Inverted Yield Curves, Impacts on Prime Rate Changes and Variable Rate Mortgages

Summary:

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 …

  1. Alberta will look better comparatively to Canada’s hot housing markets which should finally cool down.
  2. 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.
  3. 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 …

  1. More on the predictions on rate increases
  2. WTF is an inverted Yield Curve – lifted from “the Hustle”

 

  1. 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

  • https://vimeo.com/279581066
  • 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

 

Your Banking Relationship: They leverage your mortgage to rake in credit cards profits.

Below is part of an article where the bank is sad their mortgages are down 500% from last year. At the same time they made 16% more from ramming credit cards and Lines of Credits down their mortgage customer’s throats so it’s all okay in the end. For them… and how about for you?

The blue part shows that mortgage is the key to create what customers feel is a “relationship” with the bank so they can then sell you all their high margin products.

Broker lenders only “sell” 1 thing, mortgages, so consider separating your banking and your mortgage and get the best mortgage possible – through a broker lender.

 

“Having your mortgage at your bank is only convenient for them to rake it in off of your credit card fees.”

Mark Herman, top Calgary mortgage broker

 

Here is the article:

Bloomberg News, Doug Alexander, August 23, 2018 …

Canadian Imperial Bank of Commerce’s prediction of a mortgage slowdown has come true…

Despite the mortgage slowdown, CIBC posted a 16% jump in Canadian personal and commercial banking earnings due to a “significant” expansion  … and growth in credit cards and unsecured loans amid rising interest rates, Chief Financial Officer Kevin Glass said.

“Those would be the major offsets in terms of mortgage growth declining,” Glass said in a phone interview. “Mortgages are a key product for us — it’s very important from a client relationship perspective — but it’s not a high margin product, so if mortgages come off it has a far smaller impact than rate increases do, for instance.”

Prime rates should go up in July

This only affects variable rate mortgages and there are 2 increases to Prime expected for 2018, this one and one in December – depending on how the economy goes.

  • The Bank of Canada is expected to raise interest rates on July 11th.
  • They normally increase Prime by 0.25% at a time, Prime is 3.45% now and should then go to 3.70%.
  • The Central bank also emphasized that the increase will be needed to contain inflation.

 

 

This makes the 5-year fixed rates look much better as rates are slowly going back to 4% – the Theoretical Minimum

Mark Herman, Top Calgary Alberta Mortgage Broker

Some will wonder what stopped the Bank of Canada from raising interest rates today. It does seem likely that policy makers struggled with the decision, as they had little bad to say about the economy.

The reason for the delay is the same as it’s been since the start of the year: U.S. President Donald Trump. Canada’s central bank remains concerned that U.S. trade-and-tax policy will weigh on Canadian business investment, so much so that it is prepared to risk a little inflation by waiting for more clarity.

Few thought the central bank would raise interest rates on May 30. Poloz had been clear that he was comfortable with inflation running a little faster than the target rate of 2 per cent. He also said last month that hard evidence on investment would be a crucial variable and no such information has yet been published.

The central bank had been wary that its three interest-rate increases since last summer would choke domestic spending. But households seem to be coping just fine, which means the Bank of Canada can resume pushing interest rates higher.

Here is the link for the entire article: http://business.financialpost.com/news/economy/bank-of-canada-holds-interest-rate-at-1-25

The Details: What you need to know about “discount mortgages.”

Grandma always said, “The price is the price, but the details are the details!”

There are discounted and restricted mortgage rates out there but they do not share the details of their disadvantages up front with you.

  1. Restricted or Limited Products / Bait & Switch

People will not even sign a 3 year cell- phone contact any more but they will try to save $15 a month on a restricted mortgage; which could cost them $30,000 as a payout penalty – BUYER BEWARE is what the regulators say.

Brokers often advertise these products to get you to call them and then they switch you into a “regular product” if you are lucky – or you get a “restricted product” that you probably do not want if you know all the details.

Discount mortgages called “limited” or “restricted” and often have:

  • No rate holds
  • Only monthly payments
  • Only 1 statement a year
  • No on-line administration = call centre only
  • Only 5/5 extra repayment option – most broker lenders are 15/15 + 2x or 20/20
    • The 1st number is the % of the original mortgage amount you can repay every year without penalty
    • The 2nd number is the increase in monthly payment in % you can do without penalty.
    • The 2x = double the payment!
  • And they use the bank payout penalty calculations – as below in the Dirty Trick – AND in addition to that penalty, a 3% fee of the entire mortgage balance added to the penalty!
    • This could easily end up at $30,000.

