get as many applicants under contract in order to access the current mortgage insurance rules. Possession on these contracts must be completed prior to Dec. 31, 2012.
Applicants going under contract on a home purchase drawn up after July 9th will have to qualify for a mortgage under the new guidelines. We will update all pre-approvals on July 9th under the new insured mortgage guidelines.
Q1. What is required to qualify for an exception to the new parameters?
A. The new measures will apply as of July 9, 2012. Exceptions will be made to satisfy a binding purchase and sale, financing or refinancing agreement where a mortgage insurance application has been made before July 9, 2012. While the changes come into force on July 9, 2012, any mortgage insurance applications received after June 21, 2012 and before July 9, 2012 that do not conform to the measures announced today must be funded by December 31, 2012.
These guidelines have existed for some time but are now more solidified. Lenders typically require that borrowers have a credit score of greater than 680 to qualify for these elevated GDS and TDS levels. Now that we are limited to a 25 year amortization knowing exactly what the upper limits on GDS and TDS are going to be critical.
Q2. Why is the Government limiting the maximum gross debt service (GDS) and total debt service (TDS) ratios?
A. The GDS ratio is the share of the borrower’s gross household income that is needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses. The TDS ratio is the share of the borrower’s gross income that is needed to pay for home-related expenses and all other debt obligations, such as credit cards and car loans.
The new measure announced today will set the maximum GDS ratio at 39 per cent and reduce the maximum TDS ratio to 44 per cent. These debt service ratios measure the share of a household’s income that is required to cover payments associated with servicing debt. Both measures are already used by lenders and mortgage insurers to assess a borrower’s ability to pay. Setting a GDS limit and reducing the TDS limit will help prevent Canadian households from getting overextended and reduce the number of households vulnerable to economic shocks or an increase in interest rates.
More Technical Nerdy Data:
CAAMP believes that Canadians understand the importance of paying down their mortgages. These changes, together with new OSFI underwriting guidelines – also to be announced today – may precipitate the housing market downturn the government so desperately wants to avoid. The changes take effect July 9, 2012.
CAAMP was pleased that it was again successful in ensuring the 5% down payment rule remains intact; however, the government may have overreached with this latest round of changes.
-Important to note that these rules apply in high-ratio insured mortgage – not conventional mortgages. We will likely see changes to conventional lending over time. Many lenders will opt to apply the same rules to all mortgages but there will be exceptions. Many lender is Canada now only offer insured mortgage regardless of the down payment so these rules are going to impact the majority of applications.
-We have seen changes every year for the last four years and in all cases existing mortgages already approved under the old rules were exempt from the rule changes. I would expect the same response this time with existing approved files not being affected by the current changes. I will let you know as soon as I have some understanding of how pre-approvals will be affected.
-In his new release this morning Jim Flaherty specifically mentions the Toronto/Vancouver condo market so rather than restricting condo development in those two cities they have opted to impact the entire country. They also mention the concern over Canadian household debt which had already consistently been dropping.
-OSFI the mortgage regulator is also expect to make mortgage related changes today. 65% maximum finance for lines of credit and amortization restrictions relative to age have been discussed as additional possibly changes. There is going to be a lot of confusion relative to news releases so check in with me if you have questions on specific client situations.
1. Item one is pretty severe. Fewer buyers will qualify to get into the market, those that do qualify took a haircut on what they can afford.
2. Reduced from 85%. Somewhat immaterial because the reduction from 90-85% limited the refinance market significantly already. Now even more Canadians will not be able to move high interest debt into extremely low interest mortgage debt.
3. We don’t see a lot of insured mortgage files in this price range. This rule appears to be focused directly on Toronto and Vancouver.
4. This one needs some clarification. These higher GDS and TDS ratios have always been around but limited to very high credit score applicants. I will try to get some clarification on the specifics of this changes. I believe that this item is just solidifying rules that have been very subjective historically.
I love this data below as it is easily summarized into: World events mean that mortgage rates in Canada are going to stay low for about another year. This is great news for people in the variable as rates (Prime) were expected to rise and they are not going to for a while now. Fixed rates will also stay low too so everyone wins.
If you are not sleepy right now then do not bother to read the rest of this below. Perhaps bookmark it for a sleepless night and use the powers of economic speak to zonk you out then.
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.”
This last blip in the stock market has taken the wind out of the world’s recovery sails. It now looks like rates are going to stay the same or go DOWN!?! for the 12 months or so.
The USA has said for the 1st time ever that they are not going to change their rates until 2013. They have never given a date in the past and this IS a big deal. It means that Canadian rates are going to have to track closely to the USA rates or our dollar will skyrocket and quickly slow our growth and path to recovery.
That would mean that while fixed rates have NEVER been better in 111-years, variable rates are also super attractive because Prime (P) will now stay close to 3% (where it is today) and the rate of P-8% = 2.2% for a mortgage is CRAZY low now that we know it is going to stay around there for 2 more years!
Call to discuss if you have any questions on this. 403-681-4376: Mark
A 180 Degree Change in Rate Views
- 46% probability of a rate cut Sept. 7.
- 100% probability of a rate cut by year-end.
That amounts to a 180 degree swing in market psychology. Just a few weeks ago traders were pricing in a rate hike by January.
“As we’ve seen, markets can swing and perception can swing quite aggressively, and we could well be back to a fall expectation [of a rate hike] in a month’s time,” said RBC economist Eric Lascelles to the Globe & Mail.
