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Want A Cheaper Loonie? No Need to Cut Rates If Jawboning Does the Trick – Monday Morning Interest Rate Update (October 24, 2016)

by David Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) left its policy rate unchanged last week, as was expected, but it surprised markets by offering a decidedly dovish outlook in its latest Monetary Policy Report (MPR).

The most recent MPR was best summed up by BoC Governor Poloz during his press conference, when he said that the report forecasted “a lower profile for economic growth, an extended period of economic slack, and a later return of inflation to the 2% target.” His statement, at the accompanying press conference, provided us with another example of the Bank’s favourite monetary-policy tool of late: jawboning.

Jawboning is a term that describes using words instead of actions to produce desired outcomes. When central bankers jawbone, they use their bully pulpit to move markets in a certain direction. In last week’s case, the BoC used its dovish language to help keep the Loonie from appreciating, and to buy some time until the U.S. Federal Reserve hikes its policy rate and the Greenback rises in response (which will weaken the Loonie and provide further stimulus to our exporters).

As far as monetary-policy tools go, jawboning, if effective, is a preferred option. It replaces quantitative easing and other more permanent forms of central-bank balance-sheet expansion, and while cutting rates is a more sure-fire way to devalue your currency, when your overnight rate sits at 0.50% (as ours does now) you don’t have much dry powder left and you don’t want to make more cuts until you have no other choice.

Also, if you do end up having to cut your policy rate later, the Loonie is likely to sell off again, taking it down another notch, so your jawboning plus an eventual rate cut should give you two currency devaluations for the price of one actual move.

Here are the highlights from the latest MPR, with my comments added: read more…

David Larock is an independent full-time mortgage agent 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 Canada’s Latest Mortgage Rule Changes Mean for You – Part Four (October 19, 2016)

by David Larock

Tough Decisions Ahead Road SignIn Part One of my four-part series covering our Department of Finance’s latest round of mortgage-rule changes, we focused on the change that took effect on October 17, and in Part Two, we covered the changes that will take place on November 30.

In Part Three, I explained why I believe that another round of changes was necessary, I offered my view on the changes’ longer-term impacts for Canadian borrowers, lenders and our housing markets, and I closed with my take on whether our policy makers got these changes right.

Today, in Part Four, I propose three tweaks that I think our policy makers should make to these latest rounds of mortgage rule changes. Not that they asked mind you – I haven’t found any industry insiders who were consulted before these changes were announced, but here’s hoping they’re open to suggestions and that they read my posts!

  1. Change How the Mortgage Qualifying Rate Is Set

Today, the Bank of Canada (BoC) calculates the Mortgage Qualifying Rate (MQR) by taking the mode of the posted five-year fixed rates listed by the Big Six banks (RBC, TD, Scotia, CIBC, BMO and National Bank). To the best of my knowledge, these rates are not used for actual lending. Instead, their sole purpose seems to be to inflate the size of the fixed-rate penalties that banks charge their customers.

It would make much more sense to base the MQR on some sort of real-market rate. For example, the BoC could use an average of the Government of Canada (GoC) five-year bond yield over the past twelve months with an additional premium added on top, and it could then reset this rate on the first business day of each month if the underlying average GoC bond yield moved by more than 10 basis points in the interim. Basing the MQR on a real-world rate would represent an enormous step forward without compromising the Department of Finance’s objectives in any way.

Without this tweak, our policy makers will continue to surrender de facto control of the MQR rate to the Big Six, thus giving them the power to determine how many borrowers can qualify for an insured mortgage. Since non-bank lenders rely on insured-mortgage funding much more than the banks do, it doesn’t take much imagination to envision the Big Six keeping their artificial posted rates high in order to starve out some of their competition, only to lower them once they have more of the playing field to themselves.

Changing the way in which the MQR is calculated wouhead-with-interest-ratesld also eliminate the potential for conflicts of interest, which are inherent whenever a sub-group of market participants is given control over the setting of a key policy rate.

