Alberta renovation spending to lead country
This is great news for Calgary. It shows two things.
1. Due to the home price drops from the peak in 2007 many are choosing to renovate rather than move out of their “upside down” mortgages.
2. The Perfect Home Program allows you to include the cost of renovations in the mortgage when it is purchased. Call to discuss how this program work. It means that you can buy a home in the location YOU want and then make it YOUR Perfect Home with your own kitchen, floors, basement and all the rest.
Alberta renovation spending to lead country
1.7% growth in 2011, 4.9% in 2012.
Renovation spending in Alberta is forecast to lead the country in year-over-year growth this year and in 2012, according to a report by the Altus Group, an economic consulting firm.
The report said spending in Alberta on renovations hit $5.7 billion in 2010, which accounted for 9.5 per cent of all spending in the country. Total spending in the province was up 7.2 per cent from the previous year which was behind many other provinces for annual growth.
Canada saw 9.2 per cent growth in 2010 to $60.1 billion.
Altus Group forecasts spending to increase in Alberta by 1.7 per cent this year and by 4.9 per cent next year — both growth rates leading the nation.
For Canada, the report forecasts a 0.1 per cent decline this year followed by a 3.6 per cent hike in 2012.
“Canada’s general economic recovery continues, but at a modest pace,” said the report. “Job growth has been stronger through the recovery than after the last recession, but still suffers from weakness, particularly in terms of youth and full-time jobs. The cautiously optimistic forecast for economic growth translates into equal caution over the forecast for renovation demand.
“The good news for renovators is that weaker than expected economic growth has extended the period of very low interest rates, perhaps into 2012. Low interest rates are important for this sector both in terms of affordability for those who need to borrow to finance their renovations, as well as in keeping mortgage payments in check, thereby freeing up income for discretionary renovation spending.”
© Copyright (c) The Calgary Herald
Canada’s jobless rate falls to lowest level in two years
this is more great news.
By Julian Beltrame, The Canadian Press
OTTAWA – Canada’s unemployment rate fell to its lowest in more than two years as a combination of more self-employed workers and fewer job seekers in May pushed the key economic marker down to 7.4 per cent.
Statistics Canada said 22,300 new jobs were created last month, slightly above consensus estimates following April’s strong 58,000 jobs gain. The last time Canada’s unemployment rate was as low as 7.4 per cent was in January 2009, a few months after the economy had plunged into recession.
The finer details of the May report were less impressive, however.
The jobless rate dropped two-tenths of a point due as much to the fact that 27,500 fewer Canadians were actively looking for work as to the new jobs created.
While all the jobs were full time, they came in the less desirable self-employment category, which could indicate that many Canadians turned to creating their own employment because they were unable to find more traditional work.
“Small business is of vital importance to the Canadian economy, but job creation within this category in a soft spot for the economy (and) is always a knock against the quality of the headline gain,” Derek Holt, vice-president of economics for Scotiabank, said in a note to clients.
The number of employees in Canada actually dropped by 7,500 in May and the goods producing sector of the economy saw a pullback in employment, with manufacturing taking the biggest hit with 22,500 fewer jobs. The month also showed the public sector is starting to tighten, shedding 44,300 jobs as governments begin dealing with large deficits.
The markets treated the report as a status quo finding. The loonie barely budged after the data was released early Friday, although the currency swooned in later trading on dipping oil prices.
Holt noted that hours worked rose just 0.3 per cent and wages were only 2.2 per cent higher than last year, down from 2.6 per cent in March.
“After stripping out inflation, real wages are going nowhere and that remains bearish for consumer spending as households are simply unable to post income growth beyond covering higher fuel and grocery costs in a generalized commodity shock,” he said.
Still, analysts said any job gain following April’s strong advance is good news. It showed April was not a mirage.
“The details in this month’s job growth were not all rosy, but any gains at all were impressive given that they came on the heels of an outsized 58,000 prior-month tally and amidst signs that the economy is decelerating sharply in the second quarter,” said CIBC chief economist Avery Shenfeld .
