Garry Marr
Finance Minister Jim Flaherty would consider takingCanada Mortgage Housing Corp. out of the mortgage default insurance business he told theNational Post’s editorial board.
‘I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada’
“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.”
He offered no timetable on when the government could get out of mortgage default insurance business, just offering it up as a possibility. “We have a list of Crowns, Crown agencies that are being reviewed,” said Mr. Flaherty.
In a wide-ranging discussion on the housing market, he said he has no plans to increase CMHC’s current $600-billion loan limit, ruled out any possibility of regulating foreign real estate investment and made it clear his focus is on the governance of Crown corp. which controls about 75% of the mortgage default insurance business in the country.
“For some time now I’ve had concerns about the large commercial role that CMHC now plays. CMHC has become a significant Canadian financial institution. As you know, historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that.”
Thefinance minister moved this week to tighten control of CMHC, placing it under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions. Previously, it fell under the watch of the Department of Human Resources and Skills Development.
The shift comes with CMHC closing in on the $600-billion limit the government has for how much of its portfolio will be backstopped by the taxpayer. Three years ago it was $450-billion.
By law, consumers must buy mortgage default insurance if they have less than a 20% down payment on a home and are borrowing from a federally regulated financial institution.
But CMHC has not been insuring just those loans, it has agreed to step in and insure loans — with the premiums paid by financial institutions — for lower-ratio mortgages, or what is called “portfolio” or “bulk insurance.”
He said the head of OFSI will now have the power to look at the books of CMHC the way she looks at the books of other private financial institutions in Canada. Already, the government has placed the deputy minister of finance on the board of CMHC.
“We have quite a bit of information about what the banks do and don’t do. [Superintendent] Julie Dickson had to go to some of them in the last year and say ‘you must ensure that your board policies on residential lending mortgages are carried through,” he said. “She’s quite a strict supervisor which is good for our country.”
OSFI has already been looking into CMHC and established one of the key issues for the organization is governance. “OFSI are certainly of the view there are necessary governance improvements we can do,” said Mr. Flaherty.
He made it clear there are no plans to extend CMHC’s $600-billion limit. “For a while,” said Mr. Flaherty, about how long the Crown corporation would have to exist under that limit. It was at $541-billion at the end of the third quarter of last year but business has slowed as the agency culled its portfolio business.
Mr. Flaherty’s own opinion on the housing market is that has been fuelled by low interest rates which he says he does not control. “Cheap money,” he said, noting he did talk to the banks about being unhappy about their mortgage rate wars earlier this year which had reduced the rate on a five-year closed mortgage to below 3% — an all-time low.
As to whether the market has been in part fueled by foreign buyers, as many in the real estate industry have suggested, Mr. Flaherty said his government will not get involved in that aspect of the market. “No,” he said, pausing to emphasize the point. “I don’t think there is [a role]. They key in housing from my point of view is to get the best information on housing.”
Monday 30 April 2012
Friday 27 April 2012
Government fixes mortgage market, but will it work?
Once again Ottawa has stepped in to slow what it believes is an overheated housing market, this time by putting theCanada Mortgage and Housing Corp. under tighter oversight and banning the use of CMHC insurance on covered bonds.
But what are the odds the measures will succeed? Certainly the last few efforts haven’t had much impact.
Since the financial crisis Finance Minister Jim Flaherty has tightened the rules around CMHC insurance three times, shortening the maximum amortization, raising the minimum down payment and various other tweaks. Last month the federal banking regulator announced proposed new guidelines requiring banks to take a lot more care around real estate lending, especially home equity lines of credit (HELOCs), one of the most successful products in the history of the industry.
Yet home prices continue to rise, grinding steadily higher in most major markets and prompting commentators such as Bank of Canada Governor Mark Carney to warn of a possible bubble.
For their part, proponents of Ottawa’s strategy claim it’s not surprising that the mortgage market hasn’t leveled off given that the government’s moves are aimed at achieving a gentle landing as opposed to slamming on the brakes, potentially leading to dire economic consequences.
The idea is that by gradually tightening up lending standards around CMHC insured mortgages, the “froth” will be removed from the market and equilibrium will return.
Problem is, Canadian real estate is anything but a normal market.
A crown corporation, the CMHC has already provided insurance on roughly $600-billion of the roughly $1.1-trillion of mortgages outstanding in this country. The purpose of that insurance is to allow wider access to the housing market.
Since the borrower pays for the insurance, the banks are able to lend the money at no additional cost compared to conventional uninsured mortgages. Indeed, because they’re ultimately backed by the taxpayer, CMHC insured mortgages are actually safer for lenders than conventional uninsured home loans, requiring less capital. They’re also much more easily packaged up into mortgage backed securities.
Despite all the moves it’s taking to limit the issuance of CMHC insurance, the government has so far done nothing to dampen the fundamental appeal of taxpayer guaranteed home loans for banks, who are one of the most important players in all this.
Just how significant the mortgage business is for the banks was made apparent in the near record earnings the big banks reported last year, as outsize revenue from consumer lending at their domestic operations offset declines in other businesses.
Once all the recent changes have come into effect banks will still be inclined to favour customers with insured mortgages — those folks who in a normally functioning market should have the toughest time getting financing.
Peter Routledge, an analyst at National Bank Financial, puts it this way. Imagine two customers trying to borrow the same amount to buy a house, except one customer wants to make a 40% downpayment while the other can afford only 15% which means he has to take out insurance. All else being equal, the less credit-worthy borrower will be the more likely to get the loan, according to Mr. Routledge, because it’s more profitable to the lender.
Posted in: FP Street
But what are the odds the measures will succeed? Certainly the last few efforts haven’t had much impact.
Since the financial crisis Finance Minister Jim Flaherty has tightened the rules around CMHC insurance three times, shortening the maximum amortization, raising the minimum down payment and various other tweaks. Last month the federal banking regulator announced proposed new guidelines requiring banks to take a lot more care around real estate lending, especially home equity lines of credit (HELOCs), one of the most successful products in the history of the industry.
Yet home prices continue to rise, grinding steadily higher in most major markets and prompting commentators such as Bank of Canada Governor Mark Carney to warn of a possible bubble.
For their part, proponents of Ottawa’s strategy claim it’s not surprising that the mortgage market hasn’t leveled off given that the government’s moves are aimed at achieving a gentle landing as opposed to slamming on the brakes, potentially leading to dire economic consequences.
The idea is that by gradually tightening up lending standards around CMHC insured mortgages, the “froth” will be removed from the market and equilibrium will return.
Problem is, Canadian real estate is anything but a normal market.
A crown corporation, the CMHC has already provided insurance on roughly $600-billion of the roughly $1.1-trillion of mortgages outstanding in this country. The purpose of that insurance is to allow wider access to the housing market.
Since the borrower pays for the insurance, the banks are able to lend the money at no additional cost compared to conventional uninsured mortgages. Indeed, because they’re ultimately backed by the taxpayer, CMHC insured mortgages are actually safer for lenders than conventional uninsured home loans, requiring less capital. They’re also much more easily packaged up into mortgage backed securities.