Given that the MQR has grown in importance, using a market-based rate that is determined by the BoC seems like a more logical, and fair, approach. read more…

David Larock is an independent full-time mortgage agent 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 Canada’s Latest Mortgage Rule Changes Mean for You – Part Three (October 17, 2016)

by David Larock

great white northIn Part One of this series about the upcoming mortgage-rule changes, we focused on the first change that takes effect today. In Part Two, we covered the changes that will take place on November 30.

In today’s post, Part Three, I’ll explain why I support the view that more changes were necessary and I’ll offer my take on the longer-term impacts that these specific changes will have on our borrowers, lenders, and housing markets. Then I’ll close by offering my opinion on whether our policy makers got these changes right.

(I will also provide my usual weekly interest-rate update at the bottom of this post.)

Canada, like several of the world’s other developed countries, has a growing debt problem. Our economic growth rates have hovered just above stall speed since the start of the Great Recession in 2008, and much of the meagre growth that we have enjoyed over the past nine years can be tied to a sharp rise in our household debt levels.

This debt-for-growth trade off was initially easy to make in 2008, when the world teetered on the brink of depression and policy makers were willing to pay almost any price to avoid that outcome. At that time, allowing debt to expand further while the U.S. economy regained traction and our export demand recovered made sense, especially if it fuelled a rise in business investment that would help our exporters reposition themselves in the bargain. But our export recovery has been much slower to materialize than expected, and that hoped-for rise in business investment just hasn’t happened.

Instead, households have used ultra-low interest rates to increase their borrowings to record levels, and since the collapse in the price of oil last year, household-debt fuelled growth has been just about the only thing keeping our economy out of recession. (A recent Stats Can report showed that our real estate sector now accounts for about half of our total GDP growth.)

In 2008 , we had room to allow househbandaged pigold borrowing levels to rise, but the period of ultra-low rates that has continued from then until now has fuelled a steady expansion of our debt ever since. For example, our debt-to-disposable-income ratio, which measures the average Canadian household’s ability to service its debt, hovers at about 165%, which is just a shade below its all-time high – and that is with interest rates at record lows. If significant rate increases were to occur, distant as that prospect may seem for the time being, that ratio could rise much higher (and in a hurry).

Meanwhile, asset prices in general, and more specifically, house prices in major markets like Vancouver and Toronto, have skyrocketed, and that rapid appreciation has gradually spread to surrounding markets. Our policy makers have grown increasingly concerned about speculative real-estate investment that is based on the belief that prices will continue to rise in perpetuity. History has shown that if hot real-estate markets are allowed to run unchecked, the situation always ends in tears, and as Winston Churchill famously said, “Those who do not learn from history are doomed to repeat it.“

Today, total Canadian household debt outstanding has risen to just a shade below $2 trillion, and in the second quarter of this year, that number exceeded our country’s overall GDP for the first time ever. Of that total, our current mortgage debt outstanding accounts for about $1.3 trillion, and that number is skewed toward relatively new housing-market entrants because about one-third of Canadian home owners are mortgage free.

As our overall household debt level has continued to expand, so too have the vulnerabilities associated with it, and against that backdrop, I believe that our policy makers’ instinct to take further action was prudent. (The question about whether they took the right action is still up for debate, and I’ll offer my take on that question below.) read more…

David Larock is an independent full-time mortgage agent 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 Canada’s Latest Mortgage Rule Changes Mean for You – Part Two (October 11, 2016)

by David Larock

** Update on the new mortgage rules that will be implemented on November 30 – The Department of Finance has modified its original announcement that it will no longer default insure rental-property mortgages. After November 30, rental properties with two to four units will now still be eligible for mortgage insurance (but one-unit rental properties will not).**

In Parcanada money house with cart One, we focused on the mortgage-rule change that will take effect on October 17, 2016.

Today, in Part Two, we’ll focus on the additional rule changes that will take place on November 30, 2016. Then, in Part Three, I’ll offer my take on the longer-term impacts that these changes will have on Canadian borrowers and our housing markets across Canada.

(I will also provide my usual weekly interest-rate update at the bottom of this post.)

