How do we (mortgage brokers) know rates are going up?
Hi All – many people ask how we know that rates are going to change ahead of time. Below is a sample of the data that we read on a daily basis. If you were motivated enough to read things like this every day – or figure them out for yourself – then you would know too. Or, just let a mortgage broker do it.
MARKET COMMENTS
Bond yields today are roughly where they were a week ago but there has been plenty of volatility over the intervening period.
Last week yields were pushed higher by in-line or better than expected economic data in Canada (Manufacturing Sales Growth, Trade Balance) and the US (Retail Sales Growth, Initial and Continuing Jobless Claims, Trade Balance), together with a sense of optimism that the European debt crisis will be resolved and/or that concerted steps there would be taken to protect the banking system.
Generally speaking, “good” economic news tends to push bond yields higher as market participants are less interested in the safety bonds provide.
Notwithstanding last week’s developments, yields have come back down today as worse than expected economic data in the US and a clarification from Germany that a once-and-for-all solution to Europe’s debt crisis will not be forthcoming and that markets should expect such crisis to extend into next year.
In all, these developments present the global economy in better shape than what we thought at the start of the week, and the rise in rates reflects that change.
A 180 Degree Change in Mortgage Rate Expectations
This last blip in the stock market has taken the wind out of the world’s recovery sails. It now looks like rates are going to stay the same or go DOWN!?! for the 12 months or so.
The USA has said for the 1st time ever that they are not going to change their rates until 2013. They have never given a date in the past and this IS a big deal. It means that Canadian rates are going to have to track closely to the USA rates or our dollar will skyrocket and quickly slow our growth and path to recovery.
That would mean that while fixed rates have NEVER been better in 111-years, variable rates are also super attractive because Prime (P) will now stay close to 3% (where it is today) and the rate of P-8% = 2.2% for a mortgage is CRAZY low now that we know it is going to stay around there for 2 more years!
Call to discuss if you have any questions on this. 403-681-4376: Mark
A 180 Degree Change in Rate Views
- 46% probability of a rate cut Sept. 7.
- 100% probability of a rate cut by year-end.
That’s what prices of closely-followed overnight index swaps (OIS) were implying at the close of business on Monday. OIS trade on market expectations for Bank of Canada rate moves.
That amounts to a 180 degree swing in market psychology. Just a few weeks ago traders were pricing in a rate hike by January.
“As we’ve seen, markets can swing and perception can swing quite aggressively, and we could well be back to a fall expectation [of a rate hike] in a month’s time,” said RBC economist Eric Lascelles to the Globe & Mail.
Lascelles counterpart at Scotiabank, Derek Holt, says: “Any talk of the Bank of Canada hiking this year is just foolish in my opinion.”
Peter Gibson, chief portfolio strategist at CIBC World Markets notes: “I think it’s clear that there are a lot of serious problems still in the world and it’s more likely that we’re setting the stage for a sustainably low level of interest rates for a very long time.”
And that is the takeaway here.
Despite the roller coaster of emotions as of late, this about-face in rate assumptions reminds us of the necessity to focus on long-term trends. Long-term, North America’s prognosis still seems compatible with low-growth and low-inflation. That’s an environment where fixed mortgage rates typically underperform.
Analysis: Canada rates seen lower for longer; cuts unlikely
This is good news for people in variable rates AND fixed rates.
It all means that mortgage rates are going to stay low for longer than expected. Prime will stay lower longer partly because the US has for the 1st time said that they will leave the very low rates until 2013 to give the market something solid to work from.
That will also cause the fixed rates to stay lower, longer.
Good news all around.
By Ka Yan Ng
TORONTO (Reuters) – A dovish U.S. Federal Reserve will likely force the Bank of Canada to keep its interest rates lower for longer, but market bets on a Canadian rate cut by year-end are unlikely to pay off.
Analysts said a rate cut would send all the wrong signals for an economy that is growing, albeit slowly, and could hurt the central bank’s credibility.
“In the current situation, a rate cut by the Bank of Canada would mean that you have a second recession in Canada,” said , Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International in New York.
“And that’s not something that we see happening.”
Expectations for Canadian interest rates have swung wildly in recent weeks. As recently as July 19 traders priced in higher expectations of a rate increase this year, following unexpectedly hawkish language from the Bank of Canada.
A July 20 survey of primary dealers showed most saw a rate hike in September or October.
But tightening expectations fell sharply as the U.S. debt ceiling debate and the downgrading of the U.S. credit rating by Standard & Poor’s fueled fears of a recession there, triggering some of the worst stock market selloffs since the collapse of Lehman Brothers in 2008.
Canadian overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, and short-dated government debt began to show expectations of a rate cut rather than an increase.
