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Why Slowing Consumer Spending Will Put a Lid on Canadian Mortgage Rates – Monday Morning Interest Rate Update (October 16, 2017)

by David Larock

Economic growth has been hard to come by since the start of the Great Recession.

Today, if you offered central bankers from the world’s developed economies a 2% annual GDP growth rate, most of them would take it and run. Even China, whose GDP grew by an average of almost 10% over the thirty-year period from 1980 to 2010, saw its annual GDP growth rate slow to 6.7% in 2016, marking a 26-year low.

When Canadian GDP growth came it at 4.5% in the second quarter of this year, some market watchers speculated that this accelerating growth would fuel higher inflation, and that led them to forecast that the Bank of Canada (BoC) would hike rates multiple times over the next twelve months.

I have offered a different view in recent posts, making the case that our rates are likely to stay lower for longer, and I highlighted the surging Loonie as one of the key factors that will contribute to that outcome.

My thinking was that while a relatively weak Loonie provided our economy with a tailwind in Q2, its surge after the BoC’s two policy-rate rises this summer has since converted that tailwind into a headwind.

It was only natural to conclude that the soaring Loonie would crimp demand for our exports, and our most recent export data have confirmed that to be the case (exports having fallen more than 10% from their peak in May). But waning export demand isn’t even the most significant factor that will slow our economic momentum over the next twelve months.


Exports make up about 30% of our overall GDP, whereas consumer spending accounts for about 58% of it. So while our export sector has garnered a lot of recent attention for having finally awakened from its long slumber, we as consumers have a much bigger impact on our economy, and our spending has fuelled most of its momentum since 2008. (The chart below pretty well sums it up.) read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What Will September’s Accelerating Wage Growth Mean for Canadian Mortgage Rates? Tuesday Morning Interest Rate Update (October 10, 2017)

by David Larock

We received the September Canadian employment report last Friday and while it showed that our rate of job creation slowed, it also confirmed that average wages increased by 2.2% on a year-over-year basis.

The average wage has been slow to rise over the past several years, even as our economy has created jobs at a robust rate. That hasn’t come as a total surprise because wage growth typically lags job growth, but the lag in our current cycle has persisted for longer than expected. This has led to speculation that other factors such as globalization, automation, and the increased prevalence of just-in-time manufacturing are conspiring to keep wages down.

With year-over-year average wage growth peeking its head over the 2% threshold for the first time since last June, investors are increasing their bets that the Bank of Canada (BoC) will raise its policy rate again before the end of this year.

The Bank has recently emphasized that it will be very data dependent when determining future monetary policy and accelerating wage growth raises the odds that it might raise rates pre-emptively to stave off a sharp acceleration in overall inflation (because labour costs have a big impact on the prices of most of what we buy).

Before I offer my take on what this latest development means for our near-term mortgage rates, let’s look at the other highlights from the September employment report: read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Good News for Variable-Rate Mortgage Borrowers: Governor Poloz Shifts the Bank of Canada Into Neutral … For Now – Monday Morning Interest Rate Update (October 2, 2017)

by David Larock

All eyes were on Bank of Canada (BoC) Governor Poloz last Wednesday when he spoke at the Board of Trade in St. John’s, Newfoundland.

These were his first public comments since the BoC began to raise its overnight rate in July. Market watchers have been debating whether the Bank would now pause, after reversing the two 0.25% rate cuts that it had made in 2015 in response to the oil-price shock, or continue to raise rates to mitigate against the risk of rising inflationary pressures over the medium term.

The answer to that key question has important implications for both fixed and variable mortgage rates.

If the BoC continues to raise its overnight rate, lender prime rates will move higher in lock step. And since variable-rate mortgages are priced on lender prime rates, additional policy-rate increases by the Bank will immediately translate into higher borrowing costs for variable-rate borrowers.