Despite all the moves it’s taking to limit the issuance of CMHC insurance, the government has so far done nothing to dampen the fundamental appeal of taxpayer guaranteed home loans for banks, who are one of the most important players in all this.
Just how significant the mortgage business is for the banks was made apparent in the near record earnings the big banks reported last year, as outsize revenue from consumer lending at their domestic operations offset declines in other businesses.
Once all the recent changes have come into effect banks will still be inclined to favour customers with insured mortgages — those folks who in a normally functioning market should have the toughest time getting financing.
Peter Routledge, an analyst at National Bank Financial, puts it this way. Imagine two customers trying to borrow the same amount to buy a house, except one customer wants to make a 40% downpayment while the other can afford only 15% which means he has to take out insurance. All else being equal, the less credit-worthy borrower will be the more likely to get the loan, according to Mr. Routledge, because it’s more profitable to the lender.
Posted in: FP Street
Thursday 26 April 2012
OSFI to supervise CMHC
Gordon Isfeld, Financial Post Staff Apr 26, 2012
OTTAWA — Finance Minister Jim Flaherty confirmed Thursday the government will tighten regulations for Canada’s housing agency in a bid to help limit the risk to financial institutions amid a red-hot housing market.
Mr. Flaherty said the new measures will “enhance the government and oversight framework for Canada Mortgage and Housing Corp.”
“These proposed changes are part of the government’s continuous efforts to strengthen the housing finance system,” he said. “They will contribute to the stability of the housing market and benefit all Canadians.”
Mr. Flaherty said the Office of the Superintendent of Financial Institutions will be responsible for reviewing and monitoring CMHC’s commercial activities.
CMHC is responsible for insuring consumer mortgages and guarantees mortgage-backed securities issued by banks.
CMHC currently has a $600-billion loan limit, which the government increased three years ago from $450-billion.
The federal government currently guarantees the full value of mortgages insured by CMHC and 90% of loans insured by private firms.
The legislation was tabled Thursday in Parliament.
On Wednesday, Mr. Flaherty told reporters “the issue that pushes them near their lending limit is the desire of some of the financial institutions to purchase portfolio insurance for their low ratio mortgages,” adding “that’s not the way most people usually think of CMHC.”
The changes were alluded to in the government’s March 29 budget.
“The government will propose legislative amendments to strengthen oversight of CMHC and to ensure its commercial activities are managed in a manner that promotes the stability of the financial system,” according to the budget document.
“A legislative framework will support financial stability by helping lenders find new sources of funding and by making the market for Canadian covered bonds more robust,” it said.
Queen’s University finance professor Louis Gagnon said Thursday: “I have been concerned about the CMHC for a long time. I believe that the federal government’s plan to bring CMHC under the direct supervision of the Office of the Superintendent of Financial Institutions (OSFI) is long overdue.”
OTTAWA — Finance Minister Jim Flaherty confirmed Thursday the government will tighten regulations for Canada’s housing agency in a bid to help limit the risk to financial institutions amid a red-hot housing market.
Mr. Flaherty said the new measures will “enhance the government and oversight framework for Canada Mortgage and Housing Corp.”
“These proposed changes are part of the government’s continuous efforts to strengthen the housing finance system,” he said. “They will contribute to the stability of the housing market and benefit all Canadians.”
Mr. Flaherty said the Office of the Superintendent of Financial Institutions will be responsible for reviewing and monitoring CMHC’s commercial activities.
CMHC is responsible for insuring consumer mortgages and guarantees mortgage-backed securities issued by banks.
CMHC currently has a $600-billion loan limit, which the government increased three years ago from $450-billion.
The federal government currently guarantees the full value of mortgages insured by CMHC and 90% of loans insured by private firms.
The legislation was tabled Thursday in Parliament.
On Wednesday, Mr. Flaherty told reporters “the issue that pushes them near their lending limit is the desire of some of the financial institutions to purchase portfolio insurance for their low ratio mortgages,” adding “that’s not the way most people usually think of CMHC.”
The changes were alluded to in the government’s March 29 budget.
“The government will propose legislative amendments to strengthen oversight of CMHC and to ensure its commercial activities are managed in a manner that promotes the stability of the financial system,” according to the budget document.
“A legislative framework will support financial stability by helping lenders find new sources of funding and by making the market for Canadian covered bonds more robust,” it said.
Queen’s University finance professor Louis Gagnon said Thursday: “I have been concerned about the CMHC for a long time. I believe that the federal government’s plan to bring CMHC under the direct supervision of the Office of the Superintendent of Financial Institutions (OSFI) is long overdue.”
Wednesday 25 April 2012
Federal Reserve keeps key interest rate on hold, offers few clues on stimulus
WASHINGTON – The U.S. Federal Reserve on Wednesday repeated its promise to leave interest rates on hold until at least late 2014 but offered few clues into whether it might offer additional stimulus later this year.
The Fed described the economy as expanding moderately, just as it did in March, and said the unemployment rate had declined but remains elevated.
Officials noted a pick up in inflation but said it was largely attributable to energy cost hikes that will affect price growth only temporarily.
Economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014,” the central bank said in its policy statement.
Richmond Fed President Jeffrey Lacker again dissented against the decision, saying he believed rates would need to be raised before that time frame.
As Fed officials gathered on Wednesday, the government reported that orders for long-lasting manufactured goods plunged 4.2% in March, the biggest drop since the economy was nose-diving in early 2009.
The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.
Investors wishing for clues about how the central bank views the June end-date of Operation Twist, its latest effort to keep down long-term rates, were disappointed.
U.S. economic growth has been just firm enough to weaken the case for additional stimulus through Fed purchases of government or mortgage bonds. Gross domestic product expanded at a 3 percent annual rate in the fourth quarter but is seen slowing to around a 2.5 percent pace in the first three months of this year.
The Fed will release its latest round of quarterly forecasts at 2 p.m. (1800 GMT) and Fed Chairman Ben Bernanke will follow with a news conference at 2:15 p.m. (1815 GMT), where he will likely be peppered with questions on the chances of more easing.
Most analysts think Bernanke will do whatever he can to keep his options open.
Since the central bank’s last round of GDP, unemployment and inflation forecasts in January, the U.S. jobless rate has come down to 8.2% from 8.5%, and the financial situation in Europe has stabilized somewhat, although it is still troubling.
In January, the Fed saw the economy growing between 2.2% and 2.7%. That range may be revised a bit higher. At the same time, the unemployment rate forecast will likely shift down from January’s 8.2% to 8.5% range.
Policymakers will also offer individual projections for when the first interest rate increase should come and how quickly borrowing costs should rise – though these will appear on charts that do not link them to specific officials’ names.
Traders are currently betting the Fed will begin raising rates in April 2014, with short-term U.S. futures contracts suggesting they see a 56% chance of a rate hike then.
In response to the deepest recession in generations, the Fed lowered benchmark overnight rates effectively to zero in December 2008 and more than tripled its balance sheet by purchasing some US$2.3-trillion in government and mortgage bonds to keep long-term borrowing costs down.