Not to be overlooked, he added, is that private sector employers added workers, although a small number.
Another positive for the future, said Jimmy Jean of Desjardins Capital Markets, is that the factory sector is likely to recover once supply chain disruptions from the Japanese natural disaster are resolved.
The summer months will also benefit from an additional $10 million Ottawa is pumping into the summer jobs program to encourage student hiring. Labour Minister Diane Finley says government support will create 36,000 student jobs this summer.
Most economists had predicted a slowdown in job creation not only because they viewed April’s increase as an above-trend anomaly but also because other economic indicators pointed to slowing activity.
Meanwhile, consumer spending and housing have fallen off of late and, earlier in the week, the government reported that the important export sector shrank by 1.1 per cent in volume terms in April.
Despite the softness, Canada’s economy is doing far better than its southern neighbour, which in the same month created only 54,000 jobs, a tiny amount given the size of the U.S. labour force.
In the past year, Canada has more than recouped all the jobs lost during the 2008-2009 recession, creating 273,000 in the last 12 months alone, most full time and in the private sector. Meanwhile, the U.S. remains several million shy of its pre-crisis level and the jobless rate is above nine per cent.
In May, most of Canada’s employment gains came in the retail and wholesale trade industries, and in information, culture and recreation. There were losses in manufacturing and educational services, mostly of those in post-secondary institutions.
Regionally, the lion’s share of job creation came in Quebec, which saw its employment rise by 24,800, while Ontario saw a drop-off of 16,100. http://ca.finance.yahoo.com/news/Canada-jobless-rate-falls-capress-4119373303.html?x=0
Is Calgary’s boom back? Consumer confidence seen climbing ‘with a vengeance’
CALGARY – From BMWs to Bentleys to a good bottle of wine, Calgary consumers are opening their wallets in what’s being described as more than just a recovering economy – with some even willing to say the word “boom” again.
Retailer Wayne Henuset is in the thick of it, discovering his own barometer to measure what is quickly turning into a healthier marketplace.
The owner of Willow Park Wines and Spirits says consumer confidence has been rising “with a vengeance” since fall.
“We know this because when things are bad, people just buy wine, on sale, and bring it home.
“But when times are good, the restaurants are buying more wine from us, because people are going out more. And that’s what’s happening.”
It’s one of myriad examples that suggest Calgary is reclaiming its economic swagger, as sectors across the board enjoy a surge in consumer and investment confidence, including high-end retail, real estate, construction and, most importantly, oil and gas.
Henuset adds that during the 2008-09 recession, reduced prices and spot sales were what brought customers in.
“Now they’re not really paying attention to that as much, they’re just buying whenever,” Henuset said, adding that the pricier, highend bottles are also getting bought up more.
According to the BMO Blue Book report released this week, Alberta is expected to lead the country in real GDP growth by next year as the province’s economy starts humming again.
Real GDP is expected to expand 3.6 per cent this year before moderating to 3.4 per cent by 2012, according to BMO Capital Markets.
In Calgary, recent reports have suggested record leasing activity in the downtown office market last year, with experts saying job growth isn’t far behind.
Meanwhile, job growth has already started in the construction industry with construction giant Ledcor launching a massive recruitment campaign, with plans to hire up to 9,000 people this year in Alberta and other parts of Western Canada.
In the energy sector, industry activity is way up, says oil and gas analyst Peter Linder, with drilling activity significantly on the rise, record land sales and job prospects improving.
Alberta Energy reported this week it had sold oil and gas leases or licences on 271,000 hectares of land worth $842 million, including a whopping $107 million for a 7,900-hectare licence near Red Deer.
“All of that means more activity in the energy industry, and that means much more jobs,” said Linder.
“In fact, I think we’re on the cusp of another significant labour shortage, another boom.”
Even the lower natural gas prices that have been a hurdle in recent years will start to recover, Linder predicts.
