Coming soon: higher interest rates
- refinance – or re-do your mortgage – and get today’s rates for another 5 years,
- roll in some higher interest payments – like LOC -Line of Credit or credit cards or,
- buy your first home before rates go up or,
- finally get that summer/ ski vacation cabin.
Call for a free 5-minute mortgage check-up while there is still time. (That may be 2 or 3 weeks from now as the bond market will smell this coming inflation pretty quickly.)
Let’s start with a little tutorial (no, please keep reading, it will be brief) and then we’ll talk about why this week’s economic data changes everything, more or less.
The Bank of Canada sets the benchmark overnight rate (the rate at which banks lend to each other). That in turn affects market interest rates on everything from mortgages through to business loans. At present, the overnight rate is at 1 percent, following three hikes of 25 basis points each last year.
The tutorial is on the ‘output gap’ which is one of the major tools that the Bank of Canada looks at to set monetary policy. Here goes.
The ‘output gap’ refers to the difference between the actual output of the economy and the potential output. Potential output basically refers to the maximum that could be produced if all inputs (like the labour force, technology, capital, factory space and all that) were used to the fullest extent that they can be without triggering inflation. That last little bit is key: when the bank says ‘potential’ they don’t mean full potential, they mean ‘potential without forcing prices higher’. It is a similar concept to what economists mean when they say ‘full employment’. In that case it does not mean everyone working, it means everyone working that can be working without wages being forced higher.
The Bank of Canada monitors the output gap as best they can, first by estimating what potential output is in any period of time, then estimating how close to potential the economy looks to be. A positive output gap means the economy is operating above potential, and that inflation is a risk. A negative gap means there is excess supply (for example, too many unemployed workers) and that inflation is not a risk, or at the extreme, that deflation is possible.
The Bank of Canada adjusts policy to try to get keep things in balance and the output gap closed – sort of a ‘not too hot, not too cold’ thing. Based on their most recent calculations, their latest estimate (which was contained in last week’s Monetary Policy Review) was that the output gap would close by the middle of 2012.
Everybody still with me? Good. Here’s the thing: as well as looking at the output gap itself, the Bank also looks at a bunch of economic indicators to see how close to capacity the Canadian economy is running. Things like industrial production, the unemployment rate, unfilled manufacturing orders – and inflation.
That last one is probably the most important, and it is the one that seems to be running most out of sync with where the Bank of Canada thought it would be. In the Monetary Policy Report, the Bank said that the overall inflation rate (which they target to be 1 to 3 percent) would peak at 3 percent in the second quarter. This week, we got the March inflation report, and we find out that the inflation rate was 3.3 percent as of March – which is decisively in the first quarter. Ouch.
So what does this mean? It means something has to change to keep the Canadian economy from overheating. That something is likely to be Canadian interest rates, and when I say ‘change’ I mean ‘go higher’.
If rates do not go higher, then the output gap is at risk of going into positive territory, which means inflation takes off even more. No way is the Bank of Canada going to let that happen.
There are other things to take into account too – the spiky Canadian dollar is an important one – but it does not take away from the big picture.
Big picture? A rate hike by July, and maybe more to come after that. And yes, watch the loonie soar in the meantime.
Lower Canadian Mortgage Rates – should have happened a month ago
Here is some bank-spin b.s. in full display. Bank mortgage rates should have come down 3 weeks or a month ago like the broker rates did. Banks intentionally left their rates higher to keep their profits up. So it is supposed to be a big deal now that the Big 5 banks have a 5 year at 4.09% when we have been at 3.89% for the last month?
Always use a mortgage broker to take care of your interests! And the banks pay us so there are normally no fees to you for our services!
Global instability leads to lower mortgage rates in Canada
Global instability, highlighted by turmoil in Libya and Japan, has caused Canadian banks to drop their mortgage rates.
Just as changes to mortgage rules coming into effect Friday were likely to make borrowing for a new home more difficult, the latest drop in interest rates has helped potential new borrowers in the short term find a more affordable price.
The Royal Bank of Canada (RBC), along with the Bank of Montreal, slashed its rates on various fixed rate mortgages. Other lenders are also expected to follow suit.
After heightened confidence led to mortgage rate increases last month, banks are now following the cue of declining bond rates, according to the Globe and Mail.
For the RBC, the country’s largest bank, its residential mortgage special fixed rate was unchanged at 3.2% for one-year closed mortgages, but its four-year special fixed rate for closed mortgages was reduced 0.15% to a rate of 4.19%.
