Snapshot of Canadians’ finances
| This is super interesting. Also remember that less than 1% of Canadians work in oil and gas, and less than 20% of Canadians make more than $85,000 a year! It shows how well Alberta is doing. |
| Jason Heath Jun 30, 2012
Who is the average Canadian — financially speaking? According to the Association for Canadian Studies, our median household income is $68,560 per year. Personal incomes are lowest in Prince Edward Island at $21,620 and highest in Alberta at $36,010. We pay $11,000 per year in income tax, donate $260 to charity, contribute $2,790 to our RRSPs and carry a credit card balance of $3,462. Mortgage and household debt comes in at a total of $112,329 Our net worth per capita has continued to rise, most recently clocking in at $193,500 per capita according to Statistics Canada. Real estate gains have continued to drive the increase to our net worth, though many have suggested the Canadian market could be in for a correction — or at least a pause. The Toronto Stock Exchange has risen 59% over the past 10 years, compared with a 3% gain for the MSCI World Index and a 4% loss for the S&P 500 (excluding dividends). Our Canadian dollar has appreciated 47% against the U.S. dollar and 16% against the euro over the past 10 years. This has made global and U.S. stock market returns even worse in Canadian dollar terms. Canada had a double-digit personal savings rate in the ’90s, but over the past two decades, this has dropped dramatically to the current 3.1% — one of the lowest savings rates of all OECD countries. The flipside of this coin is that our current personal debt to income has simultaneously reached an all-time high of 153%. So gains in real estate and stocks have been tempered by a corresponding increase in personal debt. The Economist Intelligence Unit lists Canada’s government debt per person at about US$39,883 or 81.6% of GDP. This compares with the U.S. at $37,953 or 76.3%. Go figure! That said, Greece’s public debt is currently $35,874 or 141.0% and Japan is at $87,601 or 204.9%. Canada’s federal government has been consistently posting budget surpluses of about 1% of GDP since the mid-1990s, a time when many people thought Canada was on the path to a sovereign debt crisis of its own. Quite to the contrary, Canada entered and emerged from the 2008 recession relatively unscathed. And this is the asterisk beside Canada’s 81.6% debt-to-GDP ratio when compared with the 76.3% figure for the U.S. — given our neighbours are currently spending US$1.50 for every US$1 of federal revenue. Call it a “Tale of Two Countries.” Some people suggest the U.S. and Europe could learn something from the Canadian government debt experience of the 1990s. While many people in other Western countries are now suffering as a result of their government’s debt problems, our government is sitting pretty. Our personal debt is the one black spot for the red and white as we celebrate our country’s birthday. Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto |
More problems with collateral mortgages
Here is more bad news on collateral mortgages.
People refuse to sign a 3 year cell phone contract but then for some reason have no problem in losing every single thing you have ever made and be sued into bankruptcy by your bank for taking one of these mortgages. Again, we do not offer them but TD, Scotia, ING, and RBC have them as STANDARD. I would rather take a new 3 year cell phone contract!
Beware the pitfals of collateral mortgages
By Mark Weisleder | Sat Jul 30 2011
When you apply for a mortgage, you usually just ask about the term, amount, interest rate and monthly payment. Not many people understand the difference between a conventional mortgage and a collateral mortgage. Yet many banks are now asking borrowers to sign collateral mortgages — and it could result in them being tied to this bank, for life.
With a normal conventional mortgage you bargain for a set amount, rate and amortization. Say the property is worth $250,000 — you bargain for a $200,000 loan, at 3.5 per cent, a five-year term/25-year amortization, payments of $998.54 per month.
A conventional mortgage is registered against the property for $200,000. If all the payments are made on time, the mortgage is renewed on the same terms every five years and no prepayments are made, the balance is zero after 25 years.
Should another lender decide to lend you money as a second mortgage, there is nothing stopping them from doing so, subject to their own guidelines. Under normal circumstances the principal balance on a conventional mortgage goes only one way, down. In addition, banks will accept “transfers” of conventional mortgages from other banks, at little or no cost to the consumer.
