Canadian Banks on Brink of Mortgage Price War, The Globe and Mail

This article appeared in the Globe and Mail on January 27th, 2015 and was written by Tamsin McMahon.

Canadian low mortgage ratesCanada’s major banks are heading into a renewed mortgage price war in the wake of the Bank of Canada’s surprise decision to cut interest rates.

Mortgage brokers reported that Royal Bank of Canada dropped its five-year fixed rate for qualified borrowers to 2.84 per cent over the weekend. While smaller, non-bank lenders have started offering even cheaper rates, RBC’s rate cut is likely a record for a major bank, said Drew Donaldson, executive vice-president of Safebridge Financial Group. The bank also slashed its posted 10-year fixed rate to 3.84 per cent, the lowest nationally advertised rate in the country, said Robert McLister, founder of Ratespy.com.

RBC spokesman Wojtek Dabrowski said the bank continues to “review the impact of the Bank of Canada’s rate decision,” and that the company’s “individual product lines continue to make pricing adjustments in the regular course of business to ensure we provide competitive rates in the marketplace.”

Bank of Nova Scotia and National Bank of Canada have also cut fixed rates on broker-originated mortgages by 10 to 20 basis points in recent days. Toronto-Dominion Bank said it was dropping its posted 5-year fixed rate on Tuesday to 3.09 per cent, down from 3.29 per cent.

Mortgage officials said RBC was among the last of the major banks to introduce new rate specials.

“National Bank already offers competitive rates over the mortgage rate spectrum as we moved early over the past weeks,” bank spokesman Claude Breton said.

A battle in the mortgage market seemed inevitable given that Government of Canada bond yields have plummeted in recent weeks, falling 57 basis points in the past month to historic lows. Brokers had predicted that falling bond yields were almost certain to drive down the fixed-rate mortgage pricing ahead of the competitive spring housing market even as banks have largely kept their prime rates, which govern variable-rate mortgages along with other types of loans, unchanged. All the major banks will soon be forced to follow the Bank of Canada and cut their prime rates 25 basis points to 2.75 per cent, Mr. Donaldson said. “We expect more cuts to come from all lenders,” he said.

Even ahead of the Bank of Canada’s unexpected rate cut last week, the country’s major banks already seemed poised for a new round of rate cuts this year. Earlier this month, Bank of Montreal chief executive officer Bill Downe told an industry conference the bank was expecting to “again have a fresh offer that is appealing to customers” in the spring. The bank drew the ire of former finance minister Jim Flaherty in 2013 after it dropped its five-year fixed mortgage rate to 2.99 per cent in what Mr. Flaherty called a “race to the bottom.”

The renewed price war is raising concerns that the central bank’s rate cut will add fuel to the country’s overheated housing market even as Canadians struggle under the burden of rising household debt. Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal warned last week that falling mortgage rates could lead to “a monstrous spring in the real estate market.”

Others argue that low rates may not be enough to kick start a housing market that had already begun to slow toward the end of this year as oil prices plunged. Even as they predicted that Canada’s central bank will cut interest rates a second time later this year, TD economists said Monday they expect Canada’s real estate market to fare poorly this year as cheap crude and sky-high house prices in major cities are making it difficult for new buyers to afford to jump into the market despite low mortgage rates. “The housing market is … projected to be a drag on growth, with changes in existing home sales and prices, as well as housing starts, forecast to tilt into negative territory,” the bank said.

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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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Get Ready for Interest Rate Shock in 2015, CBC News

Get Ready for Interest Rate Shock in 2015, Consumers with high levels of debt to be most affected when Fed, Bank of Canada raise rates. This article appeared on CBC.ca website January 5th, 2015.

2015 is expected to be the first time in five years that benchmark interest rates are moved upwards, increasing the cost of borrowing. The U.S. Federal Reserve will go first; the Bank of Canada is expected to follow.

Most analysts expect the Fed to increase its key rate, which has been near zero for six years, by a quarter of a percentage point in the spring. Then, unless there is an unexpected shock to the U.S. economy, it will likely boost it gradually throughout the year, though the top rate is still expected to be a modest 1.25 to 1.50 per cent by the end of the year.

Canada will almost certainly follow, though with a time lag, depending on the state of the economy here.

Whenever it happens will be a shock to people carrying consumer debt, says Lynnette Purda, an associate professor at the Queen’s School of Business.

