CMHC released its House Price Analysis and Assessment report to the public for the first time last week. The report concludes that Canada’s housing markets “remain broadly consistent” with underlying economic and demographic fundamentals but that home prices in some areas are “slightly higher” than those factors would suggest.
 

RBC published its latest quarterly Housing Trends and Affordability report last week. It says that affordability “predominantly improved” in the third quarter due to rising incomes and continuing low mortgage rates and a drop in utility rates.
 

Statistics Canada reported on Friday that Canada’s GDP grew at an annualized rate of 2.8% in the third quarter. That is down from 3.6% in the second quarter but more than the 2.1% which economists were expecting.
 

The benchmark government of Canada five year bond yield ended the week at 1.37%, down sharply from 1.52% the previous week.  The next Bank of Canada rate announcement is scheduled for this Wed, Dec. 3, 2014.

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The Week in Economic and Real Estate News

The Canadian Real Estate Association published national resale data for October early last week. Both sales volumes and average prices were about 7% higher than a year ago. The MLS Home Price Index rose by 5.5%.

CAAMP’s Fall survey report and analysis was published last week. It forecasts that the rate of growth in mortgage credit in Canada will likely slow over the next year. 

CIBC Economics published research last week which looks behind the official immigration statistics and indicates that the number of non-permanent residents in Canada has been significantly under-counted, making suggestions of overbuilding less valid. 

Statistics Canada released inflation data for October on Friday. Headline inflation was 2.4% (annualized) and core inflation (which excludes some volatile items) was 2.3%, well above the Bank of Canada’s estimate. 

The benchmark government of Canada five year bond yield ended last week at 1.52%, unchanged from the previous week.

This is an old article I had on file from earlier this year that provides a good summary of how the Bank of Canada’s rate affects mortgage rates.  This article was from January so the reference and comments to market and rates may be different from where we stand today.  Not far off though in my opinion. 

Why are interest rates in focus at the moment?

Borrowing rates are garnering a lot of attention right now because there’s much uncertainty about everything from the housing market to what direction the Canadian economy is headed in. Big banks have begun lower mortgage rates again as sales activity has slowed and competition for fewer borrowers has picked up.

The Bank of Canada meanwhile is maintaining its trend-setting benchmark interest rate at 1.0 per cent. That rate is what influences lending rates among the banks and there has been speculation that the BoC could actually cut rates in a bid to juice a sluggish economy. But with Canadian households already highly indebted, officials are hesitant to create more borrowing room.

How does the Bank of Canada rate affect borrowing rates from the bank?

Lenders set their prime rates, or the minimum interest they charge their customers, based off the BoC’s key rate. “The big banks peg their prime rate against that rate, and that prime rate is the best rate a bank will lend their best customers,” says Kelvin Mangaroo of ratesupermarket.ca, a site that tracks consumer borrowing rates.

With the BoC rate at 1.0 per cent, the private lenders’ prime rate is sitting at 3.0 per cent. These rates are extraordinarily low by historical standards, after central banks slashed benchmark interest rates to near zero during the global downturn to help get credit flowing again.

One unintended consequence of the present ultra-low interest rate environment for economies like Canada’s, which is thought to have a sturdier financial system compared to others, has been a household borrowing boom that’s found an outlet in a now very pricey real estate market financed generously with debt.

If excessive borrowing is a concern, why doesn’t the BoC raise its rate?

With current rates so low, a hike of even a modest amount – say half a percentage point, or 0.5 per cent – would jack mortgage and other loan payments by a significant degree, experts say.

A rise of 0.7 per cent on a loan carrying an interest rate of 3.5 per cent, for example, would mean a hike of 20 percent on your monthly interest payment. Could you afford that? Without scaling back other spending? The one-third of Canadian mortgage holders who have variable rate mortgages would immediately feel the pinch.

Why are banks cutting their mortgage rates?

You may have noticed that the big banks, led first by Royal Bank of Canada but quickly matched by Scotia, BMO and today, TD, are once again cutting their fixed five-year rates on home loans. Mangaroo says that because their own funding rates have fallen in recent weeks they can afford to pass those lower rates onto Joe Homebuyer. The banks are also fighting with themselves and cut-rate broker lenders over a shrinking pool of borrowers as consumers hit their limit on how much they can borrow, experts say.

While the Bank of Canada overnight rate doesn’t directly influence mortgage rates, a cut today would have put even more indirect downward pressure on home lending rates. Policy-makers have expressed ongoing concern about the effect higher rates will have on homebuyers who have taken on huge mortgages at extraordinarily low lending rates.

Will interest rates rise or fall this year?

It’s looking increasingly like interest rates won’t be heading higher anytime soon, according to experts. “From a consumer perspective, it looks like low interest rates are going to be here to stay for the next little while,” Mangaroo said.

