Mortgage Rates, DEBT DOESN'T POSE BIG RISK: CIBC

| Friday, 18 December 2009

Following a week of more housing bubble speculation, CIBC released a report <http://research.cibcwm.com/economic_public/download/sdec09.pdf> stating Canada is not at risk of a "U.S.-style housing and mortgage blow-up", adding the Bank of Canada should not move prematurely to raise interest rates.

"Historically, it's clear that mortgage arrears rates are highly correlated with the unemployment rates, with little or no correlation with changes in interest rates," wrote CIBC chief economist Benjamin Tal.

Tal listed a number of other "buffers" protecting Canada from a U.S.-style housing and mortgage crisis, including the fact that many households with a debt-to-service (DSR) ratio greater than the standard 40 per cent have already accumulated a significant amount of equity in their homes. The report said out of the five million Canadian households with mortgages, only an estimated 350,000 have a mortgage with a LTV greater than 80 per cent and a DSR greater than 40 per cent.

The report also noted that most at-risk and lower-income borrowers have already locked into fixed-rate mortgages. This differs from the U.S., where a large number of low-income households opted for variable-rate mortgages.

"There is nothing in Canada akin to the huge excesses in lending that led up to the housing and mortgage crisis experienced in the U.S. in the past few years," Tal wrote. "Existing debt burdens appear to be manageable for the vast majority of Canadians ... the magnitude of the problem is not big enough to justify a premature tightening move by the Bank of Canada."

Canada Housing Resales Record November (update2)

By Alexandre Deslongchamps
Dec. 15 (Bloomberg) -- Canadian home resales rose to a record 46,450 units in November, as the housing market helped to pull the economy out of recession, a realtor group said.
Seasonally adjusted sales in November climbed 67 percent from a year earlier, the Canadian Real Estate Association said in a statement. <http://www.crea.ca/public/news_stats/pdfs/Nov09_e.pdf>
“The Canadian housing market remains on fire as the combination of low mortgage rates and still favorable buying conditions continues to spur buying activity,” Millan Mulraine <http://search.bloomberg.com/search?q=Millan+Mulraine&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1> , an economist with TD Securities in Toronto, said in a note to clients.
The Bank of Canada has predicted growth in housing investment will stay “brisk until early 2010,” and then slow as pent-up demand is satisfied and affordability declines. The bank lowered its benchmark lending rate <http://www.bloomberg.com/apps/quote?ticker=CABROVER%3AIND> to a record 0.25 percent in April to spur domestic demand and pledged to leave it there through June unless the inflation outlook changes.
Canada’s five-year mortgage rate <http://www.bloomberg.com/apps/quote?ticker=CANMORT5%3AIND> was 5.84 percent for most of November and fell to 5.59 percent by the end of the month, near the 58-year low of 5.25 percent set in April, according to Bank of Canada data.
The rebound has prompted some analysts, including Gluskin Sheff & Associates Inc.’s David A. Rosenberg <http://search.bloomberg.com/search?q=David+A.+Rosenberg&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1> , to question whether a bubble is forming in the housing market.
‘Next Closest Thing’
“Housing values are anywhere between 15 percent and 35 percent above levels we would label as being consistent with the fundamentals,” Rosenberg said in a report before today’s report. “If being 15 percent to 35 percent overvalued isn’t a bubble, then it’s the next closest thing.”
The average nationwide price rose 19 percent from last year to C$337,231 ($317,700), the association said in the statement. Seasonally adjusted listings fell 4.8 percent to 79,953 in November from a year ago.
Without adjusting for seasonality, home sales rose to 36,383 units in November, up 73 percent from a year earlier, CREA said.
“The rebound in resale housing activity led the overall Canadian economy out of recession,” CREA President Dale Ripplinger said in the statement.
To contact the reporter on this story: Alexandre Deslongchamps <http://search.bloomberg.com/search?q=Alexandre+Deslongchamps&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1> in Ottawa at adeslongcham@bloomberg.net <mailto:adeslongcham@bloomberg.net> .
Last Updated: December 15, 2009 11:33 EST