Fixed-rate mortgages are priced on Government of Canada (GoC) bond yields, and while those yields do not automatically move when the BoC raises its policy rate, they often respond to changes in the Bank’s outlook. This is especially true for longer-term GoC bonds because their extended duration makes them highly sensitive to even subtle changes in the BoC’s views on inflation and growth.

The title of Governor Poloz’s latest speech is “Data Dependence: Economic Progress Report” and that further piqued my interest because in several of my recent blog posts I have made the case that our key economic data should give the BoC pause before it hikes its policy rate further. (In those posts I explain why the surging Loonie, low inflation and sluggish wage growth all support a near term wait-and-see approach by the BoC.)

Here are the highlights from Governor Poloz’s speech last week: read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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How Inflation Is Likely to Impact Canadian Mortgage Rates in the Near Future – Monday Morning Interest Rate Update (September 25, 2017)

by David Larock

Market watchers are currently engaged in a spirited debate about whether the Bank of Canada (BoC) will continue to raise its policy rate in the near future. In last week’s post I explained why the Loonie’s recent movements against a basket of other currencies make more near-term BoC rate rises unlikely. In today’s post we’ll take a detailed look at the latest inflation data, which I believe further bolsters that view.

When the BoC raised its overnight rate by 0.25% in each of July and September, it justified these increases by saying that it must “anticipate the road ahead”. The Bank believed that our improving economic momentum would lead to higher inflation. It wanted to raise its policy rate pre-emptively to help ensure that inflation didn’t accelerate to a degree that would require more severe (and economically disruptive) monetary-policy tightening farther down the road.

This forward-looking approach to inflation initially appears consistent with the BoC’s mandate “to conduct monetary policy to promote the economic and financial well-being of Canadians … by keeping inflation low, stable and predictable.” But the Bank’s mandate also requires that its inflation-targeting approach be “symmetric”, which, in the BoC’s words, “means that the Bank is equally concerned about inflation rising above or falling below the 2 per cent target”, and on that front, its actions belie its words.

Here is a graph of our overall inflation rate since the start of the Great Recession as measured by our Total Consumer Price Index (CPI): read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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How the Loonie’s Value Is Likely to Impact Canadian Mortgage Rates In the Near Future – Monday Morning Interest Rate Update (September 18, 2017)

by David Larock

The Bank of Canada (BoC) has increased its policy rate twice over its last two meetings and there is speculation that it might raise again before the year is out. But the Bank continues to insist that its policy path is data dependent, and if that is the case, I am doubtful that it will raise again any time soon.

In last week’s post I touched on three significant obstacles standing in the way of additional BoC policy-rate increases in the near future: the surging Loonie, low inflation and lacklustre wage growth.

In today’s post I will explore the first obstacle, the surging Loonie, in more detail and explain how its fluctuations have a direct, significant, and ongoing impact on our mortgage rates. (Apologies for all the charts this week but sometimes a picture really is worth a thousand words.)

To understand how the Loonie interacts with our mortgage rates, let’s start by looking back over the last ten years.

When the financial crisis hit in 2008, the Loonie surged against the Greenback and, not surprisingly, our export volumes fell sharply. That had a big impact on our overall economic momentum because exports account for about one-third of our overall gross domestic product (GDP).

Over a five-year period from 2008 to 2013, the Loonie traded mostly at or above par against the Greenback and that was devastating for our export sector, which sells 75% of everything it produces into U.S. markets. By the time the Loonie dipped back below par on a sustainable basis in 2013, whole swaths of our export sector had been starved out of existence. Because of that, from 2013 onwards it took much longer than normal for our overall export volumes to benefit from the competitive boost of the falling Loonie.

Fast forward to today. read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Bank of Canada Raises Rates Again and Speculation Grows That It May Not Be Done Yet – Monday Morning Interest Rate Update (September 11, 2017)

by David Larock

The Bank of Canada (BoC) surprised markets last Wednesday when it raised its policy rate by 0.25%. Another rate rise had been expected before the end of the year, but the consensus believed that the Bank would wait until its October meeting.