“The second half of this year will be far, far better than the last three years.”
Ben Brunnen, chief economist with the Calgary Chamber of Commerce, explains that as oil prices recover, Calgary’s oil and gas sector is enjoying increased activity and investment confidence.
As of March 2011, 59 oilsands projects valued at nearly $100 billion were either planned or already underway in Alberta.
“And when investment is good, incomes increase here. That’s a unique perspective for Calgary because we are the head office of oil and gas,” Brunnen said.
Businesses seem to already be reaping the rewards of more disposable income.
Justin Havre, a realtor with CIR Realty, says Calgary’s real estate market is bouncing back, particularly in the luxury home market with 44 homes sold for over $1 million in Calgary alone last month.
“The luxury market is becoming really active, and it’s usually a good indicator that there’s some confidence in our economy and in Calgary investment.”
Tony Dilawri, who runs several car dealerships including Calgary BMW and the Distinctive Collection, which sells Bentleys and Aston Martins, says the luxury car market has also improved from last year.
“We’re finding consumer confidence is definitely up as people become a little more willing to spend money on their vehicles.”
BMW sales are up 20 per cent from last year, Dilawri said, adding that some 20 new and pre-owned Bentleys and Aston Martins were delivered to customers last month. Dilawri says the Calgary kind of wealth is on its way back, a swagger that’s proud, but not too boastful. Calgary is not like Montreal and Toronto, he said, filled with old money that isn’t always affected by economic shifts.
“We’re young in Alberta, and we work hard for our wealth,” he said.
“So when we get it back, we want to have some fun. We don’t want to boast, but we want to reward ourselves.”
Brunnen agreed Calgary’s economy is bouncing back, but consumers are still cautious.
“The investment is there, and the consumer confidence will come with it.”
While optimism is growing in Calgary, however, the economic mood elsewhere is guarded. Reuters reported last week the global economy is still in flux, with investors wary that the real stresses still lie ahead. European debt uncertainties and the arrest of the head of the International Monetary Fund mixed with Arab revolt and Japan’s recovery from natural disaster are all contributors.
“It is clear that some investors have decided that they need to take some risk off the table, but they do not want to take too much off,” said Andrew Milligan, head of global strategy at Standard Life Investments.
eferguson@calgaryherald.com
Mark Herman in the press on high-end properties selling quickly
High-flying stock market sends business to brokers Lingering caution at the big banks and wealthy clients increasingly bullish on the stock market are helping brokers claim their biggest share of high-end deals in years – with a Re/Max study helping explain the phenomenon.
By Vernon Clement Jones
Mortgagebrokernews.ca
Lingering caution at the big banks and wealthy clients increasingly bullish on the stock market are helping brokers claim their biggest share of high-end deals in years – with a Re/Max study helping explain the phenomenon.
“In the last week, we’ve just had two of the biggest deals of my career,” Mark Herman, an agent and team leader for Mortgage Alliance Mortgages Are Marvelous Inc. in Calgary, told MortgageBrokerNews.ca. “One was a new purchase for $1.525 million, with 5% down, and the other one was for a $750,000 line of credit on a $1.5 million purchase. High-end mortgage business for brokers in Calgary has picked up like we’ve never seen.”
Calgary brokers may not be alone.
Re/Max examined 12 major centres from coast-to-coast and found that luxury sales surged in two-thirds of them during the first four months of 2011, compared to the same period last year.
While Vancouver led in terms of percentage increases – 118% year over year – Dartmouth, at 27%, Winnipeg, 24%, Hamilton-Burlington, 13%, and Greater Toronto, 9%, also saw spikes.
Herman’s market of Calgary was also on that list, at 51%, although that scorching hot performance fell short of setting a new record, unlike the other top jurisdictions on the list. With the exception of Vancouver, their sales growth can be chalked up to domestic buyers.
