China’s economic slowdown and the seemingly never-ending drop in the price of oil are combining to hammer the TSX, the Loonie, employment momentum, and consumer and business confidence. All of this has helped push five-year Government of Canada (GoC) bond yields from a high of 0.83% on December 17, down to 0.56% at last Friday’s close. One would normally assume that this twenty-seven basis point drop would cause five-year fixed mortgage rates to fall but that has not been the case lately. In fact, market five-year fixed rates have risen from 2.64% to 2.79% over that same period.
Meanwhile, market five-year variable-rate discounts have shrunk from prime minus 0.50% to 0.35% over this same period, and that is after our lenders had already padded their variable-rate spreads by passing on only fifteen basis points of the two quarter-point overnight-rate cuts by the Bank of Canada (BoC) in 2015.
At first glance, the question of why our mortgage rates are rising when the rates they are priced on are falling was answered when our federal finance department increased the cost of securitizing mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program, the primary funding source used by most residential-mortgage lenders (which I wrote about here). read more…David Larock is an independent full-time mortgage planner 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.
We received the latest Canadian employment data last week, for December, and it showed that our economy added 22,800 new jobs last month. That was well above the 8,000 new jobs that the consensus was expecting but the strong headline number belied some weakness in the data.
Here are the highlights: read more…David Larock is an independent full-time mortgage planner 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.
Before we do that though, let’s revisit the post I wrote on the same topic at the start of the 2015 to see how those factors have played out over the last twelve months.
Recap of the Five Factors That I Predicted Would Drive Canadian Mortgage Rates in 2015
- The strength of the U.S. economic recovery – The U.S. recovery eventually found a more solid footing in 2015, and as predicted, the Fed’s December rate rise did pull Canadian bond yields higher in sympathy. That said, because the first U.S. rate rise happened so late in the year, the impacts of the Fed’s first monetary-policy tightening in almost a decade have yet to be fully felt.
- Slowing growth in China – Slowing growth in China did put downward pressure on commodity prices. The knock-on effects for our economic momentum were mostly negative, and as expected, China’s slowing growth did indirectly exert downward pressure on our mortgage rates.
- The continuation of large-scale quantitative easing (QE) programs – The European Central Bank (ECB) finally backed up its words with action and launched QE programs in early 2015, and Japan also expanded its use of QE (again) last year. While China has not officially engaged in QE, it has adopted QE-type policies, for example, by making it easier for their commercial banks to lend more aggressively. China has also continued cutting interest rates, which it still has room to do because its benchmark one-year lending rate sits at a relatively lofty 4.35% today. That said, if China’s growth continues to slow and the country experiences turbulence as it transitions from an export-led to domestic-consumer-led economy, it’s not hard to imagine China adopting full-blown QE if needed. In summary then, the continued wide-scale use of QE and QE-type monetary-policy initiatives exerted downward pressure on global bond yields, as expected, and these developments helped keep Canadian mortgage rates at ultra-low levels.
- The price of oil – Lower oil prices exerted downward pressure on our mortgage rates and their sharp fall dealt a body blow to our economic recovery. This made the Bank of Canada (BoC) increasingly cautious, which was expected, and led to two cuts to the BoC’s overnight rate, which was mostly unexpected.
- The potential for the next financial crisis – The global economy made it through the last twelve months without experiencing a significant financial crisis, but the worry list of the potential risks to global economic stability is still a long one. More on that for this year below.
Not surprisingly, there is some overlap between last year’s key factors and those that will be most important heading into 2016. Here is this year’s list: read more…David Larock is an independent full-time mortgage planner 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.
Last Wednesday the U.S. Federal Reserve voted unanimously to raise its policy rate for the first time in nearly a decade. The reaction in financial markets to this widely anticipated move was initially positive, but the euphoria didn’t last long as investors recalibrated their portfolios to account for tighter U.S. monetary policy and the resulting further appreciation of the world’s reserve currency.
Here are the highlights from the Fed’s accompanying press release:
- U.S. economic activity has been expanding at a “moderate pace”, household spending and business fixed investment have been “solid”, and the housing sector has “improved further”. The Fed expressed increased confidence in a broad range of indicators.
- The Fed observed that the U.S. labour market has shown both “further improvement” and “considerable improvement”, and the “underutilization of labour resources has diminished appreciably since the start of the year”. In my memory, these are Fed’s most favourable observations about the state of the U.S. labour market since the start of the Great Recession.