“We remain comfortable with our forecast for interest rate hikes to be a long way off on the horizon, likely in the second half of 2015,” economists at TD Bank said Wednesday.

Whether they fall further will depend on the performance of the economy. A weakening economic picture could prompt the Bank of Canada to actually cut its rate to below 1 per cent again, but it also risks continuing a borrowing spree households can likely ill afford, experts say.

With the summer season now in full swing, last week was slow in terms of real estate and mortgage news but Canada’s major real estate boards will report on June results later this week. Most observers are expecting a continuation of May’s strong sales figures.

Re/Max published its Recreational Property Report last week which shows healthy activity in recreational property markets across the country after a slow start to the traditional sales season. 

Canada’s new anti-spam law comes into effect tomorrow. Generally speaking, electronic messages intended to encourage participation in a commercial activity can no longer be sent without the consent of the recipient, starting tomorrow. 

The benchmark government of Canada five year bond yield ended the week at 1.56%, down from 1.60% the previous week.

By and large, the 5-year fixed mortgage rate follows the pattern of 5-year Canada Bond Yields, plus a spread. Bond yields are driven by economic factors such as unemployment, export and inflation.

When Canada Bond Yields rise, sourcing capital to fund mortgages becomes more costly for mortgage lenders and their profit is reduced unless they raise mortgage rates. The reverse is true when market conditions are good.

In terms of the spread between the mortgage rates and the bond yields, mortgage lenders set this based on their desired market share, competition, marketing strategy and general credit market conditions.

Source: All data percentages were taken from CAAMP “Annual State of the Residential Mortgage Market in Canada” 2010

The Canadian Real Estate Association published resale data for May last week with most markets seeing a healthy rise in sales volumes. Average prices across the country were up in May by more than 7% year-over-year to $416,584.

CMHC released results of its Mortgage Consumer Survey last week. Brokers are seeing growing market share and more than three quarters of consumers are now researching mortgages online before contacting a broker or a lender.

Canada’s inflation rate moved above 2% for the first time in more than two years, as reported by Statistics Canada on Friday. The Canadian dollar moved up to 93 cents US on the news.  According to one of CIBC’s analysts last week, they believe we may see an increase to our Overnight Target rate at the next announcment from Bank of Canada.  Although it’s just an opinion, always interesting to see the thoughts from these analysts. 

The benchmark government of Canada five year bond yield ended the week at 1.60%, up slightly from 1.58% the previous week.

We often encounter a lack of awareness with clients when it comes to mortgage completion and vacationing, that I’m hoping to shed some light as to why it’s a good idea to vacation after the mortgage is complete.  There seems to be a mis-conception that people are free to go on vacation once the mortgage is approved and you’ve signed the documents. 

As a reminder, it’s best to remain in town until your mortgage and real estate transaction are complete.  Often there may be last minute requests from the lawyer or bank and if you’re not in town to deal with them, it may cause additional time and stress for you at closing. 

Here’s a rule of thumb to help avoid additional stress;  If you are in the process of taking a new mortgage on your new or existing home, please ensure you are in town during the closing process.  You need to sign at a lawyers office a couple days prior to closing and your file will not complete on time if you are not available for the required signatures.  Stay home until the mortgage closes and take as many or as long of a vacation you choose once it completes.  Otherwise you will cause unnessesary stress on yourself and your family if there is an unforseen request made by your lawyer that you no longer are able to deal with due to being out of town. 

That being said, when you do take your well deserved vacation….Enjoy!!

The Week in Economic and Real Estate News

CMHC reported last week that housing starts in Canada were trending higher in May compared to April. Builders continue to manage their activities according to demand and analysts suggest that current levels of starts are within the range supported by market fundamentals.

According to the Teranet House Price Index, May saw modest Canadian home price increases with the index reaching a new high. Only 3 of the 11 major markets tracked saw new highs.

RBC Economics published its latest Economic and Financial Market Outlook last week. It predicts solid growth in Canada over the next two years but the housing market is expected to slow and provide limited support to the economy.

The benchmark government of Canada five year bond yield ended the week at 1.58%, unchanged from the previous week.

This time of year always brings questions about property taxes.  Most people have received notices at this point and here are a couple reminders:

If you live in your property, you need to claim the Home Owners Grant.  Usually column B on your notice.  You can often claim the grant online on your cities website or you can do it at city hall. 

If you do not claim the grant, you will receive a bill in August for the $570 due for not claiming it. 

If your lender collects taxes for you, they will pay your taxes automatically for you and you don’t need to do anything to prompt them.  You will receive a notice from your bank in August confirming what they paid on your behalf and let you know if that is any sort of adjustment made to your regular tax payment. 

If you don’t have your lender or the city collect your taxes monthly, then you will need to pay your property taxes by July 2 of this year and that can be done via online banking, in branch with your bank or paid directly to city hall. 

If you have questions or would like more clarification around this, feel free to contact me anytime at 604-729-7940.