Michael Polzler, executive vice president for Re/Max in Ontario-Atlantic Canada, pointed to three key factors for the rise in high-end business: equity gains, stock market recovery, and improved economic performance.
Brokers like Herman are pointing to the some of the same factors to explain why they’re getting more high-net-worth clients stepping across their thresholds.
“These guys weren’t buying as much during the recession, but with prices still below recent highs, high-end buyers are now out bargain shopping,” said the mortgage agent, also an MBA.
“But what they’re doing is they’re looking to keep their money in the stock market and other high-yield investments and want to buy homes with as little money down as possible – it’s all about limiting opportunity costs. Also they’re coming to brokers this time because they’re finding the banks have been slower to ease credit and aren’t giving them the discounted rates they expect.”
Less than five months into 2011, another broker, Sharnjit Gill, has already surpassed last year’s total for high-value deals.
“We’re also seeing more activity there because those clients are more educated about what we as brokers can do for them beyond rate,” he told MortgageBrokerNews.ca.
Still the trend is less obvious at other mortgage brokerages, even in those markets highlighted by the Re/Max report.
While her Ottawa brokerage has seen an uptick in volume, said Kim McKenney, senior VP at Dominion Lending Centres The Mortgage Source.
“The average dollar amount has risen by only a couple of thousands of dollars,” she told MortgageBrokerNews.ca.
Mortgagebrokernews.ca is a division of KMI Media.
Variable rates are still really good.
It’s that time again. When Mark Carney and his cohorts ascend Mount Olympus once more for the latest round of talks to decide the immediate future for Canadian mortgage holders.
The prevailing feeling however is that little will result from this month’s scheming and plotting. Another meeting will pass with rates unchanged and the variable rate mortgage holders can rest easily until July 19th signals the next round of talks. While some speculators – who haven’t been paying enough attention to our blog – earlier in the year cited this meeting as the one to kick off a series of interest rate rises, it now appears those speculators were somewhat premature in their estimations. Recent developments have meant it is now highly unlikely we will see a rate increase tomorrow, Tuesday, May 31, 2011.
Economic growth for the first quarter in the US, Canada’s primary trading partner, came in at a highly disappointing 1.8% with consumer spending slowing. And while Canada’s strong dollar has seen investment increase and manufacturing experience a long overdue rebound, these are still highly uncertain times for the Canadian economy. As expressed by Governor Mark Carney earlier this month, fears persist that rising commodity prices, combined with an inflated currency could impede Canada’s ability to increase demand in the US. The commodity boom is no longer serving Canada in the way it had previously during China’s rapid expansion. These concerns combined with the ever worsening European debt crisis and the impending impact of fiscal austerity in the US driven by irrational desires to cut the budget mean a rate hike tomorrow is highly unlikely.
While we feel that interest rate rises are coming before the end of the year we still feel the variable rate offers the greatest value for money. However we always advise our clients that if they feel ill-suited to the uncertainty of a variable rate, they should opt for a fixed. And the good news is that being adverse to risk has rarely been so well rewarded, with fixed rates plummeting in recent weeks. Fixed rates, as we predicted they would, have fallen repeatedly and there has never been a better time to opt for fixed. If you have any questions about anything you’ve read here or would like to hear how the impending rise in prime may affect you, please feel free to contact us at403-681-4376 for sound, unbiased mortgage advice.
Upcoming Interest Rate Announcement – No Change Anticipated
It is almost that time again, when eyes will turn towards Mark Carney and the Bank of Canada to see if interest rates will stay put again this time around.
The next announcement, slated for Tuesday May 31, comes at an interesting time. Throughout the first part of this year, it was widely believed that interest rates had stayed as low as they could, and for as long as they could, and the prediction was that rates would begin to creep up as early as this spring.
However, as with many predications, several things were not foreseen in the forecasting.
What has happened most notably in advance of this latest announcement- was unpredicted behaviour on a number of fronts. Consumer prices across many categories have been rising rapidly (although fell slightly below expectations last month), but are clearly displaying an upward trend. Inflation, while still manageable, is running a little too high to be ignored as a factor as well.
