Accidents can happen to any economy. Over the last year, Canadian industry has experienced troubled exports in the energy and gas sectors and our GDP has been essentially flat. Both the US and Canada have gone through many extended flat-stretches; which were then followed by growth. However, the US economy is very fragile at the moment, and we (Canada) are what amounts to ‘guilty by association’. To add fuel to the fire, there are enough clouds on the global horizon have concerns for the near future.
These considerations, and until this global economy is on a more solid track… the Bank of Canada is going to be very patient in raising rates. They are no longer worried that lower rates will trigger inflation; therefore the need to withdraw the monetary stimulus has diminished.
Bottom line? Interest rate hikes, at least for the immediate future, look unlikely. The next Bank of Canada meeting is Jan 18.
I hope your 2012 is filled with happiness, health, success and prosperity! I’ll make a concerted effort to keep you you up to date with all the latest goings-on in the industry. If there’s a better mortgage strategy in your future, I’m here to make it happen!
Hopefully, 2012 will see a continuation of historically low interest rates. More info to come, so stay tuned!
All the best,
John Abt
The Bank of Canada (BoC) left the overnight interest rate unchanged for the seventh consecutive meeting at 1.0 per cent this morning, a position it has been stuck in since September of last year.
While no one expected the BoC to change rates this morning, the market was still glued to the wires searching for clues about what’s in store for the latter half of 2010.
And it wasn’t disappointed: The bank tweaked its statement to say “some of the considerable monetary policy stimulus currently in place (i.e. really low interest rates) will be withdrawn.” In prior press releases the statement read that stimulus would be “eventually withdrawn”.
The BoC remains in a tough position, with the domestic economy ready for higher rates but considerable risk still emanating from places like the U.S. and Europe. The last thing the BoC wants to do is start raising rates and then have some sort of disorderly default in Europe or a lock up in government spending in the U.S., slowing the global economy and disrupting financial markets.
Currently, there is more uncertainty about where rates are going than has been present for some time. The market remains somewhat divided, but this morning’s press releases definitely seemed to be preparing Canadians for a rate hike in the fall. Certainly, nothing is concrete at this point but if the aforementioned global risks start to get resolved, look for rates to start moving higher at either the September 7th or October 25th meetings.
Maximum amortization drops from 35 to 30 years
The government has been concerned about Canadians’ household debt situation for a while. It moved them to tighten mortgage rules a year ago, but borrowing hasn’t dropped significantly since. So the government has decided to introduce a 2nd wave of tightening aimed specifically at marginal borrowers.
The most significant change is reducing the maximum amortization from 35 to 30 years for government-backed insured mortgages. This isn’t a huge change, and will most likely only reduce mortgage origination by about 2-3%. The maximum amount for refinances has been reduced from 90% to 85% of the house value. The changes to amortization and refinancing will take effect on March 18, 2011.
Average consumers probably won’t notice much impact from these changes. The goal isn’t to discourage people from buying a house. The goal is to make sure that people who shouldn’t be borrowing aren’t borrowing. Only people who want to get into the housing market but can’t really afford to will be impacted, and that may be a good thing all-around.
Deeply-discounted variable rates have historically beat out 5-year fixed rates roughly 77% of the time. But CIBC economist Benjamin Tal suggests the coming five years may “slightly” favour fixed rates. He displayed the following chart at the CAAMP (Canadian Association of Accredited Mortgage Professionals) Forum on Monday, November 22nd:
It projects that the typical variable-rate mortgage (VRM) will be more expensive over five years than the typical 5-year fixed. Benjamin Tal was careful to point out that this isn’t a blanket recommendation of fixed rates; it’s more of a commentary on how narrow the gap has become between fixed and variable mortgages, based on market rate expectations.
Some people will undoubtedly look at this and see no point in assuming the risk of a VRM given the minimal projected cost difference. Whatever the case, rates are near the bottom, and the market is clearly betting on future hikes. However you look at it, going variable is no longer as clear-cut a strategy as it once was.
As your mortgage professional, let me run some rate simulations. If a substantial increase in prime would stress your cash flow, a VRM may not worth the risk. Either way, I’ll be sure to point out the pros & cons of each product and help you choose the product that’s right for you.
Canada’s housing market should return to “more normal” conditions this fall after the summer slowdown, said a report from real estate firm Re/Max.The company said despite some improvement in the housing sector this fall, sales in most markets are unlikely to return to the brisk pace seen late last year.
The threat of higher interest rates, tighter mortgage rules and the new harmonized sales tax in Ontario and British Columbia had just a “nominal impact” on the housing market.
“Economic uncertainty played a much greater role on softer housing conditions over the summer months,” the company said in a statement.
For this period, home sales are up in more than half the markets, and prices have risen in all. The highest average home prices were seen in Vancouver ($667,227), Toronto ($430,055) and Victoria ($495,993).
According to a Desjardins Group economists article, Canada seems to be in a class of its own.
With a labour market that has recouped all its recession losses, a housing market that was not pummelled like in the U.S. and Europe, and a financial system that hasproven its solidity, Canada appears to be living in a glass bubble. What’s more, it’s the only G7 country to have tightened monetary policy since the end of spring.
The housing market is cooling, and the impending winding down of government stimulus programs will temper growth. Canada’s biggest weakness is probably exports. The course of the U.S. economy, combined with the current global uncertainty, should prompt the Bank of Canada to stop raising rates until next spring.