Interest Rates May Rise Despite BOC Deadline

Scotia economist warns of bond, mortgage hikes
Jonathan Chevreau, Financial Post Published: Thursday, December 10, 2009
Read more: http://www.nationalpost.com/news/story.html?id=2323217#ixzz0ZhT6MHQc
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Bond yields and mortgage rates could head higher before the Bank of Canada's pledge to hold interest rates steady expires in July, the chief economist at Bank of Nova Scotia said this week.
"There's a very good chance long-term rates will head up before then," Warren Jestin said in Toronto at a briefing sponsored by the Investment Funds Institute of Canada.
He warned new homeowners with variable-rate mortgages not to be influenced by the central bank's neutral statements on rates on Tuesday. The bank has pledged to hold rates at a historic low of 0.25% until the end of the second quarter of next year, inflation conditions permitting.
Read the "fine print" and he believes it's likely three-year and five-year mortgage rates will be higher before July 2010.
Mr. Jestin does not foresee a double-dip recession. "Those who expect renewed recession next spring will be proved wrong." For North America, "2010 is a year we fill in the hole we dug for ourselves in one of the most vicious recessions in our lives." But the global economy will grow at a "slower rate than we'd consider normal a few years ago. We believe expansion won't be that strong in 2011 so we don't see rates continuing up in 2011."
Christopher Probyn, managing director and chief economist for State Street Global Advisors, expects the U.S. Federal Reserve will raise interest rates by 0.75% to 1.5% in the second half of 2010. However, he said inflation may run surprisingly low so the Fed could "be on hold much longer than people anticipate."
The 2008-2009 period was by far the worst economy since the International Monetary Fund started collecting data in 1970. "For the first time, there was a contraction in the global economy." Growth in world gross domestic product fell from over 5% in 2007 to 3% in 2008 but went to -2.5% in 2009.
The low was the first quarter of 2009, when the economy contracted at a rate of 6% annualized. But it was flat in the second quarter and returned to positive growth in the third, "so throughout 2009 there has been progressive improvement."
Mr. Probyn foresees a sustained but "rather gradual" recovery, with GDP expanding 2.5% in 2010. Last week's favorable employment report suggests the next stage in recovery may already have arrived. "Maybe we're very close to achieving stability in the labor market," Mr. Probyn said.
Like Mr. Jestin, he doesn't foresee a double-dip recession in 2010. He said the recovery is more likely to be U-shaped, with some bouncing along the bottom, than the instant rebound of a Vshaped comeback.

Household Debt

From Friday's Globe and Mail Published on Thursday, Dec. 10, 2009 9:45PM EST Last updated on Friday, Dec. 11, 2009 7:21AM EST

Mark Carney is urging prudence among Canadians who are borrowing at super-cheap rates today but may not be able to afford higher payments tomorrow.
Household debt is now the biggest risk to the financial system, even if it is not expected to climb to levels that could cripple bank balance sheets, the central bank said Thursday in its review of the financial system. It used a “stress test'' to show that rising interest rates <http://www.theglobeandmail.com/report-on-business/carney-urges-prudence-on-debt/article1396431/> between mid-2010 and mid-2012 would saddle a growing number of Canadians with unmanageable debt loads.
Mr. Carney, the Bank of Canada <http://www.theglobeandmail.com/report-on-business/carney-urges-prudence-on-debt/article1396431/> governor, who has guided monetary policy throughout the crisis, is relying on consumers to help drive a recovery juiced by his historically low interest rates. Yet he is also warning borrowers and lenders not to go overboard and to think about the consequences of hefty debt in an inevitable environment of rising rates.
The semi-annual report marked the first time the bank has analyzed the risks based on interest rates reaching specific levels.
“Households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates,'' the bank said. “Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations.''
The warning, Mr. Carney's most detailed to date, highlights the delicate position of the 44-year-old central bank chief. With overall inflation forecast to remain low, and the economy still struggling to regain its feet, Mr. Carney has pledged to keep his benchmark rate at just 0.25 per cent until mid-2010. So there's little he can do to temper demand in sectors such as housing, where low mortgage rates have spurred buying.
Central bankers around the world will be trying to find the right moment, and the right pace, to unwind the historic monetary stimulus they undertook to fight the global downturn.
Benjamin Tal, a senior economist at CIBC World Markets and author of a recent report showing that Canadians added $44-billion to their total debt in the first half of the year, said the growth in household debt is a sign of how “efficiently” the central bank's monetary policy has worked.
The Bank of Canada's concern, Mr. Tal said in an interview, “is not up to now, their concern is the next 12 months,'' should low borrowing costs attract another wave of buyers who are overstretched.
“That's why it's really important to basically remind the market that those interest rates will not remain at this rate forever.”
Mr. Carney's report also warned that the increase in global stock prices over the past few months, which economists say helped raise consumer confidence as much as incentives to reinvigorate the housing market, may be overdone should corporate earnings not match expectations. Should investments shrink, it would be even harder for some homeowners to pay down debt.
Cheap mortgage rates, and fiscal incentives such as allowing first-time home buyers to use more of their registered retirement savings as a down payment, have fuelled a buying spree.
Existing home sales in October were 74 per cent higher than a bottom reached in January, while home prices were up 21 per cent from a year earlier. And BMO Nesbitt Burns said yesterday that November sales in Canada's seven biggest cities indicate a gain of 90 per cent from last year, led by Vancouver and Toronto.
Mr. Carney and his deputies have not raised the spectre of a bubble in the housing market. In fact, in late October he told lawmakers in Ottawa that he attributes much of the jump in home purchases to Canadians who had delayed plans to buy during the darkest days of the recession.
For the time being, reminding Canadians to be “prudent” may be all Mr. Carney can do. Raising interest rates sooner than the middle of next year might cool the housing sector, but could carry the cost of sending the strong Canadian dollar even higher, causing more problems for the country's exporters.
Eric Lascelles, a top strategist at TD Securities, said the central bank's warning is more likely to be addressed through regulations, such as increasing the minimum down payment or shortening the maximum acceptable term, steps taken just last year by the Harper government.
Finance Minister Jim Flaherty told reporters Thursday that the government is “watching and monitoring'' and would consider tightening rules if necessary, but currently has no plans to do so.
“People have to make sure that the mortgages they take out today either have a fixed rate or that they'll be able to handle increases in that mortgage rate later on,'' he said. “That's just prudent household management.''
The central bank said in its report that household debt will be “a key vulnerability over time,'' and in the stress test model assumed that the ratio of debt to income would rise from 1.42, or 142 per cent, in the second quarter of this year to 1.60, or 160 per cent, by mid-2012.
“Although Canadian household debt as a share of personal disposable income is lower than in the United States and the United Kingdom, its upward trend implies that households have a growing vulnerability to additional adverse shocks,'' the bank said.
At the same time, low interest rates <http://www.theglobeandmail.com/report-on-business/carney-urges-prudence-on-debt/article1396431/> have helped Canadians cut the amount of income that they need to devote to servicing debt, the bank said.
The proportion of households with debt-service ratios above 40 per cent of income, would rise to 8.5 per cent by the second quarter of 2012 assuming the central bank's key rate is 3.2 per cent, the Bank of Canada said. The share would increase to 9.6 per cent with a benchmark rate of 4.5 per cent. That compares to 6.1 per cent over the past decade and a peak of 7.4 per cent in 2000.
That said, the central bank said Canadian banks currently have more than enough capital on hand to absorb potential losses, suggesting that even the worst-case scenario in the stress test would fall short of risking a collapse of the financial system <http://www.theglobeandmail.com/report-on-business/carney-urges-prudence-on-debt/article1396431/> .
In its last review published in June, policy makers used a model based on a more severe recession and a resulting increase in unemployment.
With files from Bill Curry and Kevin Carmichael in Ottawa

