Bank of Canada Interest Rate Cut Expectations Tick Higher, Business News Network

Bank of Canada Kamloops Real Estate Mortgage Interest RatesThis article appeared on the Business News Network on January 14th, 2016 and was written by Fergal Smith of Reuters.

Bank of Canada interest rate cut speculation intensified on Tuesday as crude oil prices and the Canadian dollar both weakened to 12-year lows, with traders pricing in a full 25-basis-point easing by mid year.

The Canadian central bank cut rates twice in 2015 as an oil price shock drove the economy into recession in the first half of the year, but has been sidelined since July.

“People are calling for the Bank of Canada to cut rates at the next meeting,” said David Bradley, director of foreign exchange trading at Scotiabank.

The implied probability of a Bank of Canada rate cut at next week’s interest rate announcement has climbed from 22 percent after a speech by Governor Stephen Poloz last week to more than 30 percent, while the market has nearly fully discounted a rate cut in May.

The prospect of easing helped drive the yield on the Canadian government’s two-year bond to a four-month low.

Even so, “the market is underpricing the probability of a rate cut next week,” said Andrew Kelvin, senior rates strategist at TD Securities.

A Jan. 7 speech by Poloz had left investors doubtful he would cut Canada’s benchmark rate this month.

However, the central bank’s quarterly Business Outlook Survey has since found that business sentiment has deteriorated, while investment and hiring intentions have fallen to their lowest levels since 2009.

“It’s clearly going to be a very close call for the Bank of Canada given the financial turmoil we have seen,” said Kelvin.

U.S. crude oil prices have fallen an additional 8 percent this week, dipping below US$30 a barrel. Moreover, Western Canada Select, a blend produced by Canadian oil companies, trades at a greater than $14 discount to U.S. crude oil prices.

“We know falling oil prices have preceded both the last two cuts from the Bank (of Canada),” said Kelvin.

The central bank assumed a $45 price for U.S. crude oil prices when making its latest forecasts for the economy in October.

Speaking on Tuesday, Canadian Finance Minister Bill Morneau acknowledged that the public is concerned about the economy, but declined to indicate whether the government will stick to its budget deficit pledge or boost spending.

“We will be working in our budget to make sure that our initiatives help to grow the economy. We think the initiatives we already outlined are the appropriate initiatives to make a difference,” he said.

CMHC Mortgage Holders Spend 26% of Income on Housing Loan Defaults at Low 0.34%, Showing Strong Ability to Manage Debts

This article appeared on CBC.ca on the 29th of May 2015.

CMHC Canadian Mortgage and Housing CorporationCanadians are showing a strong ability to manage their debts even as housing prices rise, with arrears on CMHC mortgages at a low 0.34 per cent for the first quarter of this year, according to new figures from the federal housing agency.

That means there were 9,572  Canada Mortgage and Housing Corp.-insured mortgages in arrears in the quarter, while it insures a total of 2.8 million mortgages. It had to pay just 588 claims.

The gross debt service ratio for Canadian homeowners – the percentage of housing costs to gross monthly income – sits at 26 per cent for the three months ended March 31.

That’s almost the same as in the first quarter of 2014, but up slightly from 25 per cent in 2013.

The ratios are highest in Alberta, British Columbia and Ontario, where housing prices have been rising rapidly. New homeowners in those provinces are also more likely to need a CMHC mortgage, which is necessary when buyers do not have a 20 per cent down payment.

However, a small proportion of CMHC-insured homeowners – 12.1 per cent – have a gross debt service ratio of more than 35 per cent, meaning more than a third of their monthly income goes to housing costs.

Another 21 per cent of CHMC-insured mortgage holders are juggling housing costs of 30 to 35 per cent of their gross income.

As housing costs rise, more than a quarter of the mortgages insured by CMHC are for over $400,000.

However, the average insured loan amount was $238,630.

In its annual report the federal agency predicts today’s low interest rates will continue to stimulate demand for housing.

It expects mortgage rates will not rise in Canada before the end of 2015.

The report comes after CEO Evan Siddall said CMHC’s share of the mortgage market had dropped from about 90 per cent of new mortgages to about half of new mortgages.

Ottawa had encouraged the agency to reduce exposure to mortgage defaults for the Canadian taxpayer, saying it wanted private insurers to take over the risk.

In its annual report, CMHC said it insured mortgages worth $543 billion in 2014, down 4.1 per cent from 2012, and below the legal limit of $600 billion.

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Why The Bank of Canada Rate Cut May Not Bring Down Mortgage Costs, The Globe and Mail

This article appeared on The Globe and Mail on Thursday, January 22nd, 2015 and was written by Robert McLister.

It could be a boon for mortgage shoppers or 2015’s greatest mortgage disappointment.

I’m talking about the Bank of Canada’s 0.25 per cent rate cut Wednesday. At first blush, it was an unexpected bonus for mortgage borrowers. Prime rate was expected to drop as it usually does, in this case from 3.00 per cent to 2.75 per cent. That would have saved variable-rate mortgage holders 0.25 per cent, or roughly $500 per year on a $200,000 mortgage.