- Inflation continues to run below the Fed’s 2% target and “long-term inflation expectations have edged down”. The overall tone of the Fed’s statement gave me the impression that it would be turning its primary focus away from labour market conditions and back towards inflation when determining the timing and trajectory of its future policy-rate increases.
- The U.S. economy is likely to require “only gradual increases” in the Fed’s policy rate and the Fed expects that it “will remain below levels that are expected to prevail in the long run” for “some time” yet. Interestingly, the Fed did not make any changes to its accompanying dot plot projections, which chart where each Fed member thinks the federal funds rate will be headed in the coming years. So this initial rate rise does not appear to signal a material change in any Fed member’s longer-term view.
- The Fed will continue to provide liquidity to financial markets by “reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities … [and by] rolling over maturing Treasury securities at auction … until normalization of the level of the federal funds rate is well under way.” This was a reassurance to investors that the Fed will not start removing liquidity from the market for a long time yet.
Last Friday our federal department of finance announced a change to the minimum down payment requirements for residential mortgages which will take effect on February 15, 2016.
While it received far less media attention, the feds also announced an increase in the cost of funding mortgages through its National Housing Act Mortgage-Backed Securities (NHA MBS) program. This change could have a much greater impact on the broader mortgage market over time because it has the potential to raise costs for all lenders, and these costs are likely to be passed on to mortgage borrowers.
In fact, this may have happened already. I think the NHA MBS cost-increase announcement helps explain why lenders have raised their mortgage rates several times of late, despite the fact that bond yields have mostly been falling. Interestingly, while researching this post I learned that all federal regulated lending institutions recently received a letter from OSFI (our lending regulator) warning them that their funding costs were about to go up. This would appear to solve the mystery of what was driving those persistent rate hikes.
In today’s post I will explain last week’s changes in detail and offer my take on the implications for Canadian mortgage borrowers. read more…David Larock is an independent full-time mortgage planner 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.
The Bank of Canada (BoC) left its overnight rate unchanged last week, as was universally expected.
The Bank also issued its latest policy statement, which is basically an assessment of how events both at home and abroad are influencing its monetary-policy direction. Here are the highlights from the BoC’s latest policy statement, with my accompanying comments: read more…David Larock is an independent full-time mortgage planner 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.
The Bank of Canada (BoC) will issue its latest policy statement this Wednesday. It summarizes the Bank’s current assessment of our economy and offers us valuable insight into how the BoC is likely to direct its monetary policy over the short and medium term.
These statements have given our variable-rate borrowers comfort for some time now because the BoC’s carefully crafted words have reassured them that the Bank has no intention of raising its overnight rate, on which our variable-rate mortgages are priced, any time soon. Canadian bond-market investors also listen carefully to the BoC’s pronouncements since any change in the BoC’s monetary-policy bias is likely to affect bond yields, on which our fixed-rate mortgages are priced.
The BoC’s upcoming policy announcement is of particular importance because it comes just ahead of what is expected to be the first policy-rate rise by the U.S. Federal Reserve in almost a decade, and because the Canadian economy has shown some encouraging signs of late, in spite of our energy-sector challenges.
To be clear, while no one expects the BoC to start talking about overnight rate increases, the Bank may replace its dovishly themed language with more neutral phrasing, and even that incremental shift could push bond yields higher and buoy the Loonie. To that end, here are five key areas that I expect the Bank to touch on, along with my take on what market watchers will be looking for in each case: read more…David Larock is an independent full-time mortgage planner 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.
Canadian mortgage rates moved higher again last week but it wasn’t because of new economic data or rising bond yields. Instead, one large lender raised rates and everyone followed, repeating a cycle that we have seen several times lately. Over the past couple of months these rounds of follow-the-leader rate changes have shrunk average five-year variable-rate discounts from prime minus 0.60% to prime minus 0.40% and increased average five-year fixed rates from 2.59% to 2.79%.
Market-wide rate changes like these are difficult to predict because they start out as subjective decisions made by one lender that everyone else then decides to follow, and in many cases, the followers have different reasons for raising than the leaders did.
Here are my thoughts on the factors that have led to these recent mortgage-rate increases:
- Lenders’ funding costs have been rising slowly but surely for some time now. The spreads between government debt and the funding vehicles that lenders use to raise capital for their mortgages have steadily widened as investors assign a higher risk weighting to these types of credit. That said, the overall increase has been relatively small and the spreads associated with our residential-mortgage funding vehicles are still miniscule when compared to the spread swaps on most other forms of credit.
