27 Aug

Prime interest rate to stabilize

General

Posted by: Tony Passalacqua

CIBC World Markets Inc. trims forecast for rate hikes and currency strength in Canada as economic growth outlook dampens abroad

TORONTO, Aug. 18 /CNW/ – Continuing weakness in the U.S. economy may force the Bank of Canada to put interest rate hikes on hold after September, notes a new report from CIBC World Markets Inc.

“North America’s story is again darkening,” says CIBC’s Chief Economist Avery Shenfeld in the latest Global Positioning Strategy report. “We were looking for a material second-half slowdown for the U.S. but as it turns out, it’s already happened.”

Economic growth stateside from April to June is being revised downward, Mr. Shenfeld notes, and key indicators are pointing to growth that will be slower than anticipated by U.S. monetary policy makers.

And still ahead is a “further fiscal belt tightening in 2011 that will have to be softened, and accompanied by quantitative easing, if the U.S. is to stay out of recession in early 2011 and get back to potential growth by the end of that year.

“Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest.”

While Canada is in much better economic shape – it leads the U.S., Eurozone, U.K. and Japan in first-half growth and has a record gap over the U.S. in the share of working age population holding a job – it “cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold,” Mr. Shenfeld contends.

For starters, an interest rate differential of 300-400 basis points would take the loonie “substantially stronger” creating additional headwinds for Canadian economic growth, says Mr. Shenfeld.

Furthermore, the “external environment will be one of less-than-normal growth as fiscal tightening bites in Europe and the U.S., and with our own upcoming fiscal tightening also hitting domestic demand, monetary policy might have to be set at stimulative levels to allow the economy to return to potential and remain there. To keep moving at all, you have to step on the gas if your car is trying to roll up a steep incline.”

Mr. Shenfeld doubts that the Bank of Canada “has been shocked enough to forestall a rate hike in September” but his forecast that Canadian growth in Q2 and Q3 will fall below the BoC’s outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.

The report also notes that there are limits to how far the Bank of Canada can diverge from the U.S. Federal Reserve without later regretting it. Episodes in recent years in which rate overnight rates were 2 per cent or more above those stateside resulted in sagging or sacrificed growth. These are “lessons learned, we hope,” says Mr. Shenfeld.

“Since a hike at every rate setting date through 2011 would take rates substantially higher than 2%, a pause is coming on the road to tightening.”

As a result of the dampened external growth outlook, Mr. Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.

A less hawkish monetary policy combined with a mixed outlook for commodity prices affected by slow global growth will also likely see the Canadian dollar roughly two cents weaker than earlier forecast over the same horizon, adds Mr. Shenfeld.

27 Aug

Canadian home prices continue to rise

General

Posted by: Tony Passalacqua

Canadian home prices continue to rise

The Globe and Mail

Home ownership becoming less affordable as sales, demand fall: Conference Board of Canada

Canadian home prices are still on the rise even as sales fall as demand peters out, one factor

that is making homes less and less affordable, according to a study by the Conference Board of

Canada.

Home sales have fallen by 25 per cent since reaching a peak at the beginning of the year as

fewer buyers compete and more houses come onto the market. That hasn’t stopped houses from

becoming more expensive, a trend that is likely to continue, said conference board associate

director Michael Burt.

“Most of the costs associated with home ownership, such as mortgage costs and insurance, are

outstripping inflation and income growth,” said Mr. Burt, who studies industrial economic trends.

“As a result, housing affordability in Canada, which has been deteriorating over the past decade,

will continue to decline during the next two years.”

Canadian home prices were up 13.6 per cent in June from a year ago, according to the Teranet—

National Bank composite house price index, released Wednesday. Month over month, June

prices were up 1.5 per cent — the largest monthly increase since last August and the 14th

straight monthly increase.

Price increases in June were driven by the bustling housing markets of Vancouver and Toronto,

where many buyers entered the market in advance of the new harmonized sales tax that took

effect July 1 in Ontario and British Columbia.