According to a Reuters poll published last week, economists have dialed down expectations for a third round of bond purchases. The respondents saw a 30% chance of more bond buys, down from 33% in a poll in March.
A report early this month that showed job growth slowed sharply in March kept some hope of easing alive, and economists will look eagerly to the next round of jobs data on May 4 for more clues on where U.S. monetary policy may be heading.
© Thomson Reuters 2012
The Fed described the economy as expanding moderately, just as it did in March, and said the unemployment rate had declined but remains elevated.
Officials noted a pick up in inflation but said it was largely attributable to energy cost hikes that will affect price growth only temporarily.
Economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014,” the central bank said in its policy statement.
Richmond Fed President Jeffrey Lacker again dissented against the decision, saying he believed rates would need to be raised before that time frame.
As Fed officials gathered on Wednesday, the government reported that orders for long-lasting manufactured goods plunged 4.2% in March, the biggest drop since the economy was nose-diving in early 2009.
The data was the latest to suggest the economy lost momentum as the first quarter drew to a close.
Investors wishing for clues about how the central bank views the June end-date of Operation Twist, its latest effort to keep down long-term rates, were disappointed.
U.S. economic growth has been just firm enough to weaken the case for additional stimulus through Fed purchases of government or mortgage bonds. Gross domestic product expanded at a 3 percent annual rate in the fourth quarter but is seen slowing to around a 2.5 percent pace in the first three months of this year.
The Fed will release its latest round of quarterly forecasts at 2 p.m. (1800 GMT) and Fed Chairman Ben Bernanke will follow with a news conference at 2:15 p.m. (1815 GMT), where he will likely be peppered with questions on the chances of more easing.
Most analysts think Bernanke will do whatever he can to keep his options open.
Since the central bank’s last round of GDP, unemployment and inflation forecasts in January, the U.S. jobless rate has come down to 8.2% from 8.5%, and the financial situation in Europe has stabilized somewhat, although it is still troubling.
In January, the Fed saw the economy growing between 2.2% and 2.7%. That range may be revised a bit higher. At the same time, the unemployment rate forecast will likely shift down from January’s 8.2% to 8.5% range.
Policymakers will also offer individual projections for when the first interest rate increase should come and how quickly borrowing costs should rise – though these will appear on charts that do not link them to specific officials’ names.
Traders are currently betting the Fed will begin raising rates in April 2014, with short-term U.S. futures contracts suggesting they see a 56% chance of a rate hike then.
In response to the deepest recession in generations, the Fed lowered benchmark overnight rates effectively to zero in December 2008 and more than tripled its balance sheet by purchasing some US$2.3-trillion in government and mortgage bonds to keep long-term borrowing costs down.
According to a Reuters poll published last week, economists have dialed down expectations for a third round of bond purchases. The respondents saw a 30% chance of more bond buys, down from 33% in a poll in March.
A report early this month that showed job growth slowed sharply in March kept some hope of easing alive, and economists will look eagerly to the next round of jobs data on May 4 for more clues on where U.S. monetary policy may be heading.
© Thomson Reuters 2012
Tuesday 24 April 2012
Bank of Canada takes aim at home equity lines of credit
The Bank of Canada sounded the alarm on growing household debt on Wednesday, taking aim in particular at the growing tendency of Canadians to take out lines of credit using home equity.
While the Bank has repeatedly warned on household debt levels in the past, on Wednesday it provided more detail about the type of debt Canadians are taking on, including its concerns about the rapid growth of so-called HELOC’s (home equity lines of credit).
The issue, as with any debt, is if these innovations or this access to debt is taken too far
“Like any financial innovation, home equity lines of credit have both positives and negatives associated with them,” Bank of GovernorMark Carney said during a press conference in Ottawa. “The issue, as with any debt, is if these innovations or this access to debt is taken too far.”
He pointed to the concerns raised by the country’s banking regulator, the Office of the Superintendent of Financial Institutions, which said earlier this year that some lenders were too lenient in providing home equity loans.
Mr. Carney’s comments build upon the release of the Bank of Canada’sMonetary Policy Report on Wednesday, a quarterly economic overview compiled by the central bank. The report highlights the explosive growth of HELOC’s and mortgage refinancings in the past decade, which have surged to $64-billion as of 2010 from $8-billion in 2001.
Canadians appear to be using such loans for two primary reasons, the Bank said. They are either paying down other higher interest loans, such as credit card debt, or using the money for everyday spending.
While the Bank has repeatedly warned on household debt levels in the past, on Wednesday it provided more detail about the type of debt Canadians are taking on, including its concerns about the rapid growth of so-called HELOC’s (home equity lines of credit).
The issue, as with any debt, is if these innovations or this access to debt is taken too far
“Like any financial innovation, home equity lines of credit have both positives and negatives associated with them,” Bank of GovernorMark Carney said during a press conference in Ottawa. “The issue, as with any debt, is if these innovations or this access to debt is taken too far.”
He pointed to the concerns raised by the country’s banking regulator, the Office of the Superintendent of Financial Institutions, which said earlier this year that some lenders were too lenient in providing home equity loans.
Mr. Carney’s comments build upon the release of the Bank of Canada’sMonetary Policy Report on Wednesday, a quarterly economic overview compiled by the central bank. The report highlights the explosive growth of HELOC’s and mortgage refinancings in the past decade, which have surged to $64-billion as of 2010 from $8-billion in 2001.
Canadians appear to be using such loans for two primary reasons, the Bank said. They are either paying down other higher interest loans, such as credit card debt, or using the money for everyday spending.
Monday 23 April 2012
What tamer inflation means for interest rates
David Ljunggren, Reuters
Reuters
The Bank of Canada, which targets a 2.0% inflation rate, this week made it clear it might have to start raising rates from near-historical lows because of reduced slack in the economy and increased underlying inflationary pressures.
OTTAWA — A drop in Canada’s year-on-year inflation rate to an 18-month low in March will not delay interest rate hikes by the Bank of Canada, which is paying closer attention to economic growth, analysts said on Friday.
Statistics Canada said the annual inflation rate fell to 1.9% in March from 2.6% in February, the lowest level since the 1.9% recorded in September 2010. Analysts had forecast a rate of 2.0%.
The Bank of Canada, which targets a 2.0% inflation rate, this week made it clear it might have to start raising rates from near-historical lows because of reduced slack in the economy and increased underlying inflationary pressures.
The central bank has kept rates unchanged since September 2010.
“We now see the bank firmly in a data dependent mode as it considers when and how much of the considerable monetary stimulus currently in place will need to be withdrawn,” said TD Securities strategist David Tulk. “There is nothing in this report in our view that will influence the outlook for monetary policy.”
A Reuters survey of primary market dealers this week showed the median forecast for the timing of the next rate increase had moved to the first quarter of 2013 from the third quarter of 2013.
Statscan said the cost of energy was up 5.1% in the 12 months to March, versus a 7.2% year-over-year rise in February. Food prices were up by 2.2% in the year to March, lower than the 4.1% comparable jump in February.
