Canada, debt, economy, opinion, rates

Days of ultra-cheap money coming to an end

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..At least that’s what Mark Carney and other Bank of Canada officials have said according to this article, yet they’re refraining from being more specific.

Meanwhile the Organization for Economic and Co-operative Development (OECD) is urging Canada to start raising interest rates in the fall and keep on raising them to stop an inflating housing bubble and reign in inflation.

The OECD, a high-powered economic research group backed by contributions from its 34 rich country members, offers a scenario: An increase in the benchmark rate of a quarter of a percentage point in the autumn, and similar increases each quarter through to the end of next year, leaving the benchmark overnight target at 2.25 per cent.

That still would be low by historical standards, yet, according to the OECD, likely a big enough increase to cause prospective homeowners to think twice before buying at current inflated prices. However, the OECD’s recommendation comes with a risk.

The Federal Reserve Board has made a conditional pledge to leave U.S. rates extremely low until the end of 2014. Following the OECD’s path could create an unprecedented spread between Canadian and U.S. interest rates, which would put upward pressure on a Canadian dollar that many say already is too strong.

Oh, and the OECD made this same recommendation a year ago and was ignored. So I wonder how Carney intends to bring the days of ultra-cheap money to an end?

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sbermunk

Does anyone know of a rental-discussion forum for the Lower Mainland? I haven’t found anything useful along those lines.

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Jerry Boyle

Re. rentals:

I pay $1400 for a pleasant 3 bed/2 bath bungalow in East Van. Rent has actually dropped $50 from where it started 6 years ago.

I do think this is a pretty good deal. Can’t imagine playing 3K. Assessed value of house is somewhere north of $700,000.

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fred

@space889: i am sorry for you being you!

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VultureBoy

@VultureBoy: i mean CDIC not CMHC.

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VultureBoy

@jesse: From the TD document, the reasons for 5 years are CMHC and the interest rate act: “A key reason for this is that the Canada Deposit Insurance Corporation (CDIC) only insures term deposits up until a 5-year maturity. Given this, depositors disproportionately tilt towards 5-year Guaranteed Investment Contracts (GICs) instead of GICs with longer maturity, and they are willing to accept a lower rate of interest. In turn, this combination of inexpensive duration-matched financing and lumpy availability encourages banks to offer their best mortgage deals for a five-year term, luring borrowers. A second reason is that Canada’s Interest Rate Act grants borrowers the right to prepay any mortgage with a term of greater than five years once the first five years have passed, for a penalty of no more than three months of interest. This is less costly than… Read more »

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jesse

@space889: yes this is a valid point, but one that can be dealt with fairly.

It would be easier if households had some proper hedging and risk management practices in place. For the most part they don’t. So enter Big Brother.

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Devore

@Anonymous:

They both ended up in the same exact place which is what matters. Have a look at the second chart down.

“Ended up”? Did time end in 2009? Using selective timeframes, you can show any correlation you like. And what about the stuff in between? This is like Dave’s “flat market”(tm), where only values at the beginning and end matter.

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space889

@watson: I don’t like to wish ill on people but if this mortgage requalification rule is implemented as it is, I really hope you lose your job right before the mortgage renewal and requalification and you can’t find a similar paying job because the economy is tanking, and despite making every single payment for 15 years, banks don’t renew your mortgage and you have to sell the house for a huge loss. All because your mortgage renewal just happened at the worst time for you.

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rp1

#80 @Mortgagee: “Hasn’t the BOC basically painted itself into a corner?” Leveraged home buyers have painted themselves into a corner. The BoC does not unilaterally set interest rates, although their actions have influence. The overnight rate is basically a floor under the 3-month bankers’ acceptances rate. http://www.bloomberg.com/quote/CDOR03:IND/chart/ If that chart goes to 1.5%, you can watch the BoC to go to 1.25%, and so on. You can verify the historical record of this from the table posted here: http://credit.bank-banque-canada.ca/financialconditions You can download the data and check. And you can check that the Fed, the RBA, and other central banks do this too. That’s how central banks set interest rates. The discussion you see in the media and elsewhere is a dog and pony show. Now that world markets are taking note of Canada’s housing bubble and especially Toronto’s overbuilding, and… Read more »

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jesse

@mac: LOL the old “take ’em out for coffee/dinner” trick. No better time to sign the deal than with a nice full tummy-tums.

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other ted

@other ted: that is $1600/month for downtown

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other ted

thanks for getting back that is what I thought. I am a bit disapointed how delusional people are as I can’t even agree with the basic facts to begin an intelligent conversaion. I was told by my brother that his friend had to go far out in surrey and as an act of charity his landlord gave his friend a basement suite for $1200. This sounds ridiculous as I could rent a suite downtown for this. But everyone insists rent is much higher than buying and throw numbers out there like $1600 and $2000-$3000 for a house in east van. I don’t know where people get his info and if true why the rental market is so strong. But looking at craigslist which is already known to be high, rents seem cheaper.

