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DECODING THE MORTGAGE MARKET Mortgage rates today are way below normal. Or are they?
Finance Minister Jim Flaherty called Canada’s low interest rates an “anomaly” last week, echoing warnings that other government officials have been making since 2009. But one of the country’s best-known economists believes today’s rates are closer to normal than many think.Benjamin Tal, deputy chief economist at CIBC, caught viewers off guard in a recent webcast with a mortgage company TMG The Mortgage Group. Whereas most economists have been calling for the Bank of Canada to lift its 1 per cent key lending rate back to a more normal 3 per cent, Mr. Tal thinks that these days, “normal” is significantly less.“The speed limit of the economy has been permanently reduced,” Tal said. Inflation, the key rate threat, is extraordinarily low at 1.1 per cent. And the pace of economic growth is in a long-run downtrend, with few signs of bucking that trend.Consequently, “The new normal is much lower interest rates than there used to be…The new normal would be maybe another 100-125 basis points (above today), not more than that.”If true, this would suggest that prime rate - the basis for variable mortgage rates – will average just 4 to 4.25 per cent over the long term, a big departure from the roughly 5 per cent prime rate that most economists forecast as “normal.”Saving ¾ of a percentage point, over the long-term, would have enormous impact on the finances of regular Canadians. Over five years alone, it would put $11,000 of interest back in people’s pockets on the average home purchase, with 20 per cent down. If you’re financially secure, that makes shorter-term and variable-rate mortgages worth a close look.In an email with Mr. Tal about his call, he was careful to point out that “the new normal is a theoretical rate.”“There is a big difference between the actual and theoretical rate,” he said. “In practice, rates tend to overshoot or undershoot. So it is possible that rates will rise by more than that, possibly to 3 per cent.”Presumably, if his model is correct, rates would then revert back down to the mean and cycle around that 4.25 per cent prime rate number.Regardless of how accurate Mr. Tal’s forecast proves to be, the odds are decent that the prime rate will remain almost two percentage points below its 6.89 per cent 30-year average. That’s in keeping with the Bay Street consensus. But more importantly, it’s reflective of Canada’s new realities: contained inflation and modest economic growth.“Variable will probably do better in this environment...if you have a five-year time horizon.” But long-term interest rates will be “permanently higher” five years from now, Tal predicts.If Mr. Tal’s estimate of a 4 to 4.25 per cent prime rate does pan out, variable rates could save people more than fixed rates over the long-run, as they have for decades. And even if “normal” turns out to be a 5 per cent prime rate (which is closer to most economic forecasts), variables should still come out on top over the long term.The question is, what happens between now and the time that rates “normalize.”Today you can find variable rates at prime – 0.5 per cent (i.e., 2.5 per cent) and five-year fixed rates at 3.49 per cent. Let’s assume that rates shoot up in 2015 as economists expect (an expectation that changes with the wind) and that they increase two percentage points over the two years that follow.In the hypothetical scenario laid out above, those of you shopping for a mortgage may find extra value in two particular terms:A three-year fixed mortgage: If you can find one in the 2.75 per cent range or better, it’s a compelling option. It gives you meaningful savings for three years (when compared to terms of four years or more). It also provides insulation from rate increases for three years. Compared to a five-year fixed mortgage, rates would have to be 2.25 percentage points higher at renewal for you to lose on this strategy. That assumes you make equal payments in all cases and renew into a two-year fixed (which adds up to five years total). Betting against a 225 basis point hike in three years is a wager that most strong borrowers should make.A hybrid (50/50) mortgage: Despite our personal beliefs, rates are impossible to foretell with accuracy. A hybrid mortgage removes the guesswork, cuts your risk of rising rates in half and lets you participate in today’s low variable rates. This strategy involves putting 50 per cent of your mortgage in a five-year variable and 50 per cent in a five-year fixed, netting you a starting rate under 3 per cent. It also gives you more flexibility than a five-year fixed by letting you refinance early with a lower potential penalty, and letting you lock in the variable rate at any time.Keep in mind, these strategies are primarily based on hypothetical interest cost. They’re also suited mainly to well-qualified borrowers with sound finances, stable employment and a five-year time horizon. Your situation may be different so as always, make sure to do your own research on what works best for you.Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage, a mortgage brokerage. You can also follow him on twitter at @CdnMortgageNews.Source:ROBERT MCLISTERSpecial to The Globe and MailPublished Sunday, Nov. 10 2013, 10:47 PM ESTLast updated Monday, Nov. 11 2013, 10:32 AM EST
BOC maintains overnight rate target at 1/2 per cent; projects moderate growth in Q2
The Bank of Canada is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Inflation is broadly in line with the Banks projection in its April Monetary Policy Report (MPR). Food prices continue to decline, mainly because of intense retail competition, pushing inflation temporarily lower. The Banks three measures of core inflation remain below two per cent and wage growth is still subdued, consistent with ongoing excess capacity in the economy. The global economy continues to gain traction and recent developments reinforce the Banks view that growth will gradually strengthen and broaden over the projection horizon. As anticipated, growth in the United States during the first quarter was weak, reflecting mostly temporary factors. Recent data point to a rebound in the second quarter. The uncertainties outlined in the April MPR continue to cloud the global and Canadian outlooks.
The Canadian economys adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment. Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions. Macroprudential and other policy measures, while contributing to more sustainable debt profiles, have yet to have a substantial cooling effect on housing markets. Meanwhile, export growth remains subdued, as anticipated in the April MPR, in the face of ongoing competitiveness challenges. The Banks monitoring of the economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.
All things considered, Governing Council judges that the current degree of monetary stimulus is appropriate at present, and maintains the target for the overnight rate at 1/2 per cent.
Canadian home sales drop in April
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales declined in April 2017.
National home sales fell 1.7% from March to April.
Actual (not seasonally adjusted) activity in April was down 7.5% from a year earlier.
The number of newly listed homes jumped 10% from March to April.
The MLS Home Price Index (HPI) was up 19.8% year-over-year (y-o-y) in April 2017.
The national average sale price rose 10.4% y-o-y in April.
Home sales over Canadian MLS Systems fell by 1.7% in April 2017 from the all-time record set in March. April sales were down from the previous month in close to two-thirds of all local markets, led by the Greater Toronto Area (GTA) and offset by gains in Greater Vancouver and the Fraser Valley.
Actual (not seasonally adjusted) activity was down 7.5% year-over-year, with declines in close to 70% of all local markets. Sales were down most in the Lower Mainland of British Columbia, where activity continues to run well below last years record-levels. The GTA also factored in the decline, with faded activity compared to record levels set in April last year.
Sales in Vancouver are down from record levels in the first half of last year but the gap has started to close, CREA President Andrew Peck. Meanwhile, sales are up in Calgary and Edmonton from last years lows and trending higher in Ottawa and Montreal. All real estate is local, and REALTORS remain your best source for information about sales and listings where you live or might like to.
Homebuyers and sellers both reacted to the recent Ontario government policy announcement aimed at cooling housing markets in and around Toronto, said Gregory Klump, CREAs Chief Economist. The number of new listings in April spiked to record levels in the GTA, Oakville-Milton, Hamilton-Burlington and Kitchener-Waterloo, where there had been a severe supply shortage. And with only ten days to go between the announcement and the end of the month, sales in each of these markets were down from the previous month. It suggests these housing markets have started to cool. Policy makers will no doubt continue to keep a close eye on the combined effect of federal and provincial measures aimed at cooling housing markets of particular concern, while avoiding further regulatory changes that risk producing collateral damage in communities where the housing market is well balanced or already favours buyers.