- Lenders are capped on the amount of volume they can securitize into the Canada Mortgage Bond (CMB) program which is their preferred funding vehicle. When lenders reach their CMB limit, they must switch to other, more expensive sources of capital. While lenders can simply raise rates to account for these higher funding costs, they might also decide to absorb them for a while in order to stay competitive because not every lender will hit their limit at the same time. That said, if the competition raises rates, this subset of lenders will be quick to match. Also, not every lender has a viable alternative to the CMB and this group may use rate rises as a way of effectively pulling out of the market until their CMB allocation limit is reset. In this scenario, raising rates is better than officially suspending new business, which makes it harder to get new business flowing again later. Lenders who use rate rises as a way of actively discouraging volume must match any and all competitor rate increases.
- This has been a busy year for lenders and many have found themselves under staffed. Lender capacity challenges are exacerbated in the current environment because experienced underwriters are now in very short supply. With backlogs piling up, some lenders have raised rates in an attempt to temporarily slow volume and to buy their underwriting teams some breathing room. Those lenders want to maintain their defensive pricing, so they adjust upwards quickly when their competitors raise. In that same vein, the last thing other lenders who are still managing to keep up want is the surge in volume that would result if they do not raise with the rest of the market. Thus, lenders in both situations are quick to match competitor rate rises.
- Lenders price their rates aggressively in the spring market when rate competition is at its fiercest. Later in the year, especially when lenders have exceeded their volume targets, as almost all have this year, they are more inclined to take back some of the extra spread that they sacrificed to spring-market promotional pricing, even if it costs them a bit of incremental volume in the bargain.
Lenders shrank their five-year variable rate discounts in early October when Banker’s Acceptance rates started to rise in the face of higher perceived credit risk (which you can read about in detail in this article written by Rob McClister). This timing worked out well because our regulators get nervous when borrowers start piling into variable rates, and we would likely have seen just that if five-year fixed rates rose while variable rates remained unchanged. The order of these rate increases ensured that changes in the fixed/variable spread did not skew demand in favour of variable rates, thereby avoiding the ire of our new federal finance minister, who is still assessing current conditions. read more…David Larock is an independent full-time mortgage planner 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.
Right now markets believe that there is about a 75% probability that the U.S. Federal Reserve will raise its policy rate at its December meeting. These odds spiked after the latest U.S. nonfarm payroll report showed that the U.S. economy created far more jobs in October than were expected (271,000 actual new jobs versus the consensus forecast of 190,000 new jobs). But the Fed has earned a reputation for doing the opposite of what markets expect over the past several years and the contrarian in me is reminded of Bob Farrell’s Rule #9 from his famous 10 rules of investing: “When all the experts and forecasts agree – something else is going to happen.”
While I won’t be surprised if the Fed does raise its policy rate in December, if only to provide symbolic reassurance to markets that the Fed thinks the U.S. economy no longer needs emergency-level interest rates, that action is still not a foregone conclusion. In her most recent comments, made last week, Fed Chair Yellen said: “While the Fed now expects that the economy will continue to grow at a pace that will continue to generate further improvement in the labor market, and to return inflation to our two percent target over the medium term, and if the incoming information supports that expectation, then our statement indicates that December would be a live possibility [for a rate rise] but importantly, we’ve made no decision about it.”
This begs a key question. If the Fed is going to continue to rely on “incoming information” between now and December before deciding if it will raise its policy rate at its next meeting, which incoming data to be released between now and then are most likely to cause the Fed to stay its hand?
At this point the Fed would likely cite falling U.S. inflation rates or a weakening employment picture (or both) as reasons for raising its policy rate for the first time in almost a decade, and I think they will get both between now and their December meeting.
Here are some examples of factors that could stop the Fed from tightening its monetary policy in December:
- The three-month rolling average for overall U.S. employment growth has slowed consistently throughout 2015, and we saw a fairly steep drop in new-job creation in August and September. If the November new-jobs headline falls more in line with the year-to-date trend, then the initial October headline that set markets aflutter will be classified as an anomaly. Also, the initial estimates for the U.S. nonfarm payroll have tended to be revised downward in follow-up releases of late, and if this happens it should also undermine the view that the October headline was a definitive signal of “further improvement” in the U.S. labour market.