 The other main “Details” that are not often disclosed are:

2.Collateral Charge

To keep you from leaving the bank for a lower rate when you renew later, the banks register your mortgage as a collateral charge – which is the same as an “I owe you” / IOU for the home. Other banks will not take another banks IOU for a mortgage; which means:

  • A lawyer will have to re-register your mortgage at land titles; $1000.
  • An appraisal is needed as the registration is usually for more than the value  of the home; $450

3. The “Dirty Trick” of how the banks calculate your payout penalty

To avoid these products, or to disucss what your personal situation may be, call us any time at 403-681-4376.

Mark Herman, Top Calgary, Alberta, mortgage broker for renewals, first time home buyers and home purchases.

A lesson from RBC’s mortgage rate increase

I love this article from the Globe as it explains why rates are going up a bit and what expectaions are for the near term.

Call for a rate hold if you are thinking of buying in the next 4 months!

“Borrowers who use a mortgage broker pay less …,” Bank of Canada.

See our reviews here: https://www.markherman.ca/CustomerREVIEWS.ubr

Mark Herman, Top best Calgary mortgage broker

The lesson home buyers should take from RBC’s mortgage rate hike

TD collecting all your data on-line

TD does collateral registrations and also look at everything you do on line. Not only do they love your money, they also love your data!

Stop trusting the big banks and talk to a mortgage broker to protect your data and your money.

Mark Herman, Top Calgary Alberta Mortgage Broker.

 

TD Visa customers’ browsing activities open to ‘surveillance’ by bank

Bank denies collecting general information about what customers do online

By Rosa Marchitelli, Go Public, Posted: Nov 30, 2015 5:00 AM ETLast Updated: Nov 30, 2015 9:11 PM ET

A B.C. man decided to Go Public after discovering Canada’s second-biggest bank can access and collect information on all of its customers’ online activities, even those that aren’t banking-related.

 

Colin Laughlan is one of thousands of Canadians who had his Visa cards switched from CIBC to TD in 2014 after the Aeroplan rewards program changed banks.

“When I saw this — I really had to read it two or three times to make myself believe I was reading what I was reading,” he said.

He points to two lines in the 66-page Visa cardholder agreement that allows TD to collect details about anything — and everything — customers do online.

Under the privacy section of the cardholder agreement:

“COLLECTING AND USING YOUR INFORMATION — At the time you request to begin a relationship with us and during the course of our relationship, we may collect information including:

  • Details about your browsing activity on your browser or mobile device.
  • Your preferences and activities.

Laughlan, from Vancouver, has a background in privacy issues as a former journalist and communications specialist. He said his radar was up when his new TD Visa card and cardholder agreement arrived in the mail.

“I couldn’t see any reason they had to do that sort of surveillance on Canadians and they weren’t being particularly forthright about it. This was slipped into the fine print of the policy and I’m well aware that the vast majority of people don’t read these things,” he said.

Laughlan said it took almost a year before his complaint finally reached TD’s privacy office.

TD’s privacy office crossed out the lines that Colin Laughlan found problematic in his cardholder agreement and an official signed them. (CBC)

The bank eventually apologized ….

http://www.cbc.ca/news/technology/td-visa-clients-browsing-open-to-surveillance-by-bank-1.3339148?cmp=googleeditorspick&google_editors_picks=true

Alberta creates 9/10 jobs in ALL OF Canada for 2013

I have about 50 posts saying the continued inbound immigration from all places in Canada and the world supports our home prices and high qualify jobs down town. Here is more awesome news …

… It was the highest pace of monthly job creation in nearly three years and well above the average gain of about 6,000 since the end of the 2009 recession.

And Alberta accounted for a stunning 87 per cent of all the jobs created in the entire country since February of last year.

and the link is here: http://www.calgaryherald.com/business/Steady+hiring+climate+expected+Calgary+region/9603604/story.html

Great news!

#Mortgage RATES to stay low for a while yet – that is great news!

Below is the technical, boring stuff we read to see where rates are going for you. Just ask us for the short version.

Short version is that the Bank of Canada is going to leave the rates the same for a while yet – like a year.

Long boring version is below.

Canadian Dollar Down in Wake of BOC Dropping Tightening Bias

TORONTO–The Canadian dollar is lower Thursday morning as it struggles with the implications of the Bank of Canada’s erasure of its tightening bias amid a broader retreat in commodity currencies.

The U.S. dollar was at C$1.0409 Thursday, from C$1.0384 late Wednesday, according to data provider CQG.

Its high for the session so far at C$1.0419 fell just shy of resistance around the C$1.0420 area.

The Australian and New Zealand dollars are also lower Thursday amid concerns about monetary policy and banking system liquidity in China. Any threat to economic growth in China puts pressure on commodities and commodity-linked currencies because Chinese demand for commodities is a key support for the asset class.

But the Canadian dollar is also grappling with the implications of the Bank of Canada’s decision on Wednesday to drop its 18-month-old tightening bias, a move some analysts believe could prompt a new round of weakness in the Canadian unit as it undermines the perception the Bank will raise interest rates before other advanced economies.

