Category: National Real Estate News

This article appeared on the Globe and Mail on August 9th, 2011 and was written by Richard Blackwell.

Canadian fixed-term mortgage rates could fall to even more affordable levels after roiling financial markets pushed the yield on five-year government bonds to record lows on Tuesday.

As investors fled equities in recent days, money poured into the haven of Canadian government bonds, pushing prices up and yields down sharply. Because banks borrow government bonds to help finance their fixed-rate mortgages, there is a tight link between five-year bond yields and five-year mortgage rates.

“We have seen a precipitous drop in five-year bond yields,” said Toronto-Dominion Bank chief economist Craig Alexander, mainly because Canadian bonds look so attractive because of the country’s positive fiscal situation.

Since July 21 the yield on those bonds has dropped a remarkable three-quarters of a percentage point, Mr. Alexander said, hitting an all-time low of about 1.5 per cent on Tuesday.

Five-year mortgage rates tend to move in lock-step with that yield, but about 1.1 to 1.4 percentage points higher, and with a lag of up to several weeks before major lending institutions react with their changes.

“The lag is really about financial institutions assessing whether the movement is going to be sustained,” Mr. Alexander said, noting that the time for them to react varies. In the current volatile market, financial institutions won’t likely move until they see whether bond yields stabilize for a period of time, he said. “There is a distinct possibility of a decline in five-year mortgage rates, but it is not clear [yet] how much of a decline there will be.”

He expects to see a drop in mortgage rates, but perhaps not as dramatic as current bond yield numbers would suggest.

For home buyers, or those looking to renew their mortgages, the prospect of lower five-year mortgage rates is very positive, said Alyssa Richard, founder of the mortgage-rate tracking website RateHub.ca. Five-year mortgage rates, on average, have been at about 3.5 per cent in recent weeks, she said, but if current bond yields are maintained those rates could drop to below 3 per cent, a level not seen before in Canada.

Such a drop would save a home buyer almost $1,200 a year on a $360,000 mortgage amortized over 30 years, Ms. Richard noted.

People holding variable-rate mortgages will also likely get a break, she said. Variable rates – which are linked to the Bank of Canada’s prime rate – will rise after the central bank’s next rate increase. But with U.S. Federal Reserve Board Chairman Ben Bernanke having said Tuesday that he will hold U.S. rates steady for two years, and the Canadian economy growing only marginally, Bank of Canada Governor Mark Carney is not expected to hike rates until next year at the earliest.

For Canada’s real estate market, which has shown some signs of softening, the prospect of even cheaper mortgages could provide a welcome shot in the arm.

“The Canadian real estate market has nine lives,” said Benjamin Tal, deputy chief economist at CIBC World Markets Inc. “Every time it looks like it’s going to slow down, something happens somewhere else in the world and interest rates stay low. The market could have been a lot weaker if not for such things.”

Still, low interest rates can also send the wrong signal to some people, said Louis Gagnon, finance professor at Queen’s University in Kingston, Ont. “Many will enter the [real estate] market at prices that are too high, with very little equity, and they will run into trouble later when rates begin to go higher.”

With a file from Steve Ladurantaye

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This article appeared on CBC.ca on July 19th, 2011.

The Bank of Canada has kept its bench-mark overnight interest rate steady at one per cent, saying the need to keep the country’s economy growing amid the U.S. and European debt crises outweighs the need to slam the brakes on inflation.

In response to the central bank’s decision, the Canadian dollar has gained more than a cent in morning trading.

The Bank of Canada said Tuesday that Canada faces an uncertain international economic situation with European and U.S. debt concerns dominating the fiscal landscape.

“The U.S. economy has grown at a slower pace than expected and continues to be restrained by the consolidation of household balance sheets and slow growth in employment,” the bank said in a press release.

“While growth in core Europe has been stronger than expected, necessary fiscal austerity measures in a number of countries will restrain growth over the projection horizon.”

Thus, while Canada is growing roughly as the central bank had forecast, the country still faces a threat to its slowly-recovering export sales, partly because of weak U.S. economic growth and partly because of a rising Canadian currency.

Tuesday’s rate decision provided further lift for the Canadian loonie. The currency traded at $1.053 US in mid-morning, up from Monday’s Bank of Canada close of $1.043 US.

Growth versus inflation

Economists had split as to whether the bank would raise its overnight borrowing rate or keep the trend-setting interest rate at its current, record-low level as the July decision approached.

Late last year, Bank of Canada governor Mark Carney talked extensively about the need for Canadians to rein in their personal debt levels, a signal many experts interpreted as the central banker about to get tough on rising prices.

Indeed, many economists began predicting that the bank would boost rates in July, especially after three months — March, April and May — when inflation popped above the central bank’s one-to-three-per-cent target range for price growth.

Carney, however, began signaling a change of sentiment in June when he talked about the financial “headwinds” Canada faced in an interview with the Wall Street Journal.

His wording lead to a subtle shift in thinking among Carney watchers.

“The hard place that Carney is caught between is the growing risk that Canada’s economy will underperform expectations if U.S. demand remains weak and/or Europe’s credit crisis erupts and spews lava across global financial markets,” said BMO Capital Markets economist Sal Guatieri in a commentary prior to Tuesday’s rate announcement.

Economic growth — something central bankers are trained to generally ignore — began pushing out concerns over rising prices in the bank’s thinking, experts said.

Still, many economists believe the Bank of Canada will boost interest rates towards the end of 2011 as long as the Canadian economy keeps to its current decent GDP growth path.

RBC Economics, for example, currently predicts that Canada’s economy will grow at a 3.2 per cent clip in 2011, equal to the growth rate for 2010.
Europe and America

There are growing fears that the Greek debt crisis is spreading to other European countries, especially the continent’s third biggest economy — Italy.

As well, the administration of U.S. President Barack Obama has so far failed to reach a deal with the U.S. Congress over whether to raise Washington’s borrowing ceiling.

Failure to get an agreement by Aug. 2 risks placing the world’s largest economy in technical default of it debt obligations.

Both situations hold the potential to drive the global economy back into a recession similar to the one in 2008-09 or at least to reduce the potential economic growth for most countries, experts have warned.
Into the winter

Still, the Bank of Canada said it is eyeing rate hikes into the later months of 2011.

“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn,” the Bank’s statement said.

The central bank now forecasts that Canada will expand by 2.8 per cent in 2011 and 2.6 per cent in 2012, the year that the Bank expects the Canadian economy will reach full capacity.

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