But now, all in mortgage-land are waiting and wondering if Canada’s major banks will actually pass along that rate cut. The Globe and Mail’s Streetwise reported Wednesday that TD Canada Trust may not reduce its prime rate. (TD sent me a statement this morning confirming that it is not changing prime rate “at this time.”)

More than nine times out of 10, banks do drop their prime rate in lockstep with Bank of Canada overnight rate cuts. But banks have also been known to hold back a cut for themselves. The last time that happened was December 2008. The Bank of Canada slashed rates 0.75 per cent. Yet, the major banks lowered prime rate by only 0.50 per cent.

We’re in a different world this time around. The average home price is 44 per cent higher than 2008, debt levels are at a record, bank revenue is pressured by multi-year lows in mortgage growth, competition has shrunk net interest margins and Ottawa had burdened banks with heaps of regulatory, capital and securitization restrictions. That makes banks and the federal government quite reluctant to see a lower prime rate.

The housing policy factor cannot be underestimated, not with the Bank of Canada admitting that certain regions’ home values may be up to 30 per cent overvalued. I spoke with one capital markets executive Thursday. He said, “I wouldn’t be surprised if the Bank of Canada called all the major banks and said, ‘Don’t use this rate cut as fuel to get more debt in consumers’ hands by lowering rates.”

Fortunately, despite TD’s reluctance to change prime (so far), if one of the major lenders does lower its prime rate, they likely all will. But if they do, there’s a very real chance the banks may also reduce variable-rate mortgage discounts. Instead of prime minus 0.65 per cent, for example, they may increase variable rates to prime minus 0.50 per cent or higher, in order to offset their lost margin. Playing their hands this way would attract less public criticism than overtly keeping the Bank of Canada’s cut for themselves.

If the banks don’t in fact pass along the Bank of Canada’s rate cut, the Big Five bank CEO’s may want to take shelter in their underground Bay Street bunkers — for there will be nuclear fallout from that decision.

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Mortgage Rates to Dip Following Bank of Canada Rate Cut: economists

This article appeared on the CP24 (CTV News) on January 21st, 2015 and was written by Alexandra Posadzki, The Canadian Press.

TORONTO — Canadian homeowners have likely gained a reprieve from an expected increase in mortgage rates this year.

Economists were expecting rates to dip slightly in response to the Bank of Canada’s surprise move Wednesday to cut its trend-setting interest rate to 0.75 per cent, from one per cent, to soften the blow of dropping oil prices on the Canadian economy.

“This signals that low interest rates will be with us a while longer,” said Avery Shenfeld, the chief economist at CIBC World Markets, noting that the central bank’s rate cut will likely mean a corresponding 0.25 drop in variable, or floating, mortgage rates.

Fixed-rate mortgages are also likely to see a slight decline, as they follow bond yields, which will move lower in response to the rate cut.

However, TD Bank (TSX:TD) was quick to announce Wednesday it will maintain its prime interest rate at three per cent, noting that factors beyond the central bank influence its rates.

“Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit,” the bank said in a statement.

It was anticipated that the Bank of Canada would move to increase its overnight rate later this year due to an improving economy, until crude prices started to slide and dropped below US$50 a barrel.

Phil Soper, president of realtor Royal LePage, predicted Canadians could be shopping for cheaper mortgages within days.

“It doesn’t take long to react to a policy change like this,” Soper said. “That’s why it’s such a powerful tool.”

A conventional five-year mortgage stands at about 4.79 per cent, according to data from the Bank of Canada.

Decreased mortgage rates could boost sales and prices of homes in Central Canada, including in Toronto’s red-hot property market, where Soper said prices could climb by 4.5 to five per cent this year.

“It will be a lift to the industry overall,” Soper said. “However, it will be particularly pronounced in Central Canada, which we believe will see a lift from lower oil prices regardless and, when you add to it the stimulative impact of lower mortgage rates, we should see an uptick in activity.”

However, the rate cut may also spur Canadians, who have been criticized previously by the Bank of Canada for holding record levels of debt, to borrow more money.

“Certainly this isn’t going to discourage anyone from taking on debt,” Shenfeld said.

“But I think in the Bank of Canada’s eyes right now, it’s a lesser of two evils. They’ve shown discomfort with the amount of borrowing Canadians have done, but the economy right now can’t afford to shut the tap off on that if we’re not getting the lift to growth from the energy sector.”

Although cheaper mortgage rates are likely to buoy real estate markets in Central and Atlantic Canada, TD economist Craig Alexander says the impact of oil prices will trump interest rates in Western Canada.

“I think it’s inevitable that you’re going to see a pullback in sales and a softening in price growth in real estate in oil-rich provinces because, at the end of the day, income growth in those provinces is going to be a lot less,” Alexander said.

“It is an economic shock, and real estate markets do reflect local economic conditions.”

In its latest report, Royal LePage predicted home prices in Calgary would grow by 2.4 per cent this year – a slowdown from the 5.5 per cent jump they made last year.

Meanwhile, older Canadians who rely on interest-bearing investments for their income could find themselves squeezed as a result of the central bank’s policy change.

“It will push them into looking at alternative investments that can generate a bit more yield than a straight GIC,” Shenfeld said.

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