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spareanickledimedollarpenny

@Makaya: Right. Heed Makayas point if you’re looking for a rental. I got a $100/ month reduction on the last two places I rented off craigslist just by asking.

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mac

@jesse: Yes. It was me. It made me nuts. I wanted him to keep the posts up so that future morons who think that… how did he put it?… oh yes, that the borrower should be insured, not the bank, to prevent any future problems with foreclosure shortfalls… that those future morons could see that they are in the wrong for borrowing money and expecting the government to bail them out. Anyway, I don’t know how I managed to digest dinner. We went to a Chinese place near Main St. and who was booming real estate advice to a middle-aged woman but this fat, bat-shit crazy realtor. He showed her how, using his hand like an airplane, the real estate market would go down by 5%. Then, plane angling up, it would go back up again and that at the… Read more »

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jesse

@VultureBoy: Corporations can obtain mortgages longer than 5 years, it seems relatively easy to modify things to allow longer durations for individuals. The real issue, as patriotz has mentioned, is that the governments in the US and Canada have been heavily involved in the mortgage markets for generations and have distorted risk premiums. This is viewed as beneficial because of externalities caused by credit market volatility. Canada was loath to adopt a US-style mortgage financing industry because of the problems the US encountered in the 1930s with its credit markets. Canada instead chose to heavily regulate mortgages at a time when household formation was occurring at a record pace in the 1950s. Since then it has gradually moved the mortgage book onto banks and continually relaxed LTV and DTI ratios (until 2008 that is) but has still maintained heavy involvement… Read more »

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Makaya

@other ted: Craigslist postings are usually overpriced. on a $1500/ month rental, you can easily negotiate $100/ month reduction, probably more depending on the property.

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spareanickledimedollarpenny

@other ted: Craigslist is pretty notorious for some goofy asking prices since it doesn’t cost anything to post. A lot of amateurs post their apartments for way above market rent. The best places I’ve found to rent were by walking around in the neighborhood or looking in smaller classifieds like the courier.

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other ted

Not trying to reply to my own post but just checked craigslist and saw a few really expensive properties but overall I thought prices were not as bad as what I heard. Is craigslist a good barometer for price?

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other ted

I just returned to Vancouver for the week and I am hearing rent is through the roof. Is this true? Is it impossible to rent a one bedroom downtown below $1200? Is east van really expensive for renting? Was under the impression rent was cheaper than what friends and family are telling me.

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DaMann

@Mortgagee:

I would snatch their hand off. 3.49% for 7 years is insane. Just goes to show how spoiled we have been with free money the last decade ( not you Mortgagee, just in general). Probably could squeeze out another 6 months to a year on variable and be ahead but at some point the rates will be up. I would take that in a heart beat!

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Mortgagee

@VultureBoy hit the nail on the head regarding 5 year Cdn versus 30 year US mortgages. Not sure why thinks this makes the Canadian mortgage market less risky. On a 30 year mortgage, you have payment security and know exactly what your home is going to cost you over your lifetime, on a 5 year mortgage, you expose yourself to interest rate risk. Can you imagine what a sharp and sudden increase in mortgage rates would do right now?

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shriller

@ Mortgage. Actually that sounds like a good deal. I think they probably want to bundle your mortgage into a covered bond. CMHC will likely start reining in the NHA-MBS pool once OFSI’s rules kick in and the banks make like 4-7 per cent on every mortgage in this pool. They’re just trying to squeeze a little bit more profit. But not from you. You’re just the conduit. So it could be good.
That said, the BoC won’t raise rates unless inflation takes off. But if commodities crash then the exchange rate depreciation will cause prices to rise (pass through). In this scenario rates could rise, maybe even quickly.

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Anonymous

@Mortgagee: “Hasn’t the BOC basically painted itself into a corner? Wouldn’t even just a modest increase cause large scale carnage?”

The BOC rates are not significantly influenced by mortgages. Other factors such as inflation would trump the carnage that will be caused when rates rise.

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Ravishing Rick

Cut the music!

From Market Watch 14 minutes ago: One old-pro Vancouver Realtor told me, “Look, interest rates are going to go up in Canada. Maybe later than sooner. We all know that. But you’re not going to see a real-estate bubble pop, like it did in the United States. What we’re starting to see here now is some of the air slowly coming out of the bubble. We don’t do things here the way you do in the States.” Thank heavens for that.

http://www.marketwatch.com/story/no-real-estate-bubble-pop-expected-in-canada-2012-05-24

What a bunch of crap! Hit the toilet flushing music!

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