To briefly recap, the BoC cut its policy rate twice in 2015 (by 0.25% each time) in response to the oil-price shock, and in early 2017 it assessed that our economy’s adjustment to lower oil prices was now close to completion. This served as a warning that those two emergency rate cuts would soon be clawed back and the only question left was the timing of when this would happen.

The reversal of the first 0.25% happened in July when the BoC raised its overnight rate from 0.50% to 0.75%. Then last week, after seeing that our annualized GDP growth came in at a whopping 4.5% in the second quarter, the Bank felt emboldened to unwind its second oil-related emergency cut by raising its overnight rate from 0.75% to 1.00%.

Lender prime rates, which our variable-rate mortgages are priced on, move in lock step with BoC overnight-rate increases, so variable-rate borrowers have just experienced their second 0.25% rate bump since July, after more than seven years with no increases.

Market watchers also keyed in on the BoC’s observation that “today’s removal of some of the considerable monetary policy stimulus in place is warranted” in its accompanying statement. The carefully placed word “some” has been interpreted as a signal that the Bank may raise again before the year is out.

In today’s post we’ll briefly look at the impact that this latest rate increase is likely to have on borrowers and house prices and then I’ll offer my take on the likelihood that the BoC will raise again before the end of the year. read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Tuesday Morning Interest Rate Update (September 5, 2017)

by David Larock

I hope everyone had a relaxing Labour Day Long Weekend. (I did, so this post will run shorter than usual.)

The Bank of Canada (BoC) meets this week and markets are expecting that it will adopt more hawkish language and/or raise its policy rate by another 0.25%.

Our ripping third-quarter GDP growth rate of 4.5% bolsters the case for tighter monetary policy but another rate hike will send the already soaring Loonie to even loftier heights (it closed at 81 cents versus the Greenback last Friday.)

Will the BoC risk more appreciation for the Loonie, knowing that it will sap our export sector’s hard-won economic momentum at a time when our inflation gauges are still well below their 2% targets?

I’ll check back next week with my take on the BoC’s upcoming announcement and rate decision.

Five-year Government of Canada (GoC) bond yields rose six basis points last week, closing at 1.60% on Friday. Five-year fixed-rate mortgages are still available at rates as low as 2.64% for high-ratio buyers,  and at rates as low as 2.69% for low-ratio buyers, depending on the size of their down payment and the purchase price of the property. Meanwhile, borrowers who are looking to refinance can find five-year fixed rates in the 3.04% to 3.09% range.

Five-year variable-rate mortgage discounts remain largely unchanged and are still available at rates as low as prime minus 0.90% (2.05% today) for high-ratio buyers, and at rates as low as prime minus 0.75% (2.15% today) for low-ratio buyers, again depending on the size of their down payment and the purchase price of the property. Borrowers who are looking to refinance should be able to find five-year variable rates around the prime minus 0.45% to 0.70% range, which works out to between 2.25% and 2.50% using today’s prime rate of 2.95%.

The Bottom Line: If the BoC increases its policy rate by 0.25% this Wednesday, variable-mortgage rates will rise by the same amount shortly thereafter. GoC bond yields should also move higher if the BoC raises, but may also do so even if it merely sounds more hawkish about the timing of future rate increases. Forewarned is forearmed.

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Does It Still Pay to Shop Around for the Best Mortgage Rate? Monday Morning Interest Rate Update (August 28, 2017)

by David Larock

Last Thursday I was interviewed by Jon Erlichman on the Business News Network about the current state of the mortgage market. (You can watch the video here.)

In the interview I explained that the mortgage-rule changes made in the fall of 2016 have limited the number of competitive offerings that are available through monoline lenders who, unlike banks and credit unions, specialize only in mortgages and don’t have cash-rich balance sheets.

As a reminder, on November 30, 2016, refinances, properties with purchase prices of more than $1 million, and single-unit rental properties all became ineligible for default-insurance coverage.