The first change our regulators announced was that, as of October 17, all default-insured borrowers would have to be qualified using the Mortgage Qualifying Rate (MQR), which stands at 4.64% currently, or slightly more than double today’s typical five-year fixed-rate. That change was made to enhance the safety of insured-mortgages portfolios by ensuring that, in future, only those who can afford significant mortgage-rate increases will be eligible for the ultra-low rates that insured mortgages provide.

If the first rule change raised the qualifying bar for mortgage insurance, the second wave of rule changes completely eliminates mortgage insurance for certain categories of borrowers. To be clear, these changes don’t mean that affected borrowers won’t still have access to mortgages, but they do mean that these borrowers will have fewer options than before and should expect to pay rates that are higher than the lowest available.

First, a quick refresher. An “insured mortgage” is backed against default by the full faith and credit of the federal government (otherwise known as the Canadian taxpayers). Once an insurance policy is in place, a properly underwritten mortgage is basically bullet proof. If an insured borrower stops paying their mortgage and the lender has to seize and sell their property, and if the sale proceeds are less than the outstanding balance of the mortgage, the insurer reimburses the lender for any shortfall.

With this default protection in place, insured mortgages can be sold to investors who will accept interest rates that are only slightly higher than those paid by our federal government when it borrows money. That insurance protection also reduces the amount of capital that lenders must set aside for each loan they make, which further reduces the lenders’ cost of the funds.

Our policy makers are now worried that the substantial benefits provided by readily available mortgage insurance may have become too much of a good thing for our housing markets, and that the current $450 billion in insured mortgage-backed debt outstanding represents too much risk for Canadian taxpayers.

When most people think of mortgage insurance, they think of a buyer who is putting down less than 20% of the purchase price of a property. This type of buyer is referred to as a “high-ratio” borrower, and they are required to pay a one-time fee that covers the cost of insuring their mortgage against default. Conversely, buyers who are putting down more than 20% of the purchase price of a property, or existing home owners who have more than 20% equity built up in their property, referred to as “low-ratio” borrowers, are not typically required to pay for mortgage default insurance, but it is still used widely on these types of mortgages today.

“Portfolio insurance” for low-ratio mortgages has become increasingly popular with lenders. They pay for the default coverage themselves because the benefits of reduced securitization costs and lower capital requirements that come with this protection are worth more to them than the cost of the coverage. Today, low-ratio portfolio-insured loans account for 35% of our total residential insured mortgages outstanding, and the vast majority of the borrowers whose mortgages are portfolio insured don’t even know it.

Nonetheless, it is this group of low-ratio borrowers who will impacted by the changes that will take effect on November 30, 2016. read more…

David Larock is an independent full-time mortgage agent 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 Canada’s Latest Mortgage Rule Changes Mean For You – Part One (October 5, 2016)

by David Larock

** Update on the Mortgage Qualifying Rate stress-test that was to be implemented on Oct 17th – The Department of Finance just announced that while the MQR stress-test will be implemented for all high-ratio borrowers, effective October 17, the test will now not be implemented for low-ratio borrowers until the next round of mortgage-rule changes takes effect on November 30.**

Yesterday Canada’s Ficanada house with moneynance Minister Bill Morneau announced a series of changes to the rules used to underwrite insured mortgages. There is a lot to unpack so I’ll do it in three installments: Part One will focus on the change that will take place on October 17, Part Two will cover the changes that will take place on November 30, and Part Three will offer my take on the longer-term impacts that these changes will have on Canadian borrowers and our housing markets across Canada.

Let’s start with the first change, which will be implemented less than two weeks from today.

Effective Oct 17, all insured mortgage applications will be underwritten using the Bank of Canada’s Mortgage Qualifying Rate (MQR).

The MQR was first implemented on April 19, 2010 as an intelligent response to the lessons learned from the U.S. housing crisis (here is a post I wrote that explains how it works in detail). In short, the MQR requires high-ratio borrowers who want to take out either variable-rate loans or fixed-rate loans with terms of less than five years to qualify using a rate that is higher than the actual rate on their mortgage.

Today, the MQR is set at 4.64%, which is about double what you would actually pay for a market five-year variable-rate mortgage, and that gap helps ensure that the borrowers most vulnerable to rate rises can afford higher payments when the time comes.