The closely watched annual core inflation rate dropped to 1.9% in March from 2.3% in February. The core measure strips out prices of volatile items such as fuel and some foodstuff.
“With the economy running closer to full capacity, downward pressure on inflation is likely to be limited,” said Dawn Desjardins, assistant chief economist at RBC Economics.
The Canadian dollar CADD4 lost some early gains against the U.S. dollar shortly after the data was released but by 9.45 am (1345 GMT) had recovered to C$0.9913, or $1.0048, its pre-release level.
The central bank now predicts overall inflation of 2.0% in the second quarter of 2012, rising to 2.2% in both the third and fourth quarters. It has also increased growth forecasts for the first three quarters of this year.
“This report won’t alter the Bank of Canada’s recent more hawkish tone. With the output gap gradually closing and core inflation running around 2%, some withdrawal of the considerable monetary stimulus is certainly looking appropriate,” said BMO Capital Markets economist Robert Kavcic.
Separately, Statistics Canada said the leading indicator rose for the ninth month in a row in March, climbing by 0.4% from February on widespread economic strength.
The increase was slightly less than the 0.5% predicted by market operators. Eight of the indicator’s 10 components advanced in March.
Reuters
The Bank of Canada, which targets a 2.0% inflation rate, this week made it clear it might have to start raising rates from near-historical lows because of reduced slack in the economy and increased underlying inflationary pressures.
OTTAWA — A drop in Canada’s year-on-year inflation rate to an 18-month low in March will not delay interest rate hikes by the Bank of Canada, which is paying closer attention to economic growth, analysts said on Friday.
Statistics Canada said the annual inflation rate fell to 1.9% in March from 2.6% in February, the lowest level since the 1.9% recorded in September 2010. Analysts had forecast a rate of 2.0%.
The Bank of Canada, which targets a 2.0% inflation rate, this week made it clear it might have to start raising rates from near-historical lows because of reduced slack in the economy and increased underlying inflationary pressures.
The central bank has kept rates unchanged since September 2010.
“We now see the bank firmly in a data dependent mode as it considers when and how much of the considerable monetary stimulus currently in place will need to be withdrawn,” said TD Securities strategist David Tulk. “There is nothing in this report in our view that will influence the outlook for monetary policy.”
A Reuters survey of primary market dealers this week showed the median forecast for the timing of the next rate increase had moved to the first quarter of 2013 from the third quarter of 2013.
Statscan said the cost of energy was up 5.1% in the 12 months to March, versus a 7.2% year-over-year rise in February. Food prices were up by 2.2% in the year to March, lower than the 4.1% comparable jump in February.
The closely watched annual core inflation rate dropped to 1.9% in March from 2.3% in February. The core measure strips out prices of volatile items such as fuel and some foodstuff.
“With the economy running closer to full capacity, downward pressure on inflation is likely to be limited,” said Dawn Desjardins, assistant chief economist at RBC Economics.
The Canadian dollar CADD4 lost some early gains against the U.S. dollar shortly after the data was released but by 9.45 am (1345 GMT) had recovered to C$0.9913, or $1.0048, its pre-release level.
The central bank now predicts overall inflation of 2.0% in the second quarter of 2012, rising to 2.2% in both the third and fourth quarters. It has also increased growth forecasts for the first three quarters of this year.
“This report won’t alter the Bank of Canada’s recent more hawkish tone. With the output gap gradually closing and core inflation running around 2%, some withdrawal of the considerable monetary stimulus is certainly looking appropriate,” said BMO Capital Markets economist Robert Kavcic.
Separately, Statistics Canada said the leading indicator rose for the ninth month in a row in March, climbing by 0.4% from February on widespread economic strength.
The increase was slightly less than the 0.5% predicted by market operators. Eight of the indicator’s 10 components advanced in March.
Friday 20 April 2012
Will Friday’s inflation report wipe out rate-hike expectations?
John Morrissy
OTTAWA — Expectations interest rates will rise in Canada this year could fade Friday as quickly as they rose this week, with an inflation report that’s expected to show the cost of living falling sharply in March, a leading economist says.
The Canadian dollar shot up this week after Bank of Canada governor Mark Carney raised his outlook for the economy in 2012 and said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
Market players are now factoring in a 90% likelihood the central bank will hike its key overnight lending rate by December by 25 basis points from the current 1%, where it has been since September 2010.
Yet, according to Scotia Capital economist Derek Holt, “no sooner than the ink is dry on the MPR (Bank of Canada’s Monetary Policy Report) will decelerating inflation into summer return inflation to the mid-point of the BoC’s 1% to 3% operating band or lower, and that should help put the too-quick-to-react elements within consensus who have brought forward rate-hike expectations back on their heels a bit.”
“Follow this up with differences of opinion on output gaps (or the rate at which the economy returns to full capacity) and it adds to our skepticism that any rate hikes will be delivered this year,” Holt added.
The bank uses interest rates to reached its target inflation rate of 2%. Market expectations are for the annual rise in the cost of living to fall to 2% in March from 2.6% in February when Statistics Canada releases the most recent data on Friday.
However, Michael Gregory at BMO Capital Markets said Friday’s inflation number will likely be consistent with Bank of Canada governor Mark Carney’s “somewhat firmer” 2012 inflation target of 2%.
“I don’t think it will change the market’s thinking that rate hikes are coming,” Gregory said.
The only difference is that much of a variation from the consensus target of 2% in Friday’s StatsCan report could slightly change the market’s mind as to when higher rates will arrive.
“What the bank is telling us is rooted in their worries about inflation — that current interest rates will allow inflation to drift above its 2% target in the medium term,” Gregory said.
OTTAWA — Expectations interest rates will rise in Canada this year could fade Friday as quickly as they rose this week, with an inflation report that’s expected to show the cost of living falling sharply in March, a leading economist says.
The Canadian dollar shot up this week after Bank of Canada governor Mark Carney raised his outlook for the economy in 2012 and said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”
Market players are now factoring in a 90% likelihood the central bank will hike its key overnight lending rate by December by 25 basis points from the current 1%, where it has been since September 2010.
Yet, according to Scotia Capital economist Derek Holt, “no sooner than the ink is dry on the MPR (Bank of Canada’s Monetary Policy Report) will decelerating inflation into summer return inflation to the mid-point of the BoC’s 1% to 3% operating band or lower, and that should help put the too-quick-to-react elements within consensus who have brought forward rate-hike expectations back on their heels a bit.”
“Follow this up with differences of opinion on output gaps (or the rate at which the economy returns to full capacity) and it adds to our skepticism that any rate hikes will be delivered this year,” Holt added.
The bank uses interest rates to reached its target inflation rate of 2%. Market expectations are for the annual rise in the cost of living to fall to 2% in March from 2.6% in February when Statistics Canada releases the most recent data on Friday.
However, Michael Gregory at BMO Capital Markets said Friday’s inflation number will likely be consistent with Bank of Canada governor Mark Carney’s “somewhat firmer” 2012 inflation target of 2%.
“I don’t think it will change the market’s thinking that rate hikes are coming,” Gregory said.