Recent figures from the real estate brokerage industry show July sales fell 30 per cent and prices

were essentially flat.

As more resale houses come onto the market and fewer buyers compete for homes, the housing

market is at a crossroads between a balanced market and one that favours buyers.

Many economists predict the sector could move further toward a buyers market, which could be

accompanied by a deceleration of price increases, if not outright price drops as seen in the United

States.

Marc Pinsonneault of National Bank (TSX:NA) says home prices could soon fall, especially since

the introduction of the HST in the hot housing markets of B.C. and Ontario have raised the price

of many home purchases

His report on the index — a compilation of average home price changes in six metropolitan areas

— suggests that it may be too early to conclude that vigorous price rises in April, May and June

represent a trend.

“The prospect of harmonized sales taxes coming into effect July 1 in Ontario and B.C. may have

stimulated sales in Vancouver, Toronto and Ottawa in the preceding months,” the report said.

Seasonally-adjusted home sales fell 8.2 per cent in June from the month before and shrunk 19.7

per cent compared to June 2009, according to the Canadian Real Estate Association.

However, the average Canadian home price sat at $342,662 compared to $326,689 in 2009.

Sales activity peaked in December 2009 and hovered near record levels during the first quarter of

this year as buyers rushed into the housing market ahead of changes to mortgage rules, interest

rate hikes and the HST.

4

Activity so far this year is up 5.6 per cent compared to the first seven months of last year, but the

gap is expected to shrink as the year progresses because sales ramped up heavily during the

latter part of 2009.

The strong pace of spending at the beginning of the year indicates the Canadian industry has

fully recovered from the recession, and although new home construction activity is expected to

slow, housing starts will remain at a healthy level, the Conference Board said in its report.

Housing starts slowed to 192,800 units in June, the slowest monthly pace this year. And home

building is expected to slow during the second half of the year.

“The slowdown represents a shift to a more sustainable building pace rather than the beginning of

a large correction in demand,” said the Conference Board.

Many economists predict an accompanying deceleration of price increases, with some saying

prices could begin to fall modestly by the end of the year.

While performance in the Canadian housing market is weakening, it is faring much better than the

U.S. market, where the past three months have been the worst on record for new home sales.

Sales of new U.S. homes dropped sharply last month to the slowest pace on records going back

nearly half a century, the latest sign that the economic recovery is fading.

The U.S. Commerce Department said Wednesday that new home sales fell 12.4 per cent in July

from a month earlier to a seasonally adjusted annual sales pace of 276,600.

UPDATE

25 Aug

Renewal of mortgages

General

Posted by: Tony Passalacqua

Shopping for a Renewal

While most Canadians spend a lot of time, and expend a lot of effort, in shopping for an initial mortgage, the same is generally not the case when looking at mortgage term renewals. By omitting proper consideration at the time of renewal, this practice costs Canadian citizens thousands of extra dollars every year. Nearly 60% of borrowers simply sign and send back their renewal that is first offered to them by their lender without ever shopping around for a more favourable interest rate.

Homeowners should never accept the first rate offer from their existing lender. Without any negotiation, simply signing up for the market rate on a renewal is unnecessarily costing the homeowner a lot of money on their mortgage.

Generally it is a good idea to start shopping for a new term between four and six months before your current mortgage term expires. Many lenders send out your renewal letter very close to the time that your term expires and this does not give you ample time to arrange for a mortgage term through a different lender. This means that you need to be tracking your own mortgage term timeframe and know when it is time to start shopping for a good mortgage renewal rate.

Before you ever hear from your lender about renewing your mortgage term, have a licensed mortgage professional shop around for you, you will be amazed at what they can accomplish on your behalf!

Your mortgage is one of your biggest expenses. For this reason it is imperative to find the best interest rates and mortgage terms you possibly can. By shopping around at renewal time you can save substantial amounts of money over the life of your mortgage loan. Don’t be one of the 60% who just simply sign their renewal letter and send it back. Use the services of a licensed Dominion Lending Centres mortgage professional to ensure the lenders compete for your business.