Two Mondays from now, the MQR “stress test” will be applied to all insured loans, including fixed-rate terms of five years or longer. This will have a much greater  impact than you might at first think because, these days, “insured” doesn’t just refer to the usual high-ratios borrowers who have down payments of less than 20%. A significant percentage of low-ratio mortgages (where down payments are 20% or more) are also now insured, but because the lender typically bears this cost, most affected borrowers never even know it. (Lenders buy low-ratio mortgage insurance, called “portfolio insurance”, because once these mortgages are insured against default they can be securitized more cheaply.)

Here is where the rubber meets that road. I get an email every morning with mortgage rates from twenty-two lenders. Half of them will now have to use the MQR to underwrite every loan they make, regardless of the size, mortgage type or down payment. The other half have funding alternatives that don’t require mortgage insurance, but they cost more to use and their increased usage will push mortgage rates higher. (Also, if our policy makers have real conviction, these balance-sheet lenders should be getting an MQR update from OSFI in the near future as well.) read more…

David Larock is an independent full-time mortgage agent 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 Would the Risk of Higher Mortgage Rates at Renewal Affect You? Monday Morning Interest Rate Update (October 3, 2016)

by David Larock

Mortgage Rate ConceptOur regulators are right to be concerned about our record-high household debt levels, and more specifically, about the continued rise in Canadian mortgage debt outstanding.

With mortgage rates at record lows, everyone can afford to borrow more, and when ultra-cheap borrowing costs are combined with housing markets where there is much more demand than supply, prices rise quickly. Over time, rising prices and rising mortgage debt levels feed each other in a self-reinforcing cycle, especially in places like Vancouver and Toronto, where demand has outpaced supply for some time. The longer this continues, the greater the risk that borrowers will not be able to afford their mortgages at renewal.

To their credit, the majority of borrowers I work with are well aware of the risk that mortgage rates could be higher when they renew, and as part of our discussions, we often stress test their prospective loan to assess the cost of having to renew at a higher rate. To that end, in today’s post I’ll provide an example of what this analysis looks like in our current rate environment. read more…

David Larock is an independent full-time mortgage agent 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 Last Week Was an Important One for Future Canadian Mortgage Rates – Monday Morning Interest Rate Update (September 26, 2016)

by David Larock

Mortgage Rate ConceptToday’s post will provide a summary of three notable developments last week that have implications for Canadian mortgage rates.

The Office of the Superintendent of Financial Institutions (OSFI) Proposes Increased Capital Requirements for Mortgage Insurers

Just when you thought that all of the signs pointed toward ultra-low mortgage rates for as far as the eye can see, along comes our banking regulator, OSFI, with a draft proposal that would require mortgage insurers to put up more capital for mortgages deemed to have elevated levels of default risk as of January 1, 2017.

Our regulators are feeling increased pressure to make policy changes to address overheated housing markets, and tightening up capital requirements for our mortgage default insurers seems like a reasonable place to start (given that default insurance is ultimately backed by Canadian taxpayers).

To date, our default insurers (CMHC, Genworth and Canada Guaranty) have charged the same default insurance premiums for mortgages across all regional Canadian markets. But if increased capital requirements for specific high-priced regions, like Toronto and Vancouver, are introduced, one would expect the cost of the premiums in those regions to rise. So, for example, a borrower who is putting down 10% of the purchase price of a home in Toronto might soon pay a higher default-insurance premium than a borrower making the same down payment in Winnipeg.

Most interestingly, this change would apply to both high-ratio loans, where borrowers are putting down less than 20% of the purchase price, and also to conventional loans, where borrowers are making down payments of 20% or more. The latter is significant because today, the lender typically absorbs the default insurance premiums charged on conventional loans. So whereas a lender can pass on increased insurance costs to high-ratio borrowers by bumping their up-front premiums, on conventional loans those increased costs would most likely be absorbed through mortgage-rate increases. Today there is often a small gap between high-ratio and conventional mortgage rates, where high-ratio borrowers gain a slight discount in exchange for paying for high-ratio default insurance, and that gap is likely to grow wider as a by-product of OSFI’s latest proposal.