So, rates will rise at some point, but given the existence of some volatile conditions in the market, and fears that a rate hike will erode an already tenuous hold on affordability due to rising prices, the question is, is that time now?
According to a survey done by Reuters last week, forecasters predict that a rate hike will not happen until Q3 2011. It is widely believed that rates will go up to 1.25% in the third quarter from the current 1%. Almost unanimously, the forecasters polled agreed that the announcement on May 31 will be a rate hold- again.
Supporting these findings, three of the major banks have also indicated that they don’t expect to see rate hikes until the fall either.
If all of this comes to pass, it is good news for the Canadian housing market. The time-limited offer of ultra-low interest rates will get extended. Coupled with the fact that this will end at some time contributes to a sense of urgency as well.
How does this translate into daily business for Real Estate and for the Mortgage professions? Propertywire.ca asked some members of the community.
Tara Gibson, Mortgage Broker, TAG Financial – Mortgage Alliance TAG Mortgages, agrees that rates will remain steady for the time being, but thinks that an increase could come as early as the summer. “In my opinion, our strong dollar is enough to predict that we won’t see an increase in interest rates this time; more likely in July. The question is, will discounts on Prime change with the lenders? I think we may start seeing this compress a bit soon enough; in fact, some lenders have already started to close the gap. Many clients are currently choosing to go with a variable rate; simple case of supply and demand, prices go up with increased demand.”
“Despite all the pressure to see interest rates increase, industry experts believe that the Bank of Canada and lenders will increase rates at a slow rate. Advice to borrowers, if you want a variable, get in on the rate holds before we see more lenders change the discount! Further to that and much more important, global uncertainty is only postponing the inevitable, rates WILL go up so make sure you are fully prepared to handle the change when you go to renew your mortgage in 5 or 10 years!”
Trish Pigott,Broker/Owner, Primex Mortgages agrees too that status quo will be the order of the day on Tuesday. “I’m sure they are going to remain steady and unchanged. The majority of economists were predicting July as our next increase but they are now changing that until September and even some as early as next year. With our global economy in the state it’s in, I can’t see it changing much until the rest of the world stabilizes.”
Calgary region MLS sales and prices forecast to rise: CMHC
Good news:
House sales up 5%
Prices up 1%
CALGARY — A report by Canada Mortgage and Housing Corp. forecasts MLS sales in the Calgary region to increase by nearly five per cent this year compared with a year ago while the average sale price will rise by just over one per cent.
The CMHC’s Spring 2011 Calgary Housing Market Outlook, released Monday, predicted MLS sales in the Calgary census metropolitan area would hit 22,000 this year, up by 4.8 per cent, and increase a further 2.3 per cent in 2012 to 22,500 transactions.
The agency forecast the average sale price to increase by 1.1 per cent this year to $403,000 while it would jump another 2.2 per cent in 2012 to $412,000.
New-to-Canada mortgages for immigrants have been around for years!
Do you want to read some total BS-PR-spin that the banks put out? Below is a press release from a bank patting themselves on the bank for lending to new immigrants. Funny thing is that this program that they have “developed” has been around for more than 7 years. All they did was sign up for the CMHC New to Canada program that every other lender that we use has had since I started doing this in 2004! Good job ING. Way to do what every one else is doing. Many years late.
Getting a mortgage in this country may have just gotten slightly easier.
ING Direct Bank, recognizing the overwhelming desire for most Canadians, particularly with newcomers to the country, to realize the dream of home ownership is modifying its’ lending criteria.
In a release, ING Direct Bank said, “ING DIRECT, the country’s 6th largest mortgage lender, announced today it is offering its popular unmortgage to permanent and non-permanent residents with limited or no credit history. Permanent and non-permanent residents include those who have been residing in Canada for no longer than 60 months. “
ING Direct recognizes the sheer numbers and the tremendous influence that immigration plays- not just in the makeup of the Canadian population, but in the marketplace as well. As such, they are developing product to meet that need.