These changes significantly reduced the types of mortgages that monolines could offer because their business models were built by securitizing mortgages through third parties like the Canada Mortgage Bond (CMB) Program, which require all of their loans to be default insured. At the same time, the changes left some of what I called “the greenest grass” for banks and credit unions, who don’t need to securitize their mortgages and can fund them with their balance sheets instead.

That being the case, the next logical question for anyone in the market for a mortgage is, if monoline lenders aren’t as competitive today as they used to be, should I still shop around to see what they have to offer or should I just go with my own bank?

To answer that question, today’s post will provide a summary of which type of lender is typically offering the best value to the three different segments of mortgage borrowers that were created by last fall’s mortgage rule changes. read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why Aren’t Average Incomes Rising More Rapidly? Monday Morning Interest Rate Update (August 21, 2017)

by David Larock

Central bankers must continually grapple with the disconnect between economic theory and practice.

They design intricate models that try to predict how today’s policy decisions will affect future economic outcomes, but there are myriad variables involved and things often do not rarely turn out as planned. (This has led to the quip: economists exist to make the weather forecasters look good.)

Today, our policy makers can’t fully explain why average incomes aren’t rising at a much faster rate. Over the past several years, both Canada and the U.S. have seen strong job creation coincide with average income growth of about 2% and that’s barely higher than our respective rates of inflation. For a point of reference, Fed Chair Yellen has said that in the current environment, average wage growth of 4% to 5% would be a sign that the U.S. labour market has turned the corner.

Classic economic theory says that strong job creation should lead to tighter labour market conditions as the demand for labour grows in relation to its supply. When labour becomes scarcer, employers should be compelled to increase compensation in order to attract new workers. Then, as the cost of labour rises, companies would be expected to increase prices to maintain their profit margins, thereby fuelling increased inflation across the broader economy.

Central bankers are charged with maintaining overall price stability and they don’t want to wait until this process plays out fully before raising rates. Labour costs are a key component in most forms of economic output. If they rise quickly, it will create higher-than-expected inflation that will then require more severe policy actions to rein it in.

That’s why their instinct is to tighten monetary policy pre-emptively.

True to form, when the Bank of Canada (BoC) and the U.S. Federal Reserve started their current rate-hike cycles, both cited strengthening labour-market conditions as key factors in their decisions. The BoC’s policy pivot came in a speech by Deputy Governor Carolyn Wilkens where she emphasized that it takes time for monetary-policy changes to impact economic momentum and that the Bank must “anticipate the road ahead”.

But what if central bank forecasts are wrong and incomes don’t start rising more quickly? Are there other factors influencing average incomes that central bank models have difficulty accounting for?

This is the key question for anyone keeping an eye on mortgage rates today because they should move in the same direction as average incomes over time, and at a similar speed. I have read many theories about why average wages aren’t rising as expected and a recent article, Wages vs. Jobs by Gary Shilling, offers particularly valuable insight. His observations focus on the U.S. labour market, but much of what he says also applies to Canada.

Here is a summary of Shilling’s key points with my comments included as well: read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Five Key Questions for Mortgage Borrowers to Focus On – Monday Morning Interest Rate Update (August 14, 2017)

by David Larock

Last week was relatively quiet for mortgage-related news.

The latest U.S. inflation data (for July) showed that overall U.S. inflation increased by 0.1% on a year-over-year basis, which was less than the 0.2% rise the consensus had been expecting. Bluntly put, this latest report isn’t likely to change anyone’s pre-existing view of what the U.S. Federal Reserve might do next.

In today’s post I’ll reflect on some of the forces that will affect Canadian mortgage rates in future by highlighting five key questions that borrowers should be focused on as we look toward the fall market (in order of importance) read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What Do Strong Job Growth and Weak Wage Growth Mean for Our Mortgage Rates? Tuesday Morning Interest Rate Update (Tuesday, August 8)

by David Larock

Last Friday we received the latest Canadian employment data and while the headline number came in a little lower than expected, the underlying details were encouraging.