Lascelles counterpart at Scotiabank, Derek Holt, says: “Any talk of the Bank of Canada hiking this year is just foolish in my opinion.”
Peter Gibson, chief portfolio strategist at CIBC World Markets notes: “I think it’s clear that there are a lot of serious problems still in the world and it’s more likely that we’re setting the stage for a sustainably low level of interest rates for a very long time.”
And that is the takeaway here.
Despite the roller coaster of emotions as of late, this about-face in rate assumptions reminds us of the necessity to focus on long-term trends. Long-term, North America’s prognosis still seems compatible with low-growth and low-inflation. That’s an environment where fixed mortgage rates typically underperform.
This is good news for people in variable rates AND fixed rates.
It all means that mortgage rates are going to stay low for longer than expected. Prime will stay lower longer partly because the US has for the 1st time said that they will leave the very low rates until 2013 to give the market something solid to work from.
That will also cause the fixed rates to stay lower, longer.
Good news all around.
By Ka Yan Ng
TORONTO (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.”
This article below is good news for everyone with a variable rate – as it looks like they will not go up that fast.
The data below is the most accurate with out any hype that I have seen is a while.
Teetering on the edge of a rate hike
Well we have a better idea of where Bank of Canada Governor Mark Carney stands, and it appears that we’re teetering on the edge of a rate hike.
This comes as no surprise, with many analysts crying for a rate increase for some time now. The question is whether it will be at the next meeting, or the meeting after that, or even before year end.
The key takeaway is that Carney signaled that ‘some’ government stimulus ‘will’ be withdrawn, rather than ‘all’ and ‘eventually’ withdrawn. That means he’s close to pulling the plug. We are looking at growth and employment numbers for the second half of the year and if it remains strong, we may see rates move before year end.
With this week’s announcement put on the backburner, analysts are focused on where we’re going over the next several months, and they certainly have a lot to consider in their projections.
The Bank has a goal of a neutral rate, which bolsters the economy yet controls inflationary pressures. There’s no magical ‘neutral rate’, but economists figure it’s in the 3%-4% range. However, Carney seems reluctant to pull the trigger on rates, considering the likes of the U.S. economy along with the issues we see in several European countries. If we widen the rate gap with the U.S. it will only drive the loonie up further, creating more resistance for economic growth.
Another external factor is the European sovereign debt crisis, in which Carney senses more concern over their troubles that the U.S. will default on its debt. The chances of the U.S. defaulting on its debt is slim and more of a scare tactic than anything. Don’t get me wrong, it’s a huge problem and the Obama Administration doesn’t know whether to turn left or right, but at the same time, if the US defaulted we’d be talking about a whole new worldwide fiasco.
Since the Bank of Canada doesn’t declare what a neutral rate is, it’s hard to determine when and how much rates will move when they do. By the way that Carney is talking it appears as though when rates do start to rise that they will in a controlled manner and they won’t be too aggressive. Analysts and economists shouldn’t assume that rate increases are going to be quick and steep.
Here at home our economy seems to be moving along as projected, and any sudden, high rate increases will be sure to stifle our growth. It looks like if everything goes to plan we may see a modest hike in October, but if some of the assumptions are off a bit it may be later before we see any movement.
In a time characterized by widespread economic turmoil across the US and Europe, there was a certain comfort to be taken in the mundanity of the Bank of Canada’s (BoC) report today. As almost unanimously predicted, the BoC left overnight rates unchanged at 1%, meaning the prime rate stays pegged at 3% and the variable rate mortgage holders of Canada continue to prosper. However, there were some nods towards a rate increase approaching on the horizon. The quote of the day being the warning that monetary stimulus “will be withdrawn”, a statement whose severity is underscored by the omission of the word “eventually”, which was mentioned at the BoC’s May 31st meeting.
However, it is our contention that we are unlikely to see rate increases at the next meeting, in September. A far more likely target would be December at earliest or, more likely, early next year. This prediction comes with a backdrop of increasing pessimism concerning the US. It is our belief that the US policies for growth, characterized by strict austerity measures, could see the US plummet into an economic purgatory from which it may find it hard to escape. This would restrain the BoC from making any substantial rate hikes and, while an increase in rate is almost certainly just around the corner, a series of hikes may not be sustainable. When you add this to the increasing likelihood of Greece’s loan default and now the potential inclusion of Italy into the economic abyss, the case for dramatic rate hikes only erodes further.
While the Bank of Canada will likely act to stem core inflation, which it has highlighted as “slightly firmer than anticipated”, the prevailing consensus remains that this is being driven by “temporary factors”. The bottom line is that we think the 40% of Canadian home owners who are now in variable mortgages can rest assured that they’ve made the right option. Obviously if you’re not comfortable with the inherent risk associated with variable mortgages there’s always the fixed option and it’s rare to see fixed rates so low, so it’s a nice option to have.
If you should have any questions on anything you’ve read here or are interested in perhaps switching to a variable rate mortgage and would like some of our sound, unbiased mortgage advice then we suggest you give us a call today at 403-681-4376.
The case for using a broker has never been stronger, with more and more Canadians beginning to realize that savings associated with utilizing the services of a broker. We’ve included a link to this Bank of Canada report outlining the savings on “search costs” which brokers provide. They demonstrated that “over the full sample the average impact of a mortgage broker is to reduce rates by 17.5 basis points.” For all those mathematically limited soles like me, that means $1,670 of interest savings on a typical $200,000 mortgage over five years. Don’t be one of those people who let the comforts of a familiar bank name dissuade you from making the savings available to you. Call Mark Herman today!