“At ING DIRECT, our goal has always been to give the power of saving to all Canadians, so offering our unmortgage to new residents allows us to stay true to that promise,” said Peter Aceto, President and CEO of ING DIRECT Canada. “We want to give newcomers access to the same products and savings opportunities we have been providing to Canadians for the last 14 years”
Motivated by the desire to establish a banking relationship right from day one with newcomers to this country, ING Direct jumped into action to provide a solution for people trying to establish their credit history.
Aceto says, “We have always been committed to making the mortgage experience better for our clients. For newcomers to Canada, our product is simple and easy to understand. We always provide the best rates upfront and guarantee those rates for up to 120 days after applying, and our flexible pre-payment options allow our clients to own their homes sooner by paying as little interest as possible over the life of the mortgage.”
Canada is known globally for its’ stringent lending policies- which are partly to thank for escaping the recent recession relatively unscathed.
While qualifying for a mortgage may have loosened slightly, it is likely not a sign that credit criteria is less stringent generally. Qualifying for a mortgage , while taking credit history into account, generally has some different criteria, because it is as much about the asset that is securing the debt, and the amount of cash available to pay for ongoing expenses.
ALBERTA’S HOUSING AFFORDABILITY REMAINS STABLE AND ATTRACTIVE: RBC ECONOMICS
Calgary market transitioning into a more vigorous phase.
This is great news as affordability is super important. Note in Vancouver it takes about 3/4 of a person’s income to pay for their home. Yikes! Have a look at some other good reports here.
TORONTO, May 20 /CNW/ – Unlike most other major centres across Canada, housing affordability in Alberta remained stable in the first quarter of 2011, according to the latest Housing Trends and Affordability report issued by RBC Economics Research.
Until the fall of 2010, abundant availability of homes for sale in the face of sluggish demand kept housing prices firmly under control. Resulting stable or slightly declining property values contributed to a substantial improvement in affordability in Alberta last year.
“The Alberta market continued to be stuck in low gear in the first quarter of 2011. Sales of existing homes and construction of new housing units showed very modest increases,” said Robert Hogue, senior economist, RBC. “While market conditions have become more balanced in recent months, owning a home doesn’t seem to be getting more expensive in the provincial market at this stage. Affordability levels are still looking quite attractive.”
RBC’s housing affordability measures for Alberta, which capture the province’s proportion of pre-tax household income needed to service the costs of owning a home, remained relatively unchanged and below their long-term averages in the first quarter of 2011. The measure for the benchmark detached bungalow in the province moved up to 31.3 per cent (an increase of 0.4 of a percentage point from the previous quarter), the standard condominium stayed flat at 20.2 per cent and the standard two-storey home fell to 34.2 per cent (down by 0.2 of a percentage point).
RBC’s report notes that there are signs that the Calgary housing market is finally overcoming its protracted slump. Home resales in the area grew for the second consecutive period in the first quarter, the most growth since the middle of 2009, helping to remove market slack and setting a healthier balance between demand and supply.
“Calgary home prices have yet to break out of their listless trends, but they rose at their fastest rate in more than a year in the first quarter, with detached bungalows leading the way,” said Hogue. “Firmer market conditions and higher prices had only limited impact on Calgary’s affordability, which remains among the most attractive of Canada’s major cities.”
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.
Low interest rates seen sticking around – fuel for the Variable rate side
Low interest rates seen sticking around- great news for the variable rate people. Remember with a broker lender you lock-in at the best broker rate for the day when you lock in. With the banks you lock in at Posted (or Posed-1% if they pretend that they love you – and they actually love your money, not you.)
That means that for today the broker rate is 3.99% for a 5 year. Posted is 5.66%. If “the bank loves you” you get 5.66-1% = 4.66% BUT you should have had 3.99% at a broker bank.