A collateral mortgage has as its primary security a promissory note or loan agreement and as “backup,” a collateral security, being a mortgage against your property. The difference is that, in most cases, the mortgage will be for 125 per cent of the value of the property. In our example, the mortgage registered will be for $312,500. But you will only receive $200,000. The loan agreement will indicate the actual amount of the loan, interest rate and monthly payments.
The collateral mortgage may indicate an interest rate of prime plus 5-10 per cent. This will permit you to go back to this same bank and borrow more money from time to time, without having to register new security. The lender will offer you a closing service, to register the mortgage against your property, at fees that will be cheaper than what a lawyer would charge you. Sounds good so far, doesn’t it?
However, this collateral loan agreement has different consequences, which are usually not explained to the borrower.
• Most banks will not accept “transfers” of collateral mortgages from other banks, so the consumer is forced to pay discharge fees to get out of one mortgage and additional fees to register a new mortgage if they move to a new lender. Thus the bank is able to tie you to them for all your lending needs indefinitely because it will cost you too much to move.
• Lenders may be able to use the collateral mortgage to offset any other unpaid debts you have. Offset is a right under Canadian law that says a lender may be able to seize equity you have in your home, over and above the mortgage balance, to pay, for example, a credit-card balance, a car loan, or any loan you may have co-signed that is in default with the same lender. In essence any loans you may have with that lender may be secured by the collateral mortgage. Nobody goes into a mortgage thinking about default, but “stuff” happens in people’s lives and 25 years is a long time.
• Let’s say your house value is $200,000. A collateral first mortgage registered on the property is $250,000. The amount owing on the mortgage is $150,000. If you were to need an additional $20,000, but the lender declines to lend it for any reason, then practically speaking you won’t be able to approach any other lender. They will not go behind a $250,000 mortgage. Your only way out would be to pay any prepayment penalty to get out of the first mortgage and pay any additional costs to get a new mortgage.
• Let’s say your mortgage is in good standing but you default under a credit line with the same bank. The bank could in most cases still start default proceedings under your mortgage, meaning you could lose the house.
• Some lenders are offering collateral mortgages in a “negative option billing” manner. Unless you are informed enough to say you want a conventional mortgage, you will be asked to sign documents for a collateral mortgage.
I spoke with David O’Gorman, the president and principal mortgage broker with MortgageLand Inc. He tells me it is his duty under the law to ensure the “suitability” of any mortgage he arranges for a consumer.
He would be hard pressed to justify the recommendation of this type of collateral first mortgage to any consumer, without disclosing both verbally and in writing the points listed above, and he believes the consumer should have their own lawyer review everything before they sign.
Lending money to people without proper explanation of the consequences is wrong. The banking regulators need to look into this practice and stop it. In the meantime, do not sign any mortgage document without discussing it first with your own lawyer.
Burgeoning Calgary population to fuel demand in housing market & the West is now bigger than the East!
The migration West continues! Just yesterday Canada Census noted that for the first time in history the West has more people than the East – sure it is only by 0.1% but hey … it’s official.
The migration continues mostly for jobs in energy and all those people need homes to live in. This supports prices and continued demand – but unfortunately fills up the roads and parking lots too.
New home construction and MLS sales on upswing
CALGARY — A burgeoning population will spark another real estate cycle in Calgary with increased demand fuelling more MLS sales and more new home construction.
But industry experts don’t expect the next cycle to mirror the boom of a couple of years ago which experienced a frenzy of activity and fast-rising house prices due to a lack of supply.
Instead, a stable, steady growth is expected in Calgary’s real estate market.
On Wednesday, Statistics Canada reported the Calgary census metropolitan area had the highest rate of population growth in the country at 12.6 per cent between 2006 and 2011 and is now more than 1.2 million for the region.
Tim Logel, president and partner of home builder Cardel Lifestyles in Calgary, said the population data supports what the industry believes is happening in the market.
“What’s positive about it is that as more people move to Calgary then more of the inventory or the supply that we’ve been working on reducing gets absorbed,” said Logel. “And it gets absorbed quicker and gets us closer to being in a higher demand environment where we’re being asked to produce more new housing products of all types for the market … Over the next year with this in-migration, the extra supply will be absorbed.”
Logel said a new real estate cycle has been started in the city. The last one finished in the spring of 2007 in the Calgary market.