In addition to higher borrower costs, default insurers are likely to tighten their underwriting guidelines in markets that require increased capital, which means fewer exceptions for marginal borrowers who are just getting under the bar. And this change will hit many of the monoline lenders harder than banks, because the monolines, which specialize in mortgage lending only, typically need to insure all of their conventional loans against default, whereas banks have access to alternative funding sources that don’t require default insurance.

While higher borrowing costs and a tilted playing field that favours certain lenders over others aren’t music to our ears, raising capital requirements to address the significant and rising disparities between our regional housing markets seems like a prudent move. In the long run, changes like this should continue to be good for us, in a brussel sprouts sort of way. read more…

David Larock is an independent full-time mortgage agent 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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A Quiet Announcement That Could Have a Big Impact on Future Canadian Mortgage Rates – Monday Morning Interest Rate Update (September 19, 2016)

by David Larock

Mortgage Rate ConceptThe Office of the Superintendent of Financial Institutions (OSFI) recently launched a proposal that could push future Canadian mortgage rates higher.

When OSFI makes changes, it first issues a proposal that is “open for public consultation” up to a certain deadline, which in this case is October 18. But OSFI is making this proposal in the same way that I propose to my kids that they brush their teeth before bed – while technically I am asking, one way or another, it’s going to happen.

In its recently revised Capital Adequacy Requirement (CAR) Guideline, which is designed “to ensure that capital requirements continue to reflect underlying risks and developments in the financial industry”, OSFI has made allowances for increased risk at both the individual and market levels.

To account for increased market risk in future, OSFI will add a “countercyclical buffer” to its toolkit. This buffer will require lenders to put aside more capital if OSFI perceives that market risks have become unduly elevated. So, for example, if house prices continue to accelerate in hot regional markets, OSFI could increase lender capital requirements, thereby increasing the cost of the funds that are being lent out. read more…

David Larock is an independent full-time mortgage agent 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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Are You Buying the Hope That the Bank of Canada Is Selling? Monday Morning Interest Rate Update (September 12, 2016)

by David Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) left its overnight rate unchanged last week, as was widely expected. Some market watchers had speculated that the Bank might actually cut its policy rate in response to the recent worsening in our economic data, but the BoC’s ongoing concerns about rising household imbalances make a near-term policy-rate drop unlikely in all but the most extreme circumstances (for the reasons I outlined in this recent post).

In its accompanying press statement, the Bank followed a familiar pattern, acknowledging that the current data are weak while expressing hope that momentum will soon turn in our favour.

Here are the highlights from the BoC’s latest statement with my comments included: read more…

David Larock is an independent full-time mortgage agent 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 Real Reason the U.S. Federal Reserve Might Raise Rates in 2016 – Tuesday Morning Interest Rate Update (September 6, 2016)

by David Larock

Mortgage Rate ConceptThe U.S. Federal Reserve has sounded increasingly hawkish of late, with its members repeatedly raising the prospect of a rate hike in either September or December of this year. Tough talk from the Fed is nothing new, but there may be some new thinking behind it now (more on that in a minute).

The Fed’s rate-increase rhetoric has been primarily attributed to improvements in the U.S. employment data, so all eyes were on the latest U.S. non-farm payroll report last week as investors tried to gauge how the U.S. labour market’s current momentum might affect the Fed’s tightening timetable.

The latest data proved disappointing. The headline number came in well below consensus expectations and the details showed that momentum in the most cyclically sensitive parts of the U.S. labour market has continued to slow.

Here are the key details from the latest U.S. non-farm payroll report: read more…

David Larock is an independent full-time mortgage agent 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 (U.S.) Elephant’s Latest Twitches and Grunts – Monday Morning Interest Rate Update (August 29, 2016)

by David Larock

Mortgage Rate ConceptLast Friday, U.S. Federal Reserve Chair Janet Yellen gave a much anticipated speech at the Jackson Hole Summit, an annual meeting of the world’s central bankers in Jackson Hole, Wyoming. Fed Chair Yellen covered a wide range of topics and her words were carefully parsed by market watchers around the globe for hints of what the Fed might do and when.