Bluntly put, if you’re looking for mortgage-rate implications there is nothing in the latest data that would discourage the Bank of Canada (BoC) from increasing its policy rate by another 0.25% before the end of the year, which it is now widely expected to do. That said, there also weren’t any new indications that our average labour costs are increasing to a degree that would require the Bank to accelerate its rate-hike timetable further.

Here is a summary of the key details from the latest report: read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Canadian GDP Surges Higher in May. Will Mortgage Rates Follow? Monday Morning Interest Rate Update (July 31, 2017)

by David Larock

The Canadian economy continues to defy expectations.

Last Friday we learned that Canadian GDP grew by 0.6% in May, three times the consensus estimate of 0.2% for the month. It now looks as if our second-quarter growth rate will come close to matching the 3.7% rate we saw in the first quarter (which led the G7 countries).

Last month’s growth surge was broad based, with increases recorded in fourteen of the twenty sectors tracked by Statistics Canada.

The Bank of Canada (BoC) has expressed increased confidence in the strength of our economic recovery, and the latest GDP result bolsters that view. It also raises the odds that the BoC will increase its policy rate by at least another 0.25% before the end of this year, thereby eliminating the 0.50% in emergency rate cuts that the Bank made in 2015 as oil prices plummeted.

Interestingly, while Government of Canada (GoC) bond yields initially surged higher on the news, they actually closed lower by end of day on Friday. While that may seem counterintuitive, because bond yields should rise if investors expect higher interest rates in future, here are some of the factors that may have contributed to that outcome: read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Three Reasons Why I Think the Market Is Overestimating the Future Path For Canadian Mortgage Rates – Monday Morning Interest Rate Update (July 24, 2017)

by David Larock

Market watchers (and mortgage borrowers) are paying close attention to our economic data after the Bank of Canada (BoC) recently moved off the sidelines and raised its policy rate for the first time in more than seven years.

They are looking for signs that reinforce the view that the BoC will continue to raise rates – and suddenly every positive economic data point is being interpreted as further proof that more near-term rate hikes are inevitable.

If you pick up any newspaper today, you can read arguments in support of this view, so in today’s post I am going to put on my contrarian hat (it’s never too far from reach) and make the case that the consensus is now overestimating future path for Canadian mortgage rates.   read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Canadian Variable Mortgage Rates Rise for the First Time in Over Seven Years. What’s Next? Monday Morning Interest Rate Update (July 17, 2017)

by David Larock

The Bank of Canada (BoC) raised its overnight rate by 0.25% last Wednesday, as expected, and lenders wasted no time in increasing their prime rates, on which our variable-rate mortgages are priced, by the same amount.

The key question now is what happens next? Should we expect more increases by the BoC at their upcoming meetings? Or will the BoC adopt a more cautious wait-and-see approach? How will our economy, with its newfound momentum still far from assured, respond?

In today’s post we’ll look at the highlights from the latest BoC statement that accompanied its rate hike, and I also recommend a review of the Bank’s latest Monetary Policy Report (MPR), which gives us the BoC’s latest assessment of the current economic conditions at home and abroad, and offers forecasts on what lies ahead. If you’re trying to figure out what the BoC will do next, the MPR provides important clues. read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Rate Hikes Are Now a Virtual Certainty In Both Canada and the U.S. After the Release of the Latest Employment Data – Monday Morning Interest Rate Update (July 10, 2017)

by David Larock

The latest Canadian employment data handily beat consensus estimates once again, and the futures market is now assigning a 96% probability that the Bank of Canada (BoC) will raise its overnight rate by 0.25% when it meets this Wednesday.

Not to be outdone, the latest U.S. employment headline number also beat expectations and investors are now assigning 97% odds that the U.S. Federal Reserve will raise its policy rate by another 0.25% at its next meeting later this month.

Let’s start by taking a quick look at the latest employment report highlights for both countries:   read more…

David Larock is an independent full-time mortgage broker and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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