Currency strategists at UBS said in a report the Bank’s move derailed a rally they had expected to see in the currency.

“Having felt conditions were ripe for a CAD rally, we were taught a harsh lesson on Wednesday by the BOC: never ever underestimate the determination of a small, open economy’s central bank to defy expectations for a positive outlook,” they said.

The tightening effect on the Canadian economy from any gain in the Canadian dollar is simply too big for the Bank of Canada to risk, and the bank wanted to keep policy steady in order to retain maximum policy flexibility, UBS said.

Write to Don Curren at don.curren@wsj.com

 

Calgary listed as an “out-performer” in Canadian real estate market

Great news to show support for Calgary home prices. It is due to the in-migration which has Canadians from all over moving here for higher quality and higher paying jobs. That is not expected to slow any time soon.

Calgary listed as an “out-performer” in Canadian real estate market

Pace predicted to be moderately lower for the rest of Canada

Calgary realtor Kaitlyn Gottlieb of Century 21 Bamber Realty Ltd.

Photograph by: Colleen De Neve Colleen De Neve, Calgary Herald

CALGARY — Canada is expected to embark on a gradual, modest, downward housing market adjustment over the next three years with a “measly” two per cent annual price gain over the next decade, says a study released Monday by TD Economics.

But the bank has also listed Calgary as an “out-performer” in Canada for the long-run rate of return on Canadian real estate. Compared with the national picture, Edmonton, Vancouver, Victoria and Toronto were also listed as out-performers for the future.

“With the slowdown in the Canadian housing market well entrenched, many are worried about the future value of their homes. This is not surprising as real estate is the largest financial asset most Canadians have in their possession,” said TD Economics.

“The housing market is prone to cyclical ups and downs and we should embark on a gradual, modest, downward adjustment over the next three years. We project a 3.5 per cent annual rate of return on real estate to prevail beyond 2015 – this is the long-run rate of increase for home prices in Canada. However, this pace will be moderately lower than they have been historically (5.4 per cent).”

Derek Burleton, vice-president and deputy chief economist with TD Economics, said Calgary had a run-up in prices before the recession and then a sharp decline during the recession.

“I guess prices didn’t come back too much but certainly sales fell back and now you’re getting a bit of a cyclical bounce,” he said, adding a long-term forecast takes into account key economic drivers like population growth and the potential of the economy to generate income.

“Based on some of the key drivers of growth, Calgary ranks right up there at the top and that should stand the housing market good stead. At least continue to drive above average price gains over the long run.”

The average MLS sale price in Calgary was $180,420 in 2000. That climbed to a peak of $423,770 in 2007 before dipping to $394,064 in 2009. From then, it has steadily climbed, reaching an all-time record of $428,644 in 2012.

Becky Walters, president of the Calgary Real Estate Board, said the Calgary market is really strong this year due to the in-migration it has been getting over the past 12 months.

“It’s not maybe as strong this year as it was last year but it’s certainly strong,” said Walters. “We’re seeing a nice steady growth. We’re seeing prices starting to come up a little bit not tons.”

For example, according to CREB, year-to-date until March 10, there have been 3,595 MLS sales in the city, up 4.66 per cent from the same period a year ago, and the average sale price has jumped by 9.23 per cent to $451,189.

However, at the national level, TD said a string of lacklustre performances over the next few years will mean that the annual rate of return for real estate in nominal terms will be a “measly” two per cent over the next decade, meaning home price gains should simply match the pace of inflation.

“Our research at REIN Canada is showing that for the coming five years, outperforming markets will be those based not in speculation or foreign investment, they will be those markets supported by underlying economics,” said Don Campbell, senior analyst and founding partner of the Real Estate Investment Network. “The Canadian real estate market is too broad and too diverse to paint with one story or byline and will become an increasingly regional story. Supporting economics such as increasing jobs, increasing population through migration — especially those areas which are attracting a younger, working age cohort — and increasing incomes will play a larger role in market demand and value than it has in the last five years.

“Despite Calgary and Edmonton’s value moves already experienced, they are both rated in the most affordable major centres in the country because average incomes are also higher than in most other regions. This, along with the younger age of in-migrants to these cities from other parts of the country, will be strong and supporting factors for these market for the coming years.”

Richard Cho, senior market analyst in Calgary for Canada Mortgage and Housing Corp., said in the Calgary region the average price in 2013 is expected to reach $423,000, up 2.6 per cent from 2012.

“The rate of growth is anticipated to be higher here than in many other areas of the country as the average resale price in Canada is forecast to increase by only one per cent in 2013,” he said. “Supply of homes in Calgary’s resale market has come down from a year earlier while sales have been fairly stable. The resale price in 2014 is forecast to continuing rising in Calgary, averaging $434,000.”

mtoneguzzi@calgaryherald.com

Twitter.com/MTone123