- The U.S. labour force participation rate now stands at 62.4%, which is the lowest that it has been since the start of the Great Recession. (As a reminder, the participation rate measures the percentage of working-age Americans who are either employed or are actively looking for work.) Fed Chair Yellen has repeatedly cited the participation rate as a key measure of the health of the U.S. labour market, and an all-time low certainly doesn’t signal “further improvement”.
- All of the October job gains came in the 55+ age category, while workers in the 25 to 54 age category lost 35,000 jobs during the month, with men in that category losing 119,000 jobs and women making up the difference. These trends are not new. Since the start of the Great Recession the 55+ age category of workers has added 7.5 million jobs while the 25 to 54 age category has lost a total of 4.6 million jobs over the same period. This has led several of the experts I read to conclude that would-be retirees can no longer afford to retire and that single-family households are becoming dual-income households out of necessity. If true, both trends should continue to concern the Fed.
- Part of the October employment spike was caused by retailers adding staff in advance of the holiday shopping season (retailers hired 44,000 new employees in October), but U.S. GDP growth slowed from 3.9% in September to 1.5% in October and that’s not a good omen for consumer spending. If the U.S. shopping season disappoints, layoffs will follow, and October’s gains in retail hiring would then become November’s losses.
- The more convinced markets become that the Fed will raise its policy rate in December the more the Greenback appreciates against other currencies. The soaring Greenback creates economic impacts that are similar to those caused by tightening monetary policy and as such, the appreciating U.S. dollar is effectively doing the heavy lifting that the Fed would otherwise need to use policy-rate increases to achieve. Furthermore, the surging U.S. dollar is lowering the cost of U.S. imports at the same time as commodity prices continue to fall, and both of these factors put more downward pressure on U.S. inflation. As such, if the Fed wants to delay raising its policy rate in December, it will almost certainly have the option of citing concern about U.S. inflation returning to the Fed’s two percent target over the medium term as its justification.
The Fed could use any or all of the examples listed above as reasons for not increasing its policy rate in December, but there are many more factors that could also come into play, such as a broad market sell off, rising global economic instability, geopolitical instability, plunging oil prices, bad economic data from China, and so on. The list is long and the interplay between of all of these variables means that we shouldn’t be counting on a Fed rate increase in December just yet.
What the Fed does still matters to Canadian mortgage borrowers because our economies are tightly linked. The Bank of Canada (BoC) has said that it will lag the Fed’s rate hike timetable, perhaps by a considerable margin, but if/when the Fed raises and the BoC stands pat, the Greenback will rise further against the Loonie. This will raise the cost of everything we import from the U.S. and lower the cost of what we export there, creating winners and losers in the process. Also, while it’s true that the BoC doesn’t have to move in the same direction as the Fed over the near term, Canadian monetary policy cannot decouple from U.S. monetary policy indefinitely, so the Fed’s shift towards a monetary-policy tightening stance serves as a distant-early-warning system for the BoC’s own tightening timetable (however far down the road that may still be).
Five-year Government of Canada bond yields fell eight basis points last week, closing at 0.95% on Friday. Five-year fixed-mortgage rates are available in 2.54% to 2.69% range and five-year pre-approval rates are offered at 2.74%.
Five-year variable-rates are available in in the prime minus 0.60% to prime minus 0.50% range, which translates into rates of 2.10% to 2.20% using today’s prime rate of 2.70%.
The Bottom Line: While markets are betting on a Fed policy-rate increase in December, I still think that is far from a foregone conclusion for the reasons outlined above. That said, even if the Fed does decide to raise next month, it is unlikely to do so without giving markets lots of reassurance that its monetary-policy tightening timetable will be much slower and more deliberate than in past cycles, and those soothing words should help minimize the potential impact on mortgage rates north of the 49th parallel.David Larock is an independent full-time mortgage planner 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.
The latest employment data for both Canada and the U.S. came in much higher than expected last Friday. The futures market quickly raised the odds to 75% that the U.S. Federal Reserve will hike rates at its December meeting, and bond yields on both sides of the 49th parallel surged higher in sympathy. Canadian mortgage lenders wasted no time in raising their fixed mortgage rates.
This is exactly the type of volatility that I warned about in last week’s post. The Fed’s revised wording in its latest policy statement had indicated that it was poised to raise its policy rate at its next meeting if the U.S. economic data continued to show encouraging signs. The biggest X factor in that data was U.S. employment momentum which had stalled over the previous two months after showing impressive strength over the prior twelve months. Markets reacted quickly to the upside surprise.