The same rate, 4.19%, now applies to five-year special fixed rate closed mortgages, which are down 0.1%, while 5.1% applies to a seven-year closed special fixed rate, which is down 0.2%.
Prime to be at 4% by 2012
BoC rate to reach two per cent by year end: RBC
By | 11/03/2011 2:00:00 PM | 0 comments
As part of its economic outlook for 2011, RBC projects that the Bank of Canada overnight rate will rise from one per cent to two per cent by year-end.
The gradual pace of rate increases combined with anchored inflation expectations will result in less upward pressure on long-term interest rates, added the Economic Outlook released by RBC Economics.
On the back of solid net exports in the final quarter of 2010, Canada’s economy finished the year on a high note recording stronger than expected gains. The biggest support for the economy came from net exports, which added a full 4.5 percentage points to the quarterly growth rate. Continued consumer spending also played a vital role in driving overall GDP, marking the fastest increase in spending since late 2007.
RBC expects real GDP to increase at 3.2 per cent in 2011, as U.S. demand for Canadian exports increases. Growth in 2012 is forecast to rise by 3.1 per cent.
The report also stated labour market conditions will remain firm in 2011and disposable income is expected to post a 4.1 per cent gain that will provide continued support to consumer spending.
“Consumers’ earlier confidence in taking on increasing amounts of debt was based on a combination of lower interest rates, a strengthening labour market and a 4.6 per cent rise in disposable income,” explained Craig Wright, senior vice-president and chief economist, RBC Wright. “An expected slowing in the housing market, rising interest rates and tightening mortgage lending standards all add up to a levelling out in consumer debt relative to income.”
At the provincial level, RBC forecasts Saskatchewan will lead the country in growth this year. Alberta is expected to return to a top three placing, closely trailing growth in Newfoundland and Labrador. Ontario and Manitoba will hover close to the national average while both Quebec and British Columbia will fall slightly below. Nova Scotia, New Brunswick and Prince Edward Island are still projected to lag behind at the lower end of the scale for 2011.
‘Window closing’ on ultra-low mortgage rates
Essentially we are in artificially low interest rates and the government is expecting rates to come up to normal levels in the near future. Bond yields are continuing to put pressure on long term mortgage rates and we will continue to see the rates moving upward this year. The government is also trying to make it more difficult for individuals to qualify for insured mortgages. This article, from the Financial Post, speculates rates will increase rates by May.
Enjoy the Read!
Amid the noise of volatile-but-improving economic indicators, mortgage rate hikes are likely to repeat like a chorus in the coming months.
Canadian banks are raising interest rates on mortgages, marking the beginning of a trend as they correlate with rising bond yields and expected monetary tightening.
That’s making a strong case for borrowers to lock into fixed rates before it’s too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. “The window is closing.”
TD Canada Trust and CIBC both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks where expected to follow the moves shortly.
Effective Feb. 8, the interest rate on the banks’ benchmark five-year closed fixed rate mortgage will increase 25 basis points to 5.44%. The country’s other major lenders are expected to soon follow suit.
Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.
That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee’s finances, she said.
“If you can’t afford [your payments] … that’s a problem,” Ms. Roberts said. “That’s why the government has changed the rules.”
In two stages over the past year the federal government announced changes to the conditions of mortgage lending — shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.
Many who only qualify under the old rules, however, will try to secure mortgages before the shorter maximum amortization periods come into effect next month, Ms. Roberts said.
“There are going to be a lot of people that will enter into their agreements by March 18.”
Much of the momentum in mortgage rates can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a global economy that is proving more robust than expected.
“In my opinion, the bond market will not be the place to be over the next six months, and if that’s the case, you will see mortgage rates continue to rise,” Mr. Tal said.
In addition, anticipation of increases to the Bank of Canada’s benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.
If there was any lingering doubt that the Bank will soon raise rates, last week’s jobs report erased them. The report showed Canada added four times more jobs than expected in January.
“[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front,” said Camilla Sutton, chief currency strategist at the Bank of Nova Scotia. “I think there’s a material change.”
So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data.
Source: Financial Post
Info your banks would prefer you didn’t know
What your Bank doesn’t want you to know
| Monday, 28 February 2011 22:47 |
A list of some pertinent information your banks would prefer you didn’t know:
|
CANADIAN HOMEOWNERSHIP COSTS EASE FOR SECOND CONSECUTIVE QUARTER: RBC ECONOMICS
This is great news.