The only difference is that much of a variation from the consensus target of 2% in Friday’s StatsCan report could slightly change the market’s mind as to when higher rates will arrive.
“What the bank is telling us is rooted in their worries about inflation — that current interest rates will allow inflation to drift above its 2% target in the medium term,” Gregory said.
Thursday 19 April 2012
Once again: Pay down your debts before rates rise
ROB CARRICK
From Wednesday's Globe and Mail
Published Tuesday, Apr. 17, 2012 7:53PM EDT
The decade’s most ignorable piece of financial advice: Pay down your debts before interest rates rise.
You’ve heard this warning a hundred times, you ignored it and rates held steady at historic lows. Now, the Bank of Canada is signalling that borrowing costs could rise if economic conditions keeps improving. Here are 10 reasons not to tune out this time around:
1. Rates will eventually rise – it’s inevitable
Financial stress now seems a permanent feature of the global economy. Will China’s economy stall? Will Europe’s debt problems worsen? Can the United States address its debt problems and get its economy going again? These are all open-ended questions that suggest there’s a chance interest rates will need to stay low for longer. Not forever, though. It could be years until stability rules, but it could also be months.
2. Borrowing means you can’t afford the stuff you’re buying
Borrowing is okay when buying houses and cars because few of us can pay cash for such large expenses. But using a line of credit to finance your lifestyle is like living on other people’s money. Exception: If you use your credit line strategically to acquire things that are paid off quickly without immediately running up your debt again. Question for you: How often are you using your line of credit? If it’s more than a few times a year, you’re likely overspending.
3. Cutting debt gives you a buzz
I paid off a five-year car loan three years early in 2011. What a high. Better than buying the car.
4. Less stress
I can tell from reader e-mails that people are stressed about debt and wondering what to do. Try taking your tax refund and using it to pay down your credit card or line of credit balance. Stop contributing to your registered retirement savings plan or tax-free savings account for one year and use the money to lower your debt. Get rid of that second-car loan.
5. Your next mortgage renewal could be scary
People who bought homes in the past couple of years have benefited from historically low mortgage rates. As recently as last month, you could get a fully discounted, five-year, fixed-rate mortgage for about 3 per cent. That compares with an average of roughly 4.5 per cent over the past decade and a high of about 5.5 per cent.
Use this Globeinvestor.com calculator to look at scenarios showing how much more your mortgage will cost if you renew at higher rates:http://tgam.ca/DKA7 (you’ll need to find out what your balance on renewal is).
And don’t tell me that future pay increases will help you afford larger mortgage payments. Big raises are scarce these days and, when you get one, you’re not going to want to see it eaten up by your mortgage.
6. Your kids need help affording university
One of my pet peeves is that parents are not saving enough in registered education savings plans. Cut debt and you have some free cash flow you can put into a regular monthly RESP contribution plan.
7. You get more control over when you retire
Reduce your debts and you can also increase your retirement savings. The more you save for retirement, the less likely it is that you’ll have to continue working in some capacity after you turn 65 to generate income.
8. You won’t retire with debt
People over the age of 45 are among the biggest debt fiends in the country. What are they thinking? That it would be fun to be on a fixed income while trying to cope with rising borrowing costs on lines of credit or mortgages? It’s hard to believe this even needs to be said, but a financially secure retirement starts with zero debt.
9. You’re covered for emergencies
People without debts are better able to afford a health or dental emergency, a basement flood, a leaky roof or a major car-repair bill. If you don’t have an emergency fund, pay off a debt and use the monthly payments you were making to build up your savings.
10. There’s no down side
No one has ever told me: “I really regret paying off my debts.” There’s always a use for the money you save, even if it’s to rack up more debt.
For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).
From Wednesday's Globe and Mail
Published Tuesday, Apr. 17, 2012 7:53PM EDT
The decade’s most ignorable piece of financial advice: Pay down your debts before interest rates rise.
You’ve heard this warning a hundred times, you ignored it and rates held steady at historic lows. Now, the Bank of Canada is signalling that borrowing costs could rise if economic conditions keeps improving. Here are 10 reasons not to tune out this time around:
1. Rates will eventually rise – it’s inevitable
Financial stress now seems a permanent feature of the global economy. Will China’s economy stall? Will Europe’s debt problems worsen? Can the United States address its debt problems and get its economy going again? These are all open-ended questions that suggest there’s a chance interest rates will need to stay low for longer. Not forever, though. It could be years until stability rules, but it could also be months.
2. Borrowing means you can’t afford the stuff you’re buying
Borrowing is okay when buying houses and cars because few of us can pay cash for such large expenses. But using a line of credit to finance your lifestyle is like living on other people’s money. Exception: If you use your credit line strategically to acquire things that are paid off quickly without immediately running up your debt again. Question for you: How often are you using your line of credit? If it’s more than a few times a year, you’re likely overspending.
3. Cutting debt gives you a buzz
I paid off a five-year car loan three years early in 2011. What a high. Better than buying the car.
4. Less stress
I can tell from reader e-mails that people are stressed about debt and wondering what to do. Try taking your tax refund and using it to pay down your credit card or line of credit balance. Stop contributing to your registered retirement savings plan or tax-free savings account for one year and use the money to lower your debt. Get rid of that second-car loan.
5. Your next mortgage renewal could be scary
People who bought homes in the past couple of years have benefited from historically low mortgage rates. As recently as last month, you could get a fully discounted, five-year, fixed-rate mortgage for about 3 per cent. That compares with an average of roughly 4.5 per cent over the past decade and a high of about 5.5 per cent.
Use this Globeinvestor.com calculator to look at scenarios showing how much more your mortgage will cost if you renew at higher rates:http://tgam.ca/DKA7 (you’ll need to find out what your balance on renewal is).
And don’t tell me that future pay increases will help you afford larger mortgage payments. Big raises are scarce these days and, when you get one, you’re not going to want to see it eaten up by your mortgage.
6. Your kids need help affording university
One of my pet peeves is that parents are not saving enough in registered education savings plans. Cut debt and you have some free cash flow you can put into a regular monthly RESP contribution plan.
7. You get more control over when you retire
Reduce your debts and you can also increase your retirement savings. The more you save for retirement, the less likely it is that you’ll have to continue working in some capacity after you turn 65 to generate income.
8. You won’t retire with debt
People over the age of 45 are among the biggest debt fiends in the country. What are they thinking? That it would be fun to be on a fixed income while trying to cope with rising borrowing costs on lines of credit or mortgages? It’s hard to believe this even needs to be said, but a financially secure retirement starts with zero debt.
9. You’re covered for emergencies
People without debts are better able to afford a health or dental emergency, a basement flood, a leaky roof or a major car-repair bill. If you don’t have an emergency fund, pay off a debt and use the monthly payments you were making to build up your savings.
10. There’s no down side
No one has ever told me: “I really regret paying off my debts.” There’s always a use for the money you save, even if it’s to rack up more debt.
For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).
Wednesday 18 April 2012
Bank of Canada warns on home equity lines of credit
Globe and Mail Update
Published Wednesday, Apr. 18, 2012 11:09AM EDT
Debt, debt, and more debt
The Bank of Canada today paints a troubling picture of what has become a vicious circle where consumer debt is concerned.