Here are the highlights from the U.S. non-farm payroll report for October: read more…David Larock is an independent full-time mortgage planner 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.
In its closing commentary, instead of continuing to use language consistent with a wait-and-see approach, the Fed was much more specific, indicating that it was now evaluating whether it will be appropriate to raise its policy rate “at its next meeting”.
This specific reference to the December meeting caused many analysts to speculate that the Fed was telegraphing a rate rise before the end of the year. That said, the U.S. futures market only increased the odds of a Fed rate rise in December from 35% to 50%, so it will take more positive economic data between now and then before a December rate rise becomes the market’s base-case scenario.
Those who read the Fed’s complete statement found plenty of language to support the view that its tightening timetable is not yet a forgone conclusion. The statement went on to say that “this assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” Even more specifically, the Fed said that it would need to see “further improvement in the labor market and [be] reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Here is my take on the current state of the key elements outlined in the paragraph above: read more…David Larock is an independent full-time mortgage planner 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.
The Bank of Canada (BoC) released its latest Monetary Policy Report (MPR) last Wednesday and left its policy rate unchanged at 0.50%, as was universally expected.
I always read the MPR with great interest because it gives us the BoC’s views on the state of the world’s economies and includes projections for where the Bank sees foreign and domestic economic growth headed over the next several years.
Here is a summary of the highlights from the latest MPR, with my accompanying comments: read more…David Larock is an independent full-time mortgage planner 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.
I have subscribed to the view that our mortgage rates aren’t likely to head materially higher since the start of the Great Recession and over time, that view has become increasingly mainstream. But before we all start popping champagne corks in celebration, now seems like a good time to highlight the rising economic costs (and risks) that develop when borrowing rates are kept too low for too long.
Low interest rates have been a boon to Canadian mortgage demand so it may seem surprising to read a post written by a mortgage planner about the five ways that those low rates are hurting our economy. But if monetary policy is kept loose for too long, which many observers think has already happened, today’s cheap money may well prove to have been too much of a good thing. In the same way that chocolate tastes good in the beginning but gives you a tummy ache if you overindulge, ultra-low rates give our economy an initial boost but can then create rot and excess if left in place for too long.
Here are five examples of how ultra-low interest rates are now hurting our economy: read more…David Larock is an independent full-time mortgage planner 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.
Five-year Government of Canada bond yields rose seven basis points last week, closing at 0.87% on Friday. Several lenders have recently raised their five-year fixed rates, but you can still find them in the 2.49% to 2.59% range. Five-year fixed-rate pre-approvals remain at rates as low as 2.64%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.75% range, depending on the size of your mortgage and the terms and conditions that are important to you. That said, most lenders have lowered their discounts on variable-rate mortgages to prime minus 0.50%, so I don’t expect these more deeply discounted variable rates to be around for much longer.
The Bottom Line: I expect bond yields to remain volatile this week and as such, anyone who may be in the market for a fixed-rate mortgage is well advised to lock in a pre-approval to safeguard against any short-term rate spikes. Forewarned is forearmed.David Larock is an independent full-time mortgage planner 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.
This should give the data-dependent U.S. Federal Reserve all the cover that it needs to avoid raising its policy rate in October, or perhaps at all in 2015.
Here are the highlights from the latest U.S. employment data:
- The 142,000 new jobs that were created in September fell well short of expectations and the initial non-farm payroll estimates for July and August were also revised downwards by 59,000 jobs. While there are always revisions to initial estimates, six of the past eight reports have now been revised downwards, revealing a pattern of consistently slowing employment momentum.
- The average workweek also shrank from 34.6 hours to 34.5 hours in September. While this may seem like a small change, economist David Rosenberg estimates that this drop in average hours worked is economically equivalent to 348,000 lost jobs.
- Average wages were flat for the month and average year-over-year wage growth held steady at a tepid 2.2%.
- The S. unemployment rate was unchanged at 5.1% but only because 350,000 Americans gave up looking for work and are no longer counted as part of the labour force (the U.S. participation rate, which measure this, fell from 62.6% to 62.4% in September.)
While the weak U.S. employment data should reassure Canadian mortgage borrowers that our rates aren’t likely to head higher for the foreseeable future (as if we needed more reassurance on that front), the slowing U.S. employment momentum is bad news for our broader economy. read more…David Larock is an independent full-time mortgage planner 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.