TORONTO, Feb. 24 /CNW/ – Canada’s housing affordability continued to improve in the fourth quarter of 2010, thanks in part to slight decreases in five-year fixed mortgage rates and minimal home price appreciation across the country, according to the latest Housing Trends and Affordability report released today by RBC Economics Research.
“Some of the stress that had been building in the housing market between 2009 and the first half of 2010 has been relieved, but tensions persist overall and the recent improvement in affordability is likely to be short-lived,” said Robert Hogue, senior economist, RBC. “We expect that the Bank of Canada will resume its rate hike campaign this spring and with borrowing costs set to climb further in the next two years, housing affordability will erode across the country. That said, we don’t expect this to derail the housing market because of rising household income and job creation from the sustained economic recovery.”
The RBC Housing Affordability Measure captures the proportion of pre-tax household income needed to service the costs of owning a specified category of home. During the fourth quarter of 2010, measures at the national level fell between 0.4 and 0.8 percentage points across the housing types tracked by RBC (a decrease represents an improvement in affordability).
The detached bungalow benchmark measure eased by 0.8 of a percentage point to 39.9 per cent, the standard condominium measure declined by 0.4 of a percentage point to 27.6 per cent and the standard two-storey home decreased 0.4 percentage points to 46.0 per cent.
“We expect affordability measures will rise gradually in the next three years or so while monetary policy is readjusted, but will land softly thereafter once interest rates stabilize at higher levels,” added Hogue. “This pattern would be consistent with moderate yet sustained stress on Canada’s housing market. Overall, the era of rapid home price appreciation of the past 10 years has likely run its course and we believe that Canada has entered a period of very modest increases.”
A majority of provinces saw improvements in affordability in the fourth quarter, most notably in Alberta where falling home prices once again contributed to lower the bar for affording a home. Only the standard two-storey benchmark became less affordable in Ontario and Quebec, as did the standard condominium apartment in Quebec and the Atlantic region.
RBC’s Housing Affordability Measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 68.7 per cent (down 0.4 percentage points from the last quarter), Toronto 46.8 per cent (down 0.5 percentage points), Montreal 41.3 per cent (down 0.4 percentage points), Ottawa 38.7 per cent (up 0.5 percentage points), Calgary 34.9 per cent (down 3.1 percentage points) and Edmonton 31.0 per cent (down 2.4 percentage points).
The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.
Highlights from across Canada:
- British Columbia: Buying a home in B.C. became slightly more affordable in the fourth quarter of 2010, due primarily to a small drop in mortgage rates. After experiencing some declines in the previous quarter, home prices rose modestly for most housing categories; condominium apartments bucked the trend, however, and depreciated slightly. Prices were supported by a tightening in market conditions with home resales picking up smartly following substantial cooling in the spring and summer that saw sellers lose their edge in setting property values. Demand and supply in the province are judged to be quite balanced at this point. RBC’s Affordability Measures fell between 0.8 and 1.0 percentage points in the fourth quarter which came on the heels of much more substantial drops (1.7 to 4.8 percentage points) in the third quarter. Notwithstanding these declines, affordability remains poor and will weigh on housing demand going forward.
- Alberta: Alberta officially became the most affordable provincial market in the country in the fourth quarter, according to the RBC Measures which fell once again by 1.0 to 2.4 percentage points, extending their declines since late-2007. In addition to the lower mortgage rates, the further depreciation of home prices contributed to lowering homeownership costs. Property values were negatively affected by a substantial downswing in demand in the spring and early summer, which put buyers in the drivers’ seat. The significant improvement in affordability is near the end of its line, however, as demand has shown more vigour in recent months – alongside a provincial economy that is gaining more traction – and the market has become better balanced. RBC expects that this will stem price declines this year, thereby removing a potential offset to the negative effect of projected rise in interest rates on affordability.
‘Window closing’ on ultra-low mortgage rates
Tim Shufelt, Financial Post · Monday, Feb. 7, 2011
Amid the noise of volatile-but-improving economic indicators, mortgage rate hikes are likely to repeat like a chorus in the coming months.
Canadian banks are raising interest rates on mortgages, marking the beginning of a trend as they correlate with rising bond yields and expected monetary tightening.
That’s making a strong case for borrowers to lock into fixed rates before it’s too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. “The window is closing.”
TD Canada Trust and CIBC both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks where expected to follow the moves shortly.
Effective Feb. 8, the interest rate on the banks’ benchmark five-year closed fixed rate mortgage will increase 25 basis points to 5.44%. The country’s other major lenders are expected to soon follow suit.
Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.
That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee’s finances, she said.