Informed Home Buyer/Seller Issue

Assessing a property's long term potential and Surviving Bidding Wars

Interest Rates

Ottawa — Reuters Published on Sunday, Dec. 06, 2009 10:57AM EST Last updated on Sunday, Dec. 06, 2009 4:56PM EST

The Bank of Canada <http://www.theglobeandmail.com/report-on-business/carney-may-try-to-stifle-rate-speculation/article1390435/> is widely expected to keep its hands off interest rates Tuesday, holding them at near zero and committing to do so until at least July, despite growing evidence the economy is kicking back to life.
Fears of prolonged economic stagnation eased Friday with a report showing employers hired five times as many workers as expected. The data supported the Bank of Canada's view that economic growth <http://www.theglobeandmail.com/report-on-business/carney-may-try-to-stifle-rate-speculation/article1390435/> will speed up in the fourth quarter after a disappointing third-quarter, when it barely crept out of recession with tepid 0.4 per cent annualized growth.
All 12 of Canada's primary securities dealers <http://www.theglobeandmail.com/report-on-business/carney-may-try-to-stifle-rate-speculation/article1390435/> , surveyed by Reuters after the jobs report Friday, forecast the central bank would hold its overnight target rate unchanged at 0.25 per cent at its final policy-setting meeting of the year.
The bank releases its rate decision and accompanying statement at 9 a.m. ET Tuesday.
Two-thirds of the traders think the bank will follow through on its pledge to hold rates at that level through mid-2010, conditional on inflation staying on track.
“They will lean over backward to make their conditional forecast come true,” said David Laidler, an economist with the C.D. Howe Institute.
“What they might start doing between now and June or July, is they might start making more and more public noises about the need to raise interest rates <http://www.theglobeandmail.com/report-on-business/carney-may-try-to-stifle-rate-speculation/article1390435/> immediately afterward. That's the kind of thing you'll see but not in this announcement,” he said.
Others think the bank's job will be to dampen any speculation that it will abandon its zero-rate policy at the earliest opportunity.
“We expect the bank to attempt to temper early rate hike expectations at next Tuesday's policy announcement,” said Sheryl King, head of Canadian economics and strategy at Bank of America Merrill Lynch.
The Bank of Canada will be pleased with the November job gains, not just because its prophecy of a robust 3.3 per cent fourth quarter may be fulfilled but because it lessens the bank's concerns about the strong Canadian dollar hindering a robust recovery.