Ann-Marie Lurie, chief economist for the Calgary Real Estate Board, said the growing population will help support increased demand for housing in the resale market as well.
“In the resale market, especially moving forward, we think this will also help really take up some of that inventory that is in the market because we had some out-migration in the past few years. 2010 in particular, in-migration levels were extremely slow and so that impacted our housing market as well,” said Lurie.
CREB is forecasting single-family MLS sales activity to increase by 12.2 per cent this year from 2011 levels and condo transactions to jump by 5.9 per cent. Its forecast is also for average sale prices of single-family homes to rise by 2.1 per cent and by 1.7 per cent for condos.
“It’s much more of a stable growth than it was during the last boom. I just don’t see us moving there,” said Lurie. “We’re not moving into that scenario. It’s a much more stable growth and we have a good supply of inventory right now in the resale market and frankly on the new home market they do have some room to improve in some of their construction.
“They’ve got some room to grow and build more to help meet with those household formation numbers.”
Already in January some real estate data, released Wednesday, is indicating support for increased activity in the market as housing starts and residential building permits showed impressive increases compared with a year ago.
According to Canada Mortgage and Housing Corp., housing starts in the Calgary census metropolitan area totalled 786 units in January, up 52 per cent from 518 units a year ago.
In the region, 336 single-detached units broke ground in January, up 14.7 per cent from the 293 units started in January 2011.
“This represents the sixth consecutive month where starts have increased on a year-over-year basis,” said Richard Cho, senior market analyst in Calgary for the CMHC.
Multi-family starts, which include semi-detached units, rows and apartments, increased to 450 units in January, up from 225 units a year earlier.
“As was the case in the last several months, apartment construction continues to be elevated, averaging more than 340 starts per month since August 2011,” said Cho.
Also, the estimated construction value of building permit applications for the residential sector in Calgary rose by 42 per cent in January compared with a year ago.
In releasing its latest data on Wednesday, the City said residential values increased to $153 million compared with $108 million in January 2011. This represents 651 new residential units, a 73 per cent increase compared with the January 2011 total of 376.
“The overall gain in residential value and number of new residential units can be attributed to increases in the apartment and townhouse sectors,” said Kevin Griffiths, chief building official with the city’s department of development and building approvals.
“For the month of January we accepted six apartment applications for 193 new units compared to zero last year, and 20 townhouse applications for 122 new units, compared to only seven townhouse applications totalling 44 units for the same period last year.”
© Copyright (c) The Calgary Herald
Alberta economic growth among Canada’s leaders
Alberta economic growth among Canada’s leaders: 3.7% hike forecast for this year
CALGARY — Alberta is positioned as one of Canada’s provincial leaders in growth, according to the latest RBC Economics Provincial Outlook report released Monday.
The provincial economy is set to grow at a rate of 3.7 per cent in 2011 and 3.9 per cent in 2012, said RBC. Both years Alberta will be second overall in the country behind nation-leading Saskatchewan’s growth rates of 4.3 per cent this year and 4.1 per cent next year.
Continued uncertainty in the global economy and volatility in the financial market forced RBC to downgrade its economic outlook for Canada. It is now predicting 2.4 per cent growth in 2011 and 2.5 per cent growth in 2012 for the country, down from 3.2 per cent this year and 3.1 per cent in 2012 it had forecast in June.
In June, the financial institution predicted economic growth of 4.3 per cent for Alberta this year and 3.8 per cent in 2012.
Increased production at major oilsands projects in Alberta in the past two years has rapidly boosted crude oil output and signs of further acceleration emerged earlier this year, said the report, but wildfires then forced widespread shut-downs in late-May and caused oil production to plummet in the weeks that followed.
“We expect that the negative economic impact from the wildfires will be short-lived, as most facilities were able to resume operations fairly quickly after the fires subsided,” said Craig Wright, senior vice-president and chief economist for RBC. “The economic loss associated with this disaster should be largely recovered in the second half of 2011.”
Solid investment in Alberta’s energy-related sector is the key driver of economic growth at play in the province, added the report. Oil and gas producers are slated to spend more than $24 billion this year, an 18 per cent increase over 2010.