“If you can’t afford [your payments] … that’s a problem,” Ms. Roberts said. “That’s why the government has changed the rules.”
In two stages over the past year the federal government announced changes to the conditions of mortgage lending — shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.
Many who only qualify under the old rules, however, will try to secure mortgages before the shorter maximum amortization periods come into effect next month, Ms. Roberts said.
“There are going to be a lot of people that will enter into their agreements by March 18.”
Much of the momentum in mortgage rates can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a global economy that is proving more robust than expected.
“In my opinion, the bond market will not be the place to be over the next six months, and if that’s the case, you will see mortgage rates continue to rise,” Mr. Tal said.
In addition, anticipation of increases to the Bank of Canada’s benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.
If there was any lingering doubt that the Bank will soon raise rates, last week’s jobs report erased them. The report showed Canada added four times more jobs than expected in January.
“[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front,” said Camilla Sutton, chief currency strategist at the Bank of Nova Scotia. “I think there’s a material change.”
So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data. http://www.financialpost.com/news/Window+closing+ultra+mortgage+rates/4239243/story.html#ixzz1DMwQzyWP
Housing crash is not likely to happen in Canada.
Ben is one of the best economists around and is usually correct….
However, Tal said that if rates rise, mortgage defaults will actually drop. He explained that is because rising rates imply rising employment, which influences defaults more than anything.
Canadian Prime staying at 3% – maybe for half a year
Comment – this article exactly summarizes our thoughts for how things will play out:
Prime will stay at 3% for 6 months, mortgage rates will stay low as long as the stock market bounces all over the place and now is a great time to take advantage of the situation by redoing our mortgage or buying.
Bank of Canada holds key rate at 1%
OTTAWA — Interest rate hikes are on hold until at least the spring and maybe as long as late 2011, analysts say, as the Bank of Canada decided Tuesday to keep its policy rate unchanged amid weaker-than-anticipated growth, especially in the United States.
The Canadian dollar fell by more than two cents at one point following the decision, as the central bank signalled the country would need to rely more on net exports for growth — a sign, economists added, the loonie’s value would be a key consideration in future rate decisions.
The central bank said it scaled back its growth projections for this country as the global recovery enters a “new phase.” It now expects GDP to expand just three per cent this year and 2.3 per cent in 2011, compared to expectations in July for advances of 3.5 per cent and 2.9 per cent, respectively. Second-quarter GDP growth, at two per cent annualized, was well below the central bank’s forecast of three per cent expansion.
Further, the Bank of Canada said it does not envisage the Canadian economy reaching full potential until the end of 2012, or one year later than previously expected. The same timeline applies to inflation — which guides all interest-rate decisions — as the “significant” excess slack would keep consumer prices increases from reaching the desired 2% level for another two years.
“This is not just a data watching central bank that is keeping its powder dry in order to evaluate developments over coming months — this is a central bank that has totally revised its outlook and market guidance,” said analysts at Scotia Capital. “To us, the Bank of Canada is saying they are on hold until late next year.”
The central bank also signalled the composition of growth is set to change, with less emphasis on consumer spending and increased reliance on business investment and net exports.
The Canadian dollar recovered slightly after its initial drop. It was trading around 96.92 cents U.S. at 11 a.m., down from Monday’s close of 98.61 cents U.S..
Jonathan Basile, economist at Credit Suisse Securities in New York, said this indicates the Bank of Canada “will be watching the Canadian dollar more closely” as strength in net exports is predicated on a loonie that doesn’t strengthen too much against its U.S. counterpart.
The statement “appears to be a pretty clear signal of the Bank of Canada’s intention to pause,” said Michael Woolfolk, managing director at BNY Mellon Global Markets in New York. “Moreover, it suggests that the central bank may pause longer than expected. With the Bank concerned now about the economy’s increasing reliance on net exports, it will take particular care not to unnecessarily bolster the loonie through future rate hikes.”
Economists at Royal Bank of Canada and Toronto-Dominion Bank told clients that March of next year might be the earliest at which the central bank resumes rate hikes.
“The economic outlook for Canada has changed,” said the central bank, led by governor Mark Carney. “(A) more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending” as real-estate activity slows and consumers deal with their personal debt.
The decision to keep key rate unchanged leaves “considerable monetary stimulus” in place to achieve the central bank’s preferred two per cent target, the central bank indicated.
Plus, Basile said the central bank signalled three factors that stand in the way of future rate hikes: a weaker U.S. outlook; constraints curbing growth in emerging-market economies; and domestic considerations, most notably household debt.