The Canadian dollar also fell more than a nickel against the greenback as the outlook for monetary policy moved from tightening to easing.
Rate cut expectations were reinforced by the U.S. Federal Reserve’s unprecedented announcement on Tuesday that it would likely keep rates near zero for another two years.
Analysts said the Bank of Canada is likely to keep interest rates lower for longer than previously expected because of the Fed move. One issue is that widening the rate differential between the two countries could cause an unwelcome appreciation in the Canadian dollar.
But they caution that swap markets, which are pricing in a quarter-point rate cut before year end, have it wrong.
Analysts said a cut is not needed because the Canadian economy, though highly dependent on the big U.S. market, is still growing. The central bank’s key policy rate, currently at 1.0 percent, is also seen as still being very accommodative. The rate was cut to a record low of 0.25 percent after the financial crisis.
HOUSING, RISK TO CONFIDENCE FACTORS
Those emergency rates provided conditions for the domestic housing market to surge to bubble-like proportions in some parts of the country, and allowed Canadians to take on massive personal debt loads.
Analysts said a rate cut could reignite these two segments of the economy, risks that have already been flagged by the central bank.
“The bank is going to need a lot more evidence that the downside risks are going to stick with us before they totally rewrite their script from the last statement and move toward outright easing,” said Derek Holt, an economist at Scotia Capital, noting that dovish language would inevitably have to accompany a decrease in the central bank’s key rate.
“That would be a blow to business and consumer confidence in the country as opposed to the more supportive role, which would be essentially to just stay off on the sidelines and not do anything on rates for a long time yet.”
Holt is already the most bearish among Canada’s 12 primary dealers — institutions that deal directly with the central bank as it carries out monetary policy — and is comfortable with his call that the next rate hike will be in the second quarter next year.
If anything, it could be later, “if the Fed is true to its word in terms of maintaining stimulative policy all of next year and into 2013,” he said.
Analysts said the risk of a rate cut is now more likely than an increase, given Canada’s trading ties to the United States and the risk that a recession there would also pull Canada’s economy lower.
“It is probably appropriate to price in some risk of the next move by the BoC being more a cut than a hike, just at this stage,” said Michael Gregory, senior economist at BMO Capital Markets.
“But I think that fades within six months and you start to believe that is going to skew to the next risk being a hike rather than a cut.”
($1=$0.99 Canadian)
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.
Variable rates are still good
In a time characterized by widespread economic turmoil across the US and Europe, there was a certain comfort to be taken in the mundanity of the Bank of Canada’s (BoC) report today. As almost unanimously predicted, the BoC left overnight rates unchanged at 1%, meaning the prime rate stays pegged at 3% and the variable rate mortgage holders of Canada continue to prosper. However, there were some nods towards a rate increase approaching on the horizon. The quote of the day being the warning that monetary stimulus “will be withdrawn”, a statement whose severity is underscored by the omission of the word “eventually”, which was mentioned at the BoC’s May 31st meeting.
However, it is our contention that we are unlikely to see rate increases at the next meeting, in September. A far more likely target would be December at earliest or, more likely, early next year. This prediction comes with a backdrop of increasing pessimism concerning the US. It is our belief that the US policies for growth, characterized by strict austerity measures, could see the US plummet into an economic purgatory from which it may find it hard to escape. This would restrain the BoC from making any substantial rate hikes and, while an increase in rate is almost certainly just around the corner, a series of hikes may not be sustainable. When you add this to the increasing likelihood of Greece’s loan default and now the potential inclusion of Italy into the economic abyss, the case for dramatic rate hikes only erodes further.
While the Bank of Canada will likely act to stem core inflation, which it has highlighted as “slightly firmer than anticipated”, the prevailing consensus remains that this is being driven by “temporary factors”. The bottom line is that we think the 40% of Canadian home owners who are now in variable mortgages can rest assured that they’ve made the right option. Obviously if you’re not comfortable with the inherent risk associated with variable mortgages there’s always the fixed option and it’s rare to see fixed rates so low, so it’s a nice option to have.
If you should have any questions on anything you’ve read here or are interested in perhaps switching to a variable rate mortgage and would like some of our sound, unbiased mortgage advice then we suggest you give us a call today at 403-681-4376.
The case for using a broker has never been stronger, with more and more Canadians beginning to realize that savings associated with utilizing the services of a broker. We’ve included a link to this Bank of Canada report outlining the savings on “search costs” which brokers provide. They demonstrated that “over the full sample the average impact of a mortgage broker is to reduce rates by 17.5 basis points.” For all those mathematically limited soles like me, that means $1,670 of interest savings on a typical $200,000 mortgage over five years. Don’t be one of those people who let the comforts of a familiar bank name dissuade you from making the savings available to you. Call Mark Herman today!
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.”
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.