“Continued strength in energy-related sectors will support a slight acceleration in economic growth to 3.9 per cent in 2012, maintaining Alberta’s status as a growth powerhouse,” said Wright. “This has had a positive impact on employment, as more than 77,000 jobs were added to the Alberta economy in the first eight months of this year, which was the strongest gain ever recorded over this period in the province.”
© Copyright (c) The Calgary Herald
The background on the US debt and why Obama is doing a good job
There is lots of Obama bashing going on – mostly fueled by Fox News.
I am not political at all, and do not comment on it in general, but economically speaking Obama is doing all the right things: keeping up government spending to fuel the recovery and cutting taxes to reduce the debt. This is textbook economics.
the Bush tax cuts are one of the biggest problems, and as you can see, the US rich are getting what they want – keeping the tax cuts.
See below, this most excellent chart, of the size of the mess that Bush handed over to Obama and what he has to work with. A pretty poor hand to start with.
Obama’s and Bush’s effects on the deficit in one graph
From the New York Times :
What’s also important, but not evident, on this chart is that Obama’s major expenses were temporary — the stimulus is over now — while Bush’s were, effectively, recurring. The Bush tax cuts didn’t just lower revenue for 10 years. It’s clear now that they lowered it indefinitely, which means this chart is understating their true cost. Similarly, the Medicare drug benefit is costing money on perpetuity, not just for two or three years. And Boehner, Ryan and others voted for these laws and, in some cases, helped to craft and pass them.
To relate this specifically to the debt-ceiling debate, we’re not raising the debt ceiling because of the new policies passed in the past two years. We’re raising the debt ceiling because of the accumulated effect of policies passed in recent decades, many of them under Republicans. It’s convenient for whichever side isn’t in power, or wasn’t recently in power, to blame the debt ceiling on the other party. But it isn’t true.
Teetering on the edge of a rate hike – not all bad news
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.
Rates increasing from 111-year, all-time lows now or soon!
Below is a great blurb on what is happening with yo-yo predictions of the future of mortgage rates. Get pre-approved now, consider locking-in if you were going to OR redo your mortgage now for the last of these low rates!
OPINION:
The laws of gravity dictate that what goes up must come down but I’m afraid, when it comes to the laws of economics and interest rates, what goes down must come up. Ultra-low interest rates are only a short-term solution and not sustainable in the long run. This is something which all economists agree on. Unfortunately this is the point where the common consensus ends and opinions diverge. The issue which is most divisive amongst the experts at the moment is exactly when these rate hikes will begin. As recently as a month ago many experts were predicting that rates would remain at their current levels until as late as March of 2012. A tumultuous week in the markets has seen many of these experts revise their predictions, with many now citing September as the month to bring a halt to the rate freeze.
Surprising inflationary reports for May demonstrated the fastest annual rate in eight years. While Mark Carney previously highlighted the transient threat of rising gas prices, which witnessed a 30% rise, gas prices were not alone in driving the inflation. Even the core rate, which strips out the more volatile prices of food and fuel, rose to a rate of 1.8%, quickly racing towards the Bank of Canada’s 2% target rate. With Canadian inflation now standing at 3.7%, exceeding those of Australia (3.3%); Mexico (3.3%); Chile (3.3%) and Columbia (3.0%) the calls for increased rates have grown ever louder. The fact that these countries all have short-term rates exceeding 4%, while Canada’s lingers at 1% only strengthens the case for a rate increase.
This week also saw a dramatic surge in 5 year bond yields. On Monday the yield had fallen to 2%, leading many to speculate that lenders would be forced to further drop fixed rates, which have already been subject to a series of slashes in the last few months. However these calls were short-lived as yields rebounded strongly in the face of the inflation report combined with renewed hopes that the European Central Bank could be able to prevent the default of Greek debt.
So what does this mean for your mortgage?
It means that if you are looking for pre-approval for a purchase or refinance there has never been a better time to secure your rate with Mortgage Mark while rates are still low. For those of you in a variable rate we’d like to reassure you that we still think this is still a good option. However our variable rate clients should prepare their finances and make sure they will be able to handle a potential increase to their payments coming in September. If you would like further details on any of the information listed here we implore you to call Mark Direct at 403-681-4376 for our sound, unbiased mortgage advice.
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.
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/