The central bank unveiled its Monetary Policy Report, which puts more flesh on the bare bones statement it unveiled yesterday when it held its benchmark overnight rate steady at 1 per cent, but signalled that it's thinking about hiking interest rates again, given a better outlook for the economy.
As The Globe and Mail's Jeremy Torobin reports, the report indeed projected better-than-expected economic growth, though it also cited the risks the recovery faces.
It also expanded on Governor Mark Carney's warnings over household debt, which have climbed in Canada to record levels, citing a low savings rate, "large and persistent increases" in house prices, and strong levels of real estate investment.
"It is not surprising that households would seek to consume some fraction of their increase in housing wealth, either by extracting higher housing equity to spend or by consuming more out of current income because they feel wealthier; either of these would result in a lower measured personal savings rate," the central bank's study said.
"Empirical estimates of the total marginal propensity to consume out of housing wealth in Canada range from 6 per cent to 16 per cent over the long run, assuming that the increases in wealth are viewed as permanent. This housing wealth effect on consumption may have increased over time, as financial innovations have made it easier to borrow against increased home equity."
The report also repeated Mr. Carney's warning that consumers are expected to add to their already fat debt burden, which remains the biggest threat in Canada.
The Bank of Canada appears most concerned over the tremdendous growth in home equity lines of credit, or HELOCs, and mortgage refinancings, which surged to $64-billion in 2010 from $8-billion in 2001.
About half of that is being used either to spend or pay off other loans. Here's where the vicious circle comes in:
"Surveys suggest that approximately half of this equity extraction is used either for current consumption or to pay off other debt, much of which will be higher-rate debt, itself used to finance past consumption. Overall, it is estimated that home-equity extraction has funded roughly 3 per cent of aggregate consumer spending in Canada in recent years, up from less than 1 per cent in 2001."
And note this warning: "Home equity extracted through additional borrowing cannot fund higher consumption indefinitely. Once the proportion of homeowners that access higher housing wealth through HELOC s reaches its peak, the personal savings rate can be expected to rise. This implies a lower level of consumption relative to income. With less equity in their homes, households would also be more exposed to a decline in house prices, which could further dampen consumption."
Some economists believe the central bank may address the household debt issue through rate hikes. Finance Minister Jim Flaherty has already tightened mortgage rules, and is loath at this point to do it again.
"To be sure, the case for rate hikes is strong," said Paul-André Pinsonneault and Krishen Rangasamy of National Bank.
"With the government deciding not to intervene to cool down the hot housing market and curb household leverage, the BoC will have to address on its own the 'biggest domestic risk.'" And given that fiscal drag isn't likely to be as large as first feared (based on the recent federal budget), the BoC has flexibility for rate action
Published Wednesday, Apr. 18, 2012 11:09AM EDT
Debt, debt, and more debt
The Bank of Canada today paints a troubling picture of what has become a vicious circle where consumer debt is concerned.
The central bank unveiled its Monetary Policy Report, which puts more flesh on the bare bones statement it unveiled yesterday when it held its benchmark overnight rate steady at 1 per cent, but signalled that it's thinking about hiking interest rates again, given a better outlook for the economy.
As The Globe and Mail's Jeremy Torobin reports, the report indeed projected better-than-expected economic growth, though it also cited the risks the recovery faces.
It also expanded on Governor Mark Carney's warnings over household debt, which have climbed in Canada to record levels, citing a low savings rate, "large and persistent increases" in house prices, and strong levels of real estate investment.
"It is not surprising that households would seek to consume some fraction of their increase in housing wealth, either by extracting higher housing equity to spend or by consuming more out of current income because they feel wealthier; either of these would result in a lower measured personal savings rate," the central bank's study said.
"Empirical estimates of the total marginal propensity to consume out of housing wealth in Canada range from 6 per cent to 16 per cent over the long run, assuming that the increases in wealth are viewed as permanent. This housing wealth effect on consumption may have increased over time, as financial innovations have made it easier to borrow against increased home equity."
The report also repeated Mr. Carney's warning that consumers are expected to add to their already fat debt burden, which remains the biggest threat in Canada.
The Bank of Canada appears most concerned over the tremdendous growth in home equity lines of credit, or HELOCs, and mortgage refinancings, which surged to $64-billion in 2010 from $8-billion in 2001.
About half of that is being used either to spend or pay off other loans. Here's where the vicious circle comes in:
"Surveys suggest that approximately half of this equity extraction is used either for current consumption or to pay off other debt, much of which will be higher-rate debt, itself used to finance past consumption. Overall, it is estimated that home-equity extraction has funded roughly 3 per cent of aggregate consumer spending in Canada in recent years, up from less than 1 per cent in 2001."
And note this warning: "Home equity extracted through additional borrowing cannot fund higher consumption indefinitely. Once the proportion of homeowners that access higher housing wealth through HELOC s reaches its peak, the personal savings rate can be expected to rise. This implies a lower level of consumption relative to income. With less equity in their homes, households would also be more exposed to a decline in house prices, which could further dampen consumption."
Some economists believe the central bank may address the household debt issue through rate hikes. Finance Minister Jim Flaherty has already tightened mortgage rules, and is loath at this point to do it again.
"To be sure, the case for rate hikes is strong," said Paul-André Pinsonneault and Krishen Rangasamy of National Bank.
"With the government deciding not to intervene to cool down the hot housing market and curb household leverage, the BoC will have to address on its own the 'biggest domestic risk.'" And given that fiscal drag isn't likely to be as large as first feared (based on the recent federal budget), the BoC has flexibility for rate action
Tuesday 17 April 2012
Canadian real estate market a tale of two cities
ANDY HOFFMAN AND NICOLAS JOHNSON
VANCOUVER AND TORONTO— From Tuesday's Globe and Mail
Published Monday, Apr. 16, 2012 9:19AM EDT
Last updated Tuesday, Apr. 17, 2012 6:51AM EDT
It’s a title Vancouver is more than happy to relinquish.
Canada’s hottest real estate market is finally cooling off, new sales figures show, much to the relief of those who have grown weary of talk of a West Coast property bubble.
At more than $761,000, the average cost of a Vancouver home is still higher than anywhere, but was 3.1 per cent lower in March than in the same month last year. Sales activity is slower, too, down 22.3 per cent through the first three months of 2012.
But the data from the Canadian Real Estate Association indicate that Toronto’s sizzling market is still gaining momentum, with average prices in the country’s largest city soaring more than 10 per cent last month, to about $504,000.
The diverging fortunes of the country’s two most important real-estate markets adds to the complexity of the policy decisions facing Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. Both have issued repeated warnings about the high level of personal debt that Canadians are taking on to buy increasingly expensive houses.
But Mr. Flaherty has said he is reluctant to tighten the rules on mortgages again, believing that the market will correct itself, while Mr. Carney is unlikely to raise interest rates any time soon for fear of driving up the currency and hurting other parts of the Canadian economy.