The interest rates on consumer loans, lines of credit, variable rate mortgages and some auto loans could rise immediately. For Canadians carrying consumer debt that will mean higher payments.

“Despite the low interest rates we’ve had for years, no one seems to have worked away at their debt levels. It will be a wake-up call for many consumers,” Purda told CBC News.

Consumers could pull back

Purda expects Canadians will pull back on big ticket purchases, like cars, appliances and furniture as interest rates rise.

And the biggest ticket purchase of all, housing, will not be unscathed. Overheated markets will finally cool and we may finally see the “soft landing” long predicted by the Bank of Canada and economists.

The timing of the interest rate increase – which has been predicted in past years without materializing – is no sure thing.

Although the U.S. Fed at its last rate announcement indicated it was most likely to move in the second quarter of 2015, much depends on economic indicators. Low oil prices have given a boost to the U.S. economy and left more money in people’s pockets, so there is a possibility the Fed could move even sooner.

TD Bank is predicting the Bank of Canada won’t move at the same time as the U.S. even though Canadian rates usually track what is happening in the U.S.

According to TD economist Leslie Preston, the rise may not happen here until the third quarter.

“We expect Canada to raise interest rates in October of 2015 – we expect two [quarter of a percentage] point interest rate hikes in the fourth quarter of 2015, so by the end of 2015, the overnight rate would be at 1.5 per cent – it’s currently at one per cent,” she told CBC News.

The challenge for Stephen Poloz

For Bank of Canada governor Stephen Poloz, this will be the first time he’s wielded one of the key tools in a central banker’s arsenal – the overnight interest rate which is the rate the central bank uses to lend to financial institutions.

And he’ll have to weigh inflation that currently seems quite high against the potential economic impact of higher rates.

The labour market is not yet operating near capacity, with many people still unemployed or underemployed, Preston said. And falling oil prices may slow capital spending and hiring, both in the oil patch and in sectors that supply it, such as equipment manufacturing.

“One of the challenges that emerged most recently are lower oil prices. Canada is a net oil exporter so when prices go down, it affects growth in Canada. This is a new headwind that’s come up,” Preston said.

While those factors may slow the Bank of Canada’s decision to raise rates, bond yields could rise in anticipation of a rate hike and that would affect fixed mortgage rates, according to RBC chief economist Craig Wright.

Wright said the rise in bond yields could catch people by surprise, as it may precede the Fed’s move on rates. Those who are looking to renew a mortgage in 2015 should watch what the banks do with their fixed mortgage rates, he said.

Renewing a mortgage? Lock in early

“What you tend to see is people anticipate a rise in mortgage rates and lock in,” he said, adding that only about 20 per cent of mortgage holders renew each year, so relatively few people will be affected.

Wright warns that people with credit card debt, auto loans and lines of credits are “vulnerable” to a rate hike, especially if they have high levels of debt.

But he is upbeat about prospects for the Canadian economy, saying it is likely to continue improving, with new jobs emerging in the manufacturing sector because of the lower dollar and growing exports. People who are employed are less likely to get in trouble amid rising rates, he says.

He believes Canadian companies will shrug off an interest rate hike and keep investing.

“Companies have a lot of cash to work with. As the economy improves we will be looking for them to build their businesses,” Wright said.

Wright sees the Canadian dollar headed lower next year, possibly below 84 cents US. That makes Canadian exports more competitive.

Upside of higher rates

“Higher rates have an important upside. If they are low for too long, we see bubbles appearing,” Wright said.

He points to the housing market as an example with certain markets overheated because rates are low. Higher rates should help correct any bubble in housing markets, he said.

An interest rate hike could also temper inflation, which is pushing the Bank of Canada’s two per cent target despite lower oil prices.

Preston also sees an upside for savers who want a safe haven for their money.

‘”The other side of higher interest rates is it would make life a little easier for a lot of pension funds or savers – the saving side of the economy has been struggling to get returns in a low-interest rate environment,” she said.

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CREA Updates Resale Housing Forecast, 2014 & 2015

Ottawa, ON, December 15, 2014 – The Canadian Real Estate Association (CREA) has updated its forecast for home sales activity via the Multiple Listing Service® (MLS®) Systems of Canadian real estate Boards and Associations for 2014 and 2015.

With mortgage rates remaining at historic lows since the summer, activity has remained stronger for longer than previously expected and has yet to show clear signs of fading.