Tuesday’s rate statement reflects a more dovish tone from the central bank compared to its last decision roughly six weeks ago, when it opted to raise its benchmark interest rate by 25 basis points for a third consecutive time. More detail regarding the central bank’s outlook will emerge Wednesday when the Bank of Canada releases its latest quarterly economic outlook.
The big game-changer, analysts say, is the tepid U.S. economy and the signals from the U.S. Federal Reserve that it’s preparing to inject additional liquidity in the economy through asset purchases, with a dual goal of lowering borrowing costs and boosting inflation expectations.
As a result, a pause from the Bank of Canada “is entirely justifiable,” said Eric Lascelles, chief Canadian strategist at TD Securities, in a note to clients prior to the release of the central bank’s decision. “The thought that if the U.S. needs (further easing), the economic prospects for the U.S., and by extension Canada, are also threatened.”
The Bank of Canada said the global economic recovery is entering a “new phase,” as the factors supporting growth in advanced economies, such as the rebuilding of inventories and pent-up demand, subside just as fiscal stimulus is wound down.
“The combination of difficult labour market dynamics and ongoing de-leveraging . . . is expected to moderate the pace of growth relative to prior expectations,” the central bank said. “These factors will contribute to a weaker-than-projected recovery in the United States in particular.”
Growth in emerging economies is expected to ease as governments in those markets put the brakes on stimulus spending and raise borrowing costs. As it happened, China raised interest rates earlier Tuesday.
And recent moves by emerging markets and advanced economies to intervene in foreign-exchange markets was highlighted by the Bank of Canada as a further risk to the global economic recovery. “Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery,” the central bank said.
The warning emerges just days before a key Group of 20 meeting of finance ministers and central bankers in South Korea in which foreign-exchange policies is now expected to dominate the agenda. Both Carney and Finance Minister Jim Flaherty are set to attend the meeting.
© Copyright (c) Postmedia News
Prime to stay the same until March 2011
Report says BoC likely to hold rates until March 2011
This month’s RBC Financial Markets Monthly publication reports that the Bank of Canada is likely to hold rates until March 2010.
Report Excerpts:
Canada takes a breather after sprinting out of recession
With real GDP standing a hair’s breadth away from its pre-recession peak and final domestic demand already treading into new territory, reports of more moderate activity in July did not prove too surprising. The sharp recovery in the housing market started to stall in mid-2010 because pent-up demand generated during the recession was satiated and buying—ahead of the mild tightening in mortgage rules and the implementation or increase in the HST in three provinces—was exhausted. The robust sales pace left a high level of household debt in its wake resulting in the debt-to-income ratio rising to an all-time high in the first quarter.
Recent growth has not been strong enough to exert significant downward pressure on the unemployment rate and inflation pressures have been moderate with the core rate at 1.6%. The headline inflation rate was 1.7% in August, thereby holding below the Bank’s 2% target, even after the harmonization of provincial and federal sales taxes in Ontario and BC were incorporated into the price measure. Unlike in the US, where we expect that core inflation will remain very low, we forecast Canada’s core rate to hold just below the 2% target during the forecast horizon and gravitate above 2% in mid-2012.
Rate increases likely to resume in early 2011
Our overall assessment of the Canadian outlook has changed little in the past month, so we are maintaining our call that the Bank will gradually raise the overnight rate to 2.25% in the second half of 2011. This gradual reduction in policy accommodation will keep a lid on the degree that term interest rates will rise especially against a backdrop of very low U.S. rates. We trimmed our 2011 forecast for yields looking for the two-year rate to end 2011 at 2.85% and the 10-year bond yield at 3.75%.
Other highlights from this month’s Financial Markets Monthly:
- U.S. data have been a mixed bag and confirm that the U.S. recovery is continuing, albeit slowly. The risk of deflation, not inflation, appears to be at the top of the mind for policymakers now with the Fed likely to implement another round of quantitative easing to ensure that growth and inflation do not slow further.
- The uncertain global outlook is likely to be the dominant factor in the Bank of Canada shifting to the sidelines for the remainder of 2010.
- Policymakers in the UK are unlikely to deliver a further easing in policy unless conditions become much worse.
- The RBA stayed on the sidelines this month although the statement showed a clear tightening bias which sets up for a hike before year end.
- Canada’s economy sputtered in July after very robust domestic demand earlier in the year.
- Inflation remains mild with both the headline and core rates below the Bank’s 2% target.
- The uncertain global outlook is likely to be the dominant factor in the Bank shifting to the sidelines for the remainder of 2010.