Toronto and Vancouver together account for about one-quarter of all real estate activity in Canada.
The opposing directions of the two cities have resulted in a country-wide average price that’s edging lower, easing economists’ concerns of a U.S.-style crash. And should the trend continue, it may also ease the worries of officials in Ottawa.
“When it comes to housing, Toronto is not Canada, nor is Vancouver,” Douglas Porter, an economist in Toronto at BMO Nesbitt Burns, said in a report.
“For most cities, the market looks well balanced, and is broadly moderating on its own accord.”
Nationally, the average price of a home fell 0.5 per cent to $369,677 in March from last year while sales rose 1.6 per cent.
“The slight decline in the national average price points to a tug of war between Toronto and Vancouver,” Gregory Klump, chief economist for the Canadian Real Estate Association, said in a statement. “The decline in average price reflects the change in Vancouver’s sales mix, not housing price deflation.”
Despite the price drop, few in Vancouver are calling this a correction. The spring of 2011 saw a spike in sales of expensive luxury homes in Vancouver that is now skewing the data for 2012, some argue.
Real estate agent Steve Di Fruscia, who specializes in selling high-end homes, said the Vancouver market, particularly in pricey areas such West Vancouver, are in the midst of a “typical cooling-off period,” after the frenzied activity of a year ago
“We’re still on a very optimistic, greedy part of the year where people are trying to cash in on extra high prices, believing that we will have the same spring as we did last year and prices will continue to skyrocket another 10 to 15 per cent,” he said.
Mr. Di Fruscia markets his clients’ properties in both Canada and mainland China. Some have blamed Vancouver’s high prices on an influx of so-called “foreign” and “speculative” money from foreign investors. However, Mr. Di Fruscia said 95 per cent of his sales of Vancouver homes are to Chinese buyers who are immigrating to Canada as citizens or permanent residents.
There are no statistics on what, if any, impact foreign investors are having on the real estate market in Vancouver, Toronto nor the rest of Canada. Cameron Muir, chief economist of the B.C. Real Estate Association, suggested that in Vancouver, the number of foreign buyers are “much lower” than many people think, accounting for between 1 per cent and 3 per cent of the market.
In Toronto, a low supply of properties is leading to bidding wars that drove up the average price of Toronto homes to $504,117 in March. Toronto’s average home prices have set a new record high in every year since 2000 and 2012 should be no different.
“We’d love to have more inventory to sell because there’s no shortage of buyers looking for good inventory,” said Kevin Somers, the broker area manager for Royal LePage Real Estate Services Ltd. in central Toronto.
“As long as the basic economic indicators and interest-rate outlook remain positive, people will always need a place to live and would rather own than rent in most cases.”
VANCOUVER AND TORONTO— From Tuesday's Globe and Mail
Published Monday, Apr. 16, 2012 9:19AM EDT
Last updated Tuesday, Apr. 17, 2012 6:51AM EDT
It’s a title Vancouver is more than happy to relinquish.
Canada’s hottest real estate market is finally cooling off, new sales figures show, much to the relief of those who have grown weary of talk of a West Coast property bubble.
At more than $761,000, the average cost of a Vancouver home is still higher than anywhere, but was 3.1 per cent lower in March than in the same month last year. Sales activity is slower, too, down 22.3 per cent through the first three months of 2012.
But the data from the Canadian Real Estate Association indicate that Toronto’s sizzling market is still gaining momentum, with average prices in the country’s largest city soaring more than 10 per cent last month, to about $504,000.
The diverging fortunes of the country’s two most important real-estate markets adds to the complexity of the policy decisions facing Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. Both have issued repeated warnings about the high level of personal debt that Canadians are taking on to buy increasingly expensive houses.
But Mr. Flaherty has said he is reluctant to tighten the rules on mortgages again, believing that the market will correct itself, while Mr. Carney is unlikely to raise interest rates any time soon for fear of driving up the currency and hurting other parts of the Canadian economy.
Toronto and Vancouver together account for about one-quarter of all real estate activity in Canada.
The opposing directions of the two cities have resulted in a country-wide average price that’s edging lower, easing economists’ concerns of a U.S.-style crash. And should the trend continue, it may also ease the worries of officials in Ottawa.
“When it comes to housing, Toronto is not Canada, nor is Vancouver,” Douglas Porter, an economist in Toronto at BMO Nesbitt Burns, said in a report.
“For most cities, the market looks well balanced, and is broadly moderating on its own accord.”
Nationally, the average price of a home fell 0.5 per cent to $369,677 in March from last year while sales rose 1.6 per cent.
“The slight decline in the national average price points to a tug of war between Toronto and Vancouver,” Gregory Klump, chief economist for the Canadian Real Estate Association, said in a statement. “The decline in average price reflects the change in Vancouver’s sales mix, not housing price deflation.”
Despite the price drop, few in Vancouver are calling this a correction. The spring of 2011 saw a spike in sales of expensive luxury homes in Vancouver that is now skewing the data for 2012, some argue.
Real estate agent Steve Di Fruscia, who specializes in selling high-end homes, said the Vancouver market, particularly in pricey areas such West Vancouver, are in the midst of a “typical cooling-off period,” after the frenzied activity of a year ago
“We’re still on a very optimistic, greedy part of the year where people are trying to cash in on extra high prices, believing that we will have the same spring as we did last year and prices will continue to skyrocket another 10 to 15 per cent,” he said.
Mr. Di Fruscia markets his clients’ properties in both Canada and mainland China. Some have blamed Vancouver’s high prices on an influx of so-called “foreign” and “speculative” money from foreign investors. However, Mr. Di Fruscia said 95 per cent of his sales of Vancouver homes are to Chinese buyers who are immigrating to Canada as citizens or permanent residents.
There are no statistics on what, if any, impact foreign investors are having on the real estate market in Vancouver, Toronto nor the rest of Canada. Cameron Muir, chief economist of the B.C. Real Estate Association, suggested that in Vancouver, the number of foreign buyers are “much lower” than many people think, accounting for between 1 per cent and 3 per cent of the market.
In Toronto, a low supply of properties is leading to bidding wars that drove up the average price of Toronto homes to $504,117 in March. Toronto’s average home prices have set a new record high in every year since 2000 and 2012 should be no different.
“We’d love to have more inventory to sell because there’s no shortage of buyers looking for good inventory,” said Kevin Somers, the broker area manager for Royal LePage Real Estate Services Ltd. in central Toronto.
“As long as the basic economic indicators and interest-rate outlook remain positive, people will always need a place to live and would rather own than rent in most cases.”
Monday 16 April 2012
Central bank unlikely to raise interest rates for fear of hurting the economy
By Julian Beltrame, The Canadian Press | April 16, 2012
ChatinShare0Email More Sharing Services
OTTAWA - Bank of Canada governor Mark Carney often talks about the danger of too much household debt — but he's unlikely to do anything about it when he has a chance this week.
Economists are unanimous that Carney will hold back from raising borrowing costs on Tuesday when he and his policy council announce the new target interest rate.
It's been at one per cent since September 2010, and had been even lower since the recession — leading to some of the lowest borrowing costs in Canadian history.
