Category Archives: rates

Inching towards instability

Canada’s housing market is overheating.

Don’t worry, there’s no risk of a crash yet and further action by the federal government is expect to cool things down.

This according to Bank of America Merrill Lynch economist Emanuella Enenajor.

And, perhaps more importantly, she noted that “it’s different this time” because the Federal Reserve is in the midst of gradually raising interest rates.

“Economists and investors have become numb to signs of housing excess, as the sector has defied gravity for years,” Ms. Enenajor said.

“However, as the Fed gradually exits its accommodative policy, medium-term rates in Canada could also rise.”

This, she warned, heightens the threat of a correction in Canada’s housing market.

Read the full article over at the Globe and Mail.

 

Mark Carney vs. The Race below Zero

Mark Carney (why does that name sound familiar?), The Current Head of the Bank of England is speaking out against negative interest rates.

While defending ‘monetary stimulus’ he points out that negative interest rates haven’t done much to improve economies and is instead a game of hot potato where everyone loses:

So negative interest rates are effective in only one way: via the exchange rate – or as he says, “via beggar-thy-neighbor” – which might be “an attractive route to boost activity” for an individual country. “But for the world as a whole,” this “transfer of demand weakness elsewhere is ultimately a zero sum game.

Read the full article over at business insider.

Let’s get negative (interest rates)

As the economy deteriorates further Canadians are sitting on a pile of cash. Stock portfolios are holding a record $75 billion in cash.

How do you get people spending and investing again?

Well, you could try negative interest rates.

That kinda worked in the EU. Denmark has driven down their currency which has helped exports. Of course the flip side of negative rates is the risk of housing and stock bubbles.

But how would negative rates most likely affect Canadian consumers?   Higher fees.

“What you might see happening is a negative interest rate masquerading as higher fees,” Milevsky said. “No bank in their right mind would tell a consumer, give us your hundred dollars and we’ll give you 95. That will never happen.”

Read the full article here.

Who wants a 50 cent dollar?

With rumors of another rate cut, Rob Carrick points out 8 reasons he thinks that’s a bad idea. The very first reason? The Looney will fall even further against the US dollar.

For eight years, the Bank of Canada has been trying to encourage economic growth by lowering interest rates. It’s so not working.

In fact, lower rates are hurting a lot of people more than they’re helping. We have to at least acknowledge this as speculation of yet another rate cut grows. It could come as soon as Wednesday, which is the date of the next rate announcement from the Bank of Canada.

The central bank considers the entire economy when it sets rates. Now, let’s look at things from the point of view of everyday people. Here are eight reasons why the Bank of Canada shouldn’t cut rates any lower.

1. The dollar will fall even more: The most disruptive force in personal finance right now is the falling dollar. That’s because it’s hitting us all in a vulnerable spot – our grocery bill. Helpful for exporters, a weak loonie is a tax on families and snowbirds who must change Canadian dollars into U.S. currency. Last week, the dollar fell below 70 cents (U.S.) for the first time since 2003. A lower dollar adds downward momentum.

Read the full list over at the Globe and Mail, although a number of them are directly connected to a dropping looney.

The one group that a dropping looney should help are exporters as their products get cheaper for foreign buyers, but Jayson Myers, the head of the countries largest exporters association says don’t bother.

“Interest rates are low already. A little bit of dollar stability would be better.”

As an interesting aside, in 2002 when the CAD was hitting record lows Treasury Board President Scott Brison said it was

“a pay cut to every Canadian, a drop in our standard of living and a reflection of the fact that Canadians are getting poorer as Americans are getting richer under the watch of the government,”

Scott Brison is now a key cabinet minister and top economic aide to Trudeau.

 A hat-tip to southseacompany for the links.

3.5% Fed rate in 2017?

Here’s a prediction:

“US interest rates will rise – and hit 3.5pc by the end of 2017”, The Telegraph UK

“A momentous change looms large in the US. It seems highly likely that the US Federal Reserve will raise interest rates this week.”

“What makes the probable rise in interest rates so significant is not the size of the increase. The rate rise is likely to be a mere 0.25pc. But this would represent the first rate increase for nearly 10 years. Moreover, we all know that once rates have begun to rise, usually the process does not stop after only one increase.”