So would you love your bank back when that happens?
MARTIN MITTELSTAEDT
Tuesday’s Globe and Mail
Interest rates have recently being going somewhere unexpected: down.
At their trough last week, the yields on 10-year U.S. Treasuries, the benchmark North American rate, touched 3.11 per cent, the lowest level in six months and more than half a percentage point below their February peak.
Yields on 10-year Government of Canada bonds have fallen, too, and are now virtually identical to their U.S. counterparts.
The sliding rates have surprised many market watchers. With the United States government bumping up against its debt ceiling, inflation ticking upward, and a growing debt crisis in Europe, most expected interest rates to be increasing.
While predicting the future for rates is notoriously difficult, some observers believe that the current low-rate environment may continue for a while. If so, it will mean pain for savers, but good news for borrowers.
A drop in interest rates is equivalent to a sale on the price of money, and corporations are already rushing to take advantage of the easy lending conditions, even if they’re in no immediate need of funds. A case in point is Google Inc., which has $37-billion (U.S.) in cash and marketable securities on its balance sheet, but raised $3-billion from a bond issue last week anyway. Mortgage rates have fallen, too – good news for homeowners looking to refinance.
But lower rates have not turned out so well for some of the market’s savviest players, including Bill Gross, the founder of Pimco, the world’s biggest bond fund. Earlier this year, he sold his U.S. Treasuries, because he thought interest rates were poised to rocket higher, which would drive down prices of bonds.
It’s difficult to fault his logic: only a few months ago, the case for higher interest rates seemed so compelling.
Governments around the world are carrying bloated deficits and massive borrowing needs. In the United States, politicians have yet to agree on any clear path to deficit reduction, despite more than $1-trillion in annual red ink. Meanwhile, oil has been trading consistently around the $100-a-barrel level, thereby lifting inflation, another bond-market negative.
And the U.S. Federal Reserve is no longer putting its thumb on the scale. In less than six weeks, it is going to end its program of quantitative easing, under which it is buying $600-billion in Treasuries to goose the economy. Many bond-market followers believe the Fed’s massive buying binge has been propping up Treasury prices and keeping yields artificially low.
So what has been pushing rates lower in recent months?
A weaker-than-expected recovery is the major culprit. “The global economy, and the U.S. economy in particular, is not on quite as solid a recovery track as people were imagining in the very optimistic days of six months or so ago,” observes Peter Buchanan, senior economist at CIBC World Markets.
A slew of recent statistics underlines that weakness, ranging from the poor state of U.S. home sales to the slowing pace of U.S. manufacturing growth. Meanwhile, the Japanese economy, the world’s third-largest, is shrinking and creating a further drag on global commerce, although few foresee a double-dip recession.
“We’re looking ahead toward a bit of a cooling in economic growth,” said Paul Dales, senior U.S. economist at Capital Economics, who foresees output in the U.S. rising about 2 per cent this year.
That level of growth won’t be “anything to celebrate but it’s nothing like the recession we saw previously,” he said.
Another factor driving rates lower has been the early May rout in commodities, which dampened some of the worry on the inflation front. In addition, the recent sluggish performance of the stock market suggests that investors are getting nervous and growing more willing to buy super-safe government bonds.
Mr. Dales believes the current trends have room to run, and that rates will surprise to the downside.
He predicts U.S. 10-year Treasury yields could slip to 2.5 per cent in the low-growth, less inflation-spooked environment he foresees ahead.
If growth continues to be slow, lower rates might be staying around for a while.
Mr. Buchanan says the most likely scenario, given the poorer economic outlook, is for the Fed to hold off on raising rates until 2013. He believes the yield on Treasuries will rise gradually, instead of falling further, getting back to 3.4 per cent by the end of this year and to 4 per cent by the end of 2012. http://www.theglobeandmail.com/report-on-business/economy/interest-rates/low-interest-rates-seen-sticking-around/article2032075/