Last week’s big news came from our latest employment report, which showed that the Canadian economy added 58,000 new jobs in April – a multiple of the 10,000 or so jobs that most analysts were expecting. Better still, if we add this impressive result to the 82,000 new jobs that were created in March we get the best two-month run for job creation that our economy has seen in more than thirty years. read more…
When Bank of Canada (BoC) Governor Mark Carney recently warned market watchers that he believed mortgage rates will rise faster than most observers expect, he based this view on three fundamental predictions that were outlined in the BoC’s most recent Monetary Policy Report:
- The Canadian economy will return to full capacity in early 2013.
- The U.S. economic recovery is now on a more solid footing.
- The recession in Europe will end in the second half of 2012.
Given that Governor Carney and the BoC control our short-term interest rates (and can also heavily influence our longer-term interest rates), tracking the relative progress of these three developments will allow us to gauge the likelihood and timing of future rate increases. To that end, here is what happened last week on all three fronts. read more…
It’s time for the powers that be to pick our poison.
Do they keep short-term interest rates at ultra-low levels to protect our broader economy from the economic turmoil still raging beyond our borders, even if doing so increases the risk of a debt bubble?
Should they instead raise short-term rates (and longer-term rates, by association) to slow household borrowing and restrain house-price appreciation in major markets like Toronto and Vancouver, even if doing this could stall our still vulnerable economic momentum?
Or do they try to isolate mortgage borrowing, the area of greatest concern, by tightening regulations and underwriting standards at the risk of triggering the very house price correction they seek to avoid? read more…
The global economic recovery is on a very tenuous footing. While determined optimists can string together enough positive threads in the latest economic data to make an argument that the downturn is bottoming out, the realist in me isn’t biting. Encouraging signs aside, the world’s largest economies are still far too vulnerable to withstand the next major setback, which could seemingly come from almost anywhere but will most probably originate in Spain, the fourth largest economy in Europe and the twelfth largest in the world.
In fact, I now believe that some kind of Spanish debt default is all but inevitable. read more…
Last week was an interesting one for anyone keeping an eye on Canadian mortgage rates.
The Bank of Canada (BoC) left its overnight rate unchanged on Tuesday, which was good news for variable-rate mortgage borrowers, but BoC Governor Mark Carney also indicated that the Bank may raise the overnight rate (on which variable-rate mortgages are based) sooner than previously expected. Bond-market investors jumped on this news and five-year Government of Canada (GoC) bond yields immediately surged higher in response. read more…
When the European Central Bank (ECB) injected more than US$1 trillion in cheap, three-year loans into troubled euro-zone countries using its Long-Term Refinancing Operation (LTRO), investors breathed a sigh of relief. It was widely believed that these loans would buy the euro zone more time – a year at least.
The plan was to let troubled banks use their existing bonds (even those of “questionable quality”) as collateral for three-year loans at 1%. The hope was that domestic banks would use this money to buy up their government’s sovereign debt in countries like Italy and Spain, bringing their respective bond yields back to sustainable levels.
There’s a bit of genius in the way the LTRO was designed. The framers knew that the most troubled banks and countries would lean on these emergency ECB loans the hardest, and the more sovereign debt could be shifted out of foreign hands and back onto the balance sheets of each struggling country’s domestic banks, the more contained the risk of contagion would become (at least in a relative sense). read more…
Statistics Canada released its latest employment report last Friday, and the data were a welcome surprise. The Canadian economy created 82,300 new jobs in March, smashing analyst expectations. The gains were broad-based, most were for full-time positions, and there were increases in both hours worked and average earnings. The data also showed our unemployment rate dropping from 7.4% to 7.2%, despite the fact that 52,500 more people started looking for work. read more…
Last week the euro-zone finance ministers increased the size of the European Stability Mechanism (ESM) by another US$670 billion in their latest attempt to restore investor confidence in the European bond market. In their typical fashion, the ministers tried to boost the fund by just enough to satisfy investors, but not by enough to further inflame the voters (and taxpayers) in their member countries who have become increasingly wary of the bailout brigade. read more…
This week’s update will use an ‘around the horn’ format to highlight several interesting developments that related to the Canadian mortgage market and borrowing rates last week:
Taming the Housing Beast
The Canada Mortgage and Housing Corporation (CMHC) issued a release that warned it would try to rein in the explosive growth of its insured mortgage portfolio in the coming years (CMHC grew by $170 billion from 2007-10). While much of the tightening will occur behind the scenes, by limiting the amount of bulk-portfolio insurance that lenders can purchase on what are deemed to be lower-risk loans, this new mandate will limit flexibility and increase the cost of borrowing for different sub-groups of mortgagors over time. read more…
Five-year Government of Canada (GoC) bond yields continued to surge higher last week so expect a fresh round of headlines predicting that the end of low mortgage rates is nigh.
While there is no denying that fixed-mortgage rates are heading up in the short term (I reviewed every client pre-approval in my pipeline late last week in preparation), today I will give you three reasons why I think the run up may be transitory. read more…
If you want to gauge the overall health of an economy, understanding employment trends is critical. Last week we received the latest Canadian and U.S. employment reports and both were instructive.
Canada’s labour force lost another 2,800 jobs in February and continued a recent trend of disappointing job reports. While our overall unemployment rate actually dropped from 7.6% to 7.4%, that was because a record 38,000 Canadians (most of whom are between the ages of fifteen and twenty-four) stopped looking for work. If you adjusted for this change in what is called the ‘participation rate’, our employment rate would have actually increased from 7.6% to 7.7%. read more…
It’s time for another rate simulation but this time we’re going to change it up.
The age old fixed-versus-variable question is off the front burner now that five-year fixed rates are available for only .5% more than five-year variable rates. When the spread between fixed and variable rates is that narrow, most borrowers just don’t think the variable rate offers enough of a margin of safety. Under today’s market conditions, I would agree.
Instead, the question most people are toying with these days is this: Does it make sense to lock into a ten-year fixed-rate mortgage instead of opting for the standard five-year fixed? When you consider that the market five-year fixed rate has averaged about 5% over the last decade, ten-year money at less than 4% starts to look very tempting. read more…
Last Wednesday the European Central Bank (ECB) completed round two of its Long-Term Refinancing Operation (LTRO). This program is the single biggest reason that the euro zone has so far avoided a financial meltdown.
The LTRO has given euro-zone banks two chances to borrow as much money as they want from the ECB for a three-year fixed-rate term at a 1% interest rate, provided that these banks pledge balance sheet assets (such as sovereign bonds) to the ECB as collateral. The amount of collateral required depends on its quality, but the terms are generous.
The LTRO was designed to stave off a euro-zone financial crisis by providing several short-term benefits to the euro-zone’s seventeen member countries: read more…
If you want to look beyond the incendiary headlines about housing bubbles in Canada’s largest real estate markets, last week’s report by the Bank of Canada (BoC), called Household Finances and Financial Stability Review, is worth a read. The report highlights several areas of concern, but it does not suggest any imminent collapse in house prices. read more…
Fixed-term mortgage rates are on the rise.
This is primarily being caused by higher Government of Canada (GoC) five-year bond yields, and as best as I can tell, yields are moving higher because investors are more optimistic about the strength of the U.S. recovery and are less concerned about euro-zone crisis risks. I believe this short-term trend is only a contrary blip in my long-term view of where mortgage rates are headed, but the current momentum in our five-year GoC bond yields should not be ignored by anyone planning to buy a house this spring. read more…