Does anyone believe we’ll see a rate increase by the Fed from 0.25% to 3.5% in the next two years?

Why so negative?

As long as our economy remains strong it shouldn’t be necessary to implement negative interest rates.

A link from southseacompany:

Bank of Canada: rates can go to -0.5 percent, but no need now

“The Bank of Canada estimated on Tuesday that it could if needed set its benchmark interest rate as low as minus 0.5 percent, but stressed that the economy was recovering as expected and it did not expect to use such unconventional monetary policy.”

Why are mortgage rates rising?

Southseacompany linked to this article: Why are Canadian mortgage rates rising?

Mortgage rates have inched up slightly lately for apparently no real reason, what’s with that?

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.

Read the full article here for the full analysis.

How big can debt loads get?

It seems like every few months there’s more news about Canadians taking on record levels of debt – a recent story linked to by southseacompany is on this topic:

Evidence Canadians are on a debt-fueled spending spree.

Canada may have spent the first half of the year stuck in an oil-driven recession, but you’d never know it looking at Canadians’ spending habits.

Consumer spending was 6.68 per cent higher in the third quarter of this year compared to a year earlier, payment solutions provider Moneris reported in its latest quarterly report.

British Columbia and Ontario led the way in spending growth, with B.C. up 10.2 per cent and Ontario up 9 per cent.

Even in recession-ravaged Alberta, which lost 2.6 per cent of all its jobs in the past year, consumer spending is up by 0.3 per cent compared to last year.

Any one else getting bored with the repetition? Is it really different here and can Canada pull off this trick indefinately?

Here’s the full article.

Can someone please explain this market?

The following was posted by ‘Whistler or bust?‘ in the comments this weekend:

I will be the first to admit I have been very wrong about the direction of Van RE in the past 2-3 years. That disclaimer said, lets examine some facts to see if there is any upside left:

These are the incomes required to be in each % (Source CBC)

10% of income earners $80,400*
1% of income earners $191,100*
0.1% of income earners $685,000**
0.01% of income earners $2.57 million*

So with the average Vancouver detached home at $1,408,722 (Source Yatter Matters)

A DP of $281,744 is required to buy
PPT is $26,174
Misc Closing $2,000
Total $309,918

Mortgage $1,126,978 @ 2.59 for 5 yrs = $66,072 Annually ( I will note these are record low rates)
Assume 1% Annual Maintenance (This is a standard benchmark over many years) $14,080
Property Taxes – These can vary but lets assume $7,000?

So Annual carrying costs total $87,152 AFTER TAX – I am excluding heating and hydro which vary but in no cases less than $3,000 annually for a detached home

Back to our chart above – Lets assume a 30% avg tax rate for the 10%, 35% for the 1% and 45% for the 0.1 and 0.01%.
After Tax
10% of income earners $56,200* – This house would take up 155% of the after-tax income
1% of income earners $124,215* – This house would take up 70% of after-tax income
0.1% of income earners $376,750* – This house would take up 23% of after tax income
0.01% of income earners $1.413 mil – This house would take up 6% of after- tax income

This is assuming all of these people have $310K for closing. This is assuming they are buying the average house of $1.4 mil. I think we all know what kind of house $1.4 mil gets on the West Side and even on the East side nowadays.

So the conclusion – Even the 1%ers are realistically priced out of the average Van detached home. Only the 0.1% and and above can really afford to buy.

Put another way – 99% of people are priced out. As families combined lets assume 95% are priced out.

So to all you bulls out there, please answer the questions: Is this a healthy market? Is this a market with any upside left?

I think we all know the answer.

$500 would push 16% of homeowners into default

A recent Bank of Montreal poll finds that approximately 1 in 6 Canadian homeowners would be pushed into default if payments rose $500.

According to the bank, 16 per cent of respondents said they would not be able to afford such an increase, while more than a quarter, or roughly 27 per cent, would need to review their budget.

Another 26 per cent said they would be concerned, but could probably handle it.

Such an increase would be generated in the case of a three percentage point hike in interest rates — from 2.75 per cent to 5.75 per cent — on a $300,000 mortgage with a 25-year amortization period.

Given that interest rates are likely to increase in the foreseeable future, the bank said there was no better time to put together a detailed debt management plan.

Read the full article here.