As a reminder, the Fed’s actions matter to Canadian mortgage borrowers because our economy is tightly linked to the U.S. economy. For example, Bank of Canada (BoC) Governor Poloz has long said that any sustainable Canadian economic recovery must be underpinned by increased demand for our exports, and we sell about 80% of those into U.S. markets. The BoC believes that a rise in export demand would trigger a rise in business investment, which would then lead to productivity enhancements and fuel a rise in average incomes. Because this virtuous, self-reinforcing cycle starts with increased U.S. demand for our exports and because changes in U.S. interest-rate policy have a material impact on U.S./Canadian exchanges rates, the Fed’s actions have a direct, and at times substantial, impact on our economic momentum.

More bluntly, the Canadian perspective of the U.S/Canada economic relationship was summed up well by former Prime Minister Pierre Elliot Trudeau, who once said that living next to the U.S. “is in some ways like sleeping with an elephant. No matter how friendly or temperate the beast, one is affected by every twitch and grunt.”

Speaking of those twitches and grunts, here are the highlights from U.S. Fed Chair Yellen’s market-moving speech last week, with my comments included: read more…

David Larock is an independent full-time mortgage agent 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 of My Most Read Posts In Case You Missed Them the First Time – Monday Morning Interest Rate Update (August 22, 2016)

by David Larock

Last week was a quiet one for factors that affect Canadian mortgage rates.

We received the latest Canadian Consumer Price Index (CPI) data, for July, and it showed that overall inflation rose by 1.3% last month, down from 1.5% in June and still well below the Bank of Canada’s inflation target rate of 2%.

The U.S. Federal Reserve also released the minutes from its July policy meeting and while some of its members expressed a desire to raise rates sooner rather than later, most preferred to maintain the current wait-and-see approach. As of last Friday, the futures market was still betting that the Fed’s next raise won’t happen until mid-2017, so on balance, this latest release wasn’t a game changer.

With such a slow week on the news front I thought I would revisit five of my most read posts. These are worth a read if you missed them the first time around, and while some are a few years old, the topics are still relevant today: read more…

David Larock is an independent full-time mortgage agent 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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Are Canadian Variable Mortgage Rates Headed Lower? Monday Morning Interest Rate Update (August 15, 2016)

by David Larock

Mortgage Rate ConceptOur economic data haven’t been very encouraging of late and that has caused many of the borrowers I speak with on a daily basis to speculate about whether our variable mortgage rates may be headed lower. While this is a reasonable view to hold under normal circumstances, in today’s post I’ll explain why I don’t think it will happen any time soon.

To briefly set the stage, our GDP growth rate hovers between 0% and 1%, our economy isn’t producing enough jobs to keep pace with the natural rise in our working-age population, and our average income growth is barely keeping pace with overall inflation growth, benign as it is.

Against this backdrop, the Bank of Canada (BoC) would normally be expected to drop its policy rate in an effort to stimulate economic growth, and lenders would quickly pass on that additional saving by lowering their prime rates, which our variable-rate mortgages are priced on. But today we live in anything but normal times, and if you choose a variable-rate mortgage with the expectation of future rate cuts, I think you will be disappointed.

To expand on this view, let’s look at the two key events that must both take place if variable mortgage rates are to fall from today’s levels.

Step one: The BoC must drop its overnight rate.

Here are three reasons why I think it won’t: read more…

David Larock is an independent full-time mortgage agent 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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When All Else Fails, Pray for Rain – Monday Morning Interest Rate Update (August 8, 2016)

by David Larock

Mortgage Rate ConceptLast week we received the Canadian and U.S. employment reports for June, and they stood in stark contrast to each other – Canadian employment fell last month while U.S. employment surged higher.

In today’s post we’ll look at the lowights and highlights from both reports and I’ll explain how ongoing exchange-rate adjustments should help to narrow the employment-momentum gap between our two countries over time (albeit much more slowly than most expected).