As a result, the forecast for annual sales in 2014 and 2015 has been upwardly revised. Almost all of the upward revision to national activity in both years stems from the current strength and momentum of sales across most of British Columbia and much of Ontario, particularly in the Greater Golden Horseshoe region.

In British Columbia, historically low mortgage interest rates have helped fuel a broadly based increase in the number of homes changing hands this year, although activity has only recently risen above its 10-year average. In Ontario, strong demand has been met with a rise in listings, which in recent years had been in shorter supply. The recent momentum for sales in both cases has endured for longer than expected and has shown few signs of diminishing. These two provinces together account for more than half of national activity and are responsible for much of the upward revision to projected and forecast national sales.

Sales are now projected to reach 481,300 units in 2014, representing an annual increase of 5.1 per cent. While this places annual activity eight per cent below the record set in 2007, it marks the strongest annual sales since then.

It also places activity in 2014 slightly above, but still broadly in line with its 10-year average. Despite periods of monthly volatility since the recession of 2008-09, annual sales have held steady within a narrow range around its 10-year average. This stability contrasts sharply with the rapid growth in sales seen in the early 2000s prior to the recession.

British Columbia is projected to post the largest annual increase in activity (14.5 per cent) followed closely by Alberta (9.3 per cent). Demand in both of these provinces is currently running at multi-year highs. Annual activity in Ontario is also expected to come in 3.6 per cent above 2013 levels.

Sales in Saskatchewan (+1.8 per cent), Manitoba (+0.8 per cent), Quebec (-0.1 per cent), New Brunswick (-0.8 per cent), and Prince Edward Island (no change) are expected to hold near 2013 levels. Activity in Nova Scotia and in Newfoundland and Labrador is projected to decline this year by 3.9 per cent and 4.7 per cent respectively.

In 2015, Canadian exports, job growth and incomes are expected to improve with mortgage interest rates edging only slightly higher. These opposing factors should benefit sales activity in housing markets where demand has been softer and prices have remained more affordable. Sales in relatively less affordable housing markets are expected to be more sensitive to higher mortgage interest rates.

National activity is now forecast to reach 485,200 units in 2015, representing a year-over-year increase of 0.8 per cent. While sales nationally are still expected to peak this year and trend lower throughout 2015, they are not expected to return to weakened levels recorded in the first quarter of 2014.

Sales activity is forecast to grow fastest in Nova Scotia (+2.6 per cent), followed by New Brunswick (+2.9 per cent). Quebec (+1.2 per cent), Ontario (1.1 per cent), British Columbia (0.5 per cent), and Alberta (0.1 per cent) are forecast to see little change on an annual basis, reflecting a rising trend in 2014 mirrored by a softening trend in 2015.

There are a number of upside and downside risks to the forecast. In British Columbia and Ontario, activity is still expected to be held in check by eroding affordability for single family homes. However, with sales in British Columbia now only at average levels, they may climb further before rising interest rates begins to materially reduce affordability. Sales in Ontario may also remain stronger than expected should new listings continue to come onto the market at higher levels in places and in market segments where a lack of supply in recent years has led to pent-up demand.

Additionally, consumer confidence and job growth in the Prairies may come under downward pressure depending on how far oil and non-energy commodity prices decline and on how long they remain low.

Saskatchewan and Manitoba sales are forecast to post declines of seven-tenths of one per cent and nine-tenths of one per cent respectively in 2015. Both provinces are experiencing higher than normal levels of supply while sales have shown recent signs of moderating.

The national average price has evolved largely as expected since the spring, resulting in little change to CREA’s previous two forecasts.

The national average home price is now projected to rise by six per cent to $405,500 in 2014, with similar percentage price gains in British Columbia, Alberta, and Ontario. Saskatchewan and Manitoba are expected to post increases of close to three per cent. Newfoundland and Labrador and Prince Edward Island are forecast to see average home prices rise by a little over one per cent this year, while Quebec is forecast to see an increase of slightly below one per cent. Prices are forecast to recede by about half a per cent in New Brunswick and Nova Scotia.

The national average price is forecast to edge higher by 0.9 per cent in 2015 to $409,300. Alberta and Manitoba are forecast to post average price gains of almost two per cent in 2015, followed closely by Ontario at 1.3 per cent. Average prices in other provinces are forecast to remain stable, edging up by less than one percentage point.

Average Price Forecast 2014 2015 CREA

Sales Activity Forecast 2014 2015

Sales Activity Historical Forecast 2014 2015 CREA

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