Canadian Employment Lowlights for June

  • The Canadian economy lost an estimated total of 31,200 jobs in July. The consensus had expected about 10,000 new jobs after our June report showed a loss of 700 jobs but this did not materialize.
  • What’s worse, we lost 71,000 full time jobs in July, on top of the 39,000 full-time jobs that were lost in June. We added another 40,000 part-time jobs to help cushion some of this blow but that isn’t a trade that our policy makers would willingly make because it typically replaces higher-paying jobs with lower paying ones.
  • Goods-producing employment dropped by another 4,300 jobs in July, failing to recover from the 46,000 jobs this sector lost in June. As a reminder, goods producing employment has outsized importance because these jobs spur employment growth across the broader economy (a study by the Canadian government estimated that, on average, each new goods-producing job stimulates the creation of 2.7 other jobs throughout our broader economy).
  • Our unemployment rate rose from 6.8% to 6.9%, and would have risen to 7% had our participation rate not fallen from 65.5% to 64.5 (as a reminder, our participation rate measures the percentage of working-age Canadians who are either employed or who are actively looking for work). Our participation rate now sits at its lowest level since the turn of the century.
  • Our overall employment momentum has clearly stalled. We had a nice surge in March of this year, but at that time some savvy economists cautioned that employers were “hiring up” in anticipation of a rise in future demand that might not materialize. So far, that call has looked prescient.

Not surprisingly, the Loonie fell sharply on Friday as financial markets digested the new and contrasting employment data from both countries. When the Loonie falls it makes our exports into U.S. markets more competitive, and that should, in theory, provide us with an effective stabiliser when our economic trajectory lags that of the U.S. for any length of time. But the follow through just hasn’t been happening. We had a nice surge in exports in January, but today that momentum is long gone – our total export sales have actually fallen in four of the last five months.

The lag between the cheaper Loonie and expanding export sales is not a complete mystery to our policy makers. The Bank of Canada has said that it can take up to two years for exchange rate movements to work their way through our economy in normal times. Today, we are not in normal times and we are still redefining our export sector after swaths of it were decimated at the start of the Great Recession, when U.S. demand dried up, when the Loonie soared above par with the Greenback, and when so many businesses closed their doors for good. This is going to take time.

Our policy makers have been clear about what they think it will take to get our economy rolling again – we need export growth to fuel the increased business investment that will increase the demand for labour, preferably of the more skilled varieties. But like it or not, our policy makers just can’t force our economy through this transition. read more…

David Larock is an independent full-time mortgage agent 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 the U.S. Federal Reserve Won’t Be Hiking Its Policy Rate Any Time Soon – Tuesday Morning Interest Rate Update (August 2, 2016)

by David Larock

Mortgage Rate ConceptThe U.S. Federal Reserve met last week and decided to leave its policy rate unchanged, as was widely expected. The Fed also issued a brief accompanying statement, which gave us its latest assessment of how the U.S. economy is progressing. Here are the highlights from that statement:

  • The Fed sounded a little more upbeat about some of the recent data, noting that “near-term risks to the economic outlook have diminished”.
  • The Fed observed that “household spending has been growing strongly but business fixed investment has been soft”. I will expand on this key point below.
  • The Fed observed that “the labour market strengthened”, and that “economic activity had been expanding at a moderate rate”. It was encouraged that “job gains were strong in June”, but it also acknowledged “weak growth in May”. The Fed also noted that its dashboard of labour market indicators pointed toward some “increase in labor utilization in recent months”.
  • The Fed did not appear concerned about the effects of recent labour-market improvements on inflation, noting that “inflation has continued to run below the Committee’s 2 percent longer-run objective” and that “market-based measures of inflation compensation remain low”. The Fed added that “longer-term inflation expectations are little changed, on balance, in recent months”.

While the Fed sounded more upbeat about the U.S. economy’s recent progress at the margin, it still lacks compelling evidence that its ultra-accommodative monetary policies have helped to foster sustainable economic improvements. Looking at the pattern of Fed comments over the last few years, we continue to see its key phrases oscillate between dovish and hawkish tones in a pattern that is as inconsistent as the underlying data they are based on. And that uncertainty doesn’t stop at the Fed – it is pervasive among business leaders and makes them reluctant to invest in the kind of capacity improvements and expansion that so many of the world’s economies desperately long for. read more…

David Larock is an independent full-time mortgage agent 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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