With the U.S. rate likely on hold until 2014, economists say it may be many more months before the Bank of Canada moves off one per cent, fearing that further widening the gap in the cost of money between the two countries will send the loonie into the stratosphere.
Last week, all 12 members of the C.D. Howe Institute monetary policy panel, comprising private sector economists and those in academia, were in agreement there should be no change to interest rates.
"They (central bank) are very concerned about the household debt situation and the strength of the housing market, and the overall stability of domestic spending, and it just isn't consistent with an overnight rate below inflation," said Douglas Porter of BMO Capital Markets, a member of the C.D. Howe panel.
"But unfortunately they face this eternal tension of a healthy domestic economy and a shaky external environment."
As long as the U.S. continues to struggle, despite the occasional encouraging signal, and the European debt problems remain unresolved, the Bank of Canada will be loathe to add negative drag to the domestic economy by tightening lending conditions, he explained.
Where Carney may make news this week is an upgrade to economic growth expectation for this year.
In a recent interview, the governor talked about "firmer" conditions and better than expected momentum in the U.S. recovery. Since, Statistics Canada reported employment grew by a massive 82,000 jobs in March.
In the last monetary policy review in January, the central bank estimated the economy would expand by a modest 2.0 per cent this year and 2.8 per cent next.
Analysts expect the bank to raise 2012 growth a notch to the consensus economic forecast of 2.1 per cent this year, or perhaps slightly higher.
Just how much higher may influence when Carney feels comfortable about doing what he appears anxious to do, and that is bring interest rates back to normalized levels.
Although still a minority view, three of the 12 members of the C.D. Howe panel think the governor should nudge the policy rate up to 1.25 per cent as early as June 5, and five believe it should come in October.
"Some members urging a higher overnight rate over the coming year took a more optimistic view of global prospects," the think-tank said.
"For the most part, however, the tendency toward a higher rate target stemmed from concern that Canada's growth is too tilted toward housing and fuelled by rising household indebtedness."
At 151 per cent of disposable annual income, Carney said recently Canadians have never been so indebted.
The chief concern, he said, was a shock to house prices or higher rates that would reduce household assets and increase financing charges, leaving little in consumers' pockets for purchases that stimulate the economy.
While he said he was prepared to intervene in an emergency, Carney noted more direct policy actions, such as a further tightening of mortgage rules, would be preferable and effective.
ChatinShare0Email More Sharing Services
OTTAWA - Bank of Canada governor Mark Carney often talks about the danger of too much household debt — but he's unlikely to do anything about it when he has a chance this week.
Economists are unanimous that Carney will hold back from raising borrowing costs on Tuesday when he and his policy council announce the new target interest rate.
It's been at one per cent since September 2010, and had been even lower since the recession — leading to some of the lowest borrowing costs in Canadian history.
With the U.S. rate likely on hold until 2014, economists say it may be many more months before the Bank of Canada moves off one per cent, fearing that further widening the gap in the cost of money between the two countries will send the loonie into the stratosphere.
Last week, all 12 members of the C.D. Howe Institute monetary policy panel, comprising private sector economists and those in academia, were in agreement there should be no change to interest rates.
"They (central bank) are very concerned about the household debt situation and the strength of the housing market, and the overall stability of domestic spending, and it just isn't consistent with an overnight rate below inflation," said Douglas Porter of BMO Capital Markets, a member of the C.D. Howe panel.
"But unfortunately they face this eternal tension of a healthy domestic economy and a shaky external environment."
As long as the U.S. continues to struggle, despite the occasional encouraging signal, and the European debt problems remain unresolved, the Bank of Canada will be loathe to add negative drag to the domestic economy by tightening lending conditions, he explained.
Where Carney may make news this week is an upgrade to economic growth expectation for this year.
In a recent interview, the governor talked about "firmer" conditions and better than expected momentum in the U.S. recovery. Since, Statistics Canada reported employment grew by a massive 82,000 jobs in March.
In the last monetary policy review in January, the central bank estimated the economy would expand by a modest 2.0 per cent this year and 2.8 per cent next.
Analysts expect the bank to raise 2012 growth a notch to the consensus economic forecast of 2.1 per cent this year, or perhaps slightly higher.
Just how much higher may influence when Carney feels comfortable about doing what he appears anxious to do, and that is bring interest rates back to normalized levels.
Although still a minority view, three of the 12 members of the C.D. Howe panel think the governor should nudge the policy rate up to 1.25 per cent as early as June 5, and five believe it should come in October.
"Some members urging a higher overnight rate over the coming year took a more optimistic view of global prospects," the think-tank said.
"For the most part, however, the tendency toward a higher rate target stemmed from concern that Canada's growth is too tilted toward housing and fuelled by rising household indebtedness."
At 151 per cent of disposable annual income, Carney said recently Canadians have never been so indebted.
The chief concern, he said, was a shock to house prices or higher rates that would reduce household assets and increase financing charges, leaving little in consumers' pockets for purchases that stimulate the economy.
While he said he was prepared to intervene in an emergency, Carney noted more direct policy actions, such as a further tightening of mortgage rules, would be preferable and effective.
Friday 13 April 2012
Report blames non-mortgage debt for consumer woes
By Vernon Clement Jones | 11/04/2012 7:17:00 PM |
A new report from Equifax is pointing a finger in the same direction as brokers, arguing non-mortgage debt as the real threat to consumer solvency.
"It is not surprising to see consumer credit continue to increase given the significantly improved levels of consumer delinquencies and bankruptcies witnessed in the last year, coupled with record-low consumer borrowing rates," said Nadim Abdo, VP of consulting and Analysis for the credit bureau.
While Credit card debt continued its fall during the first quarter of 2012, decreasing by 2.1 per cent from the same period last year, The Equifax Report reveals total consumer indebtedness -- excluding mortgage debt – actually increased by 3.4 per cent compared to the time last year.
New loans opened in Q1 2012 were nearly 1 per cent higher than they were a year earlier. And the largest increase in outstanding balances was in auto finance loans and lease agreements, which grew by 10 per cent over the Q1 period for 2011.
Those highlights back up the concerns of mortgage professionals calling on banking regulators to shift their focus away from tightening mortgage lending rules and toward strengthening the underwriting on unsecured debt.
The argument may be loss on the Office of the Superintendent of Financial Services as it prepares to bring in a slew of new, more rigid guidelines for banks and other mortgage providers.
Of immediate concern to brokers is its intention to increase the equity requirements for homeowners seeking HELOC – something that could remove that option for Canadians in desperate need of debt consolidation.
“This guideline change (moving the equity minimum from 20 per cent to 35 per cent) would create an artificial crisis by removing the recourse some homeowners now have to consolidating unsecured, high-interest debt into secured, low-interest debt,” said Ad Lakhanpal, an Oakville-based broker with Mortgage Alliance. “Lenders are already asking borrowers questions about what they intend to use HELOC funds for to ensure it’s not being abused.”
The comments jive with those of other brokers reacting to proposed guideline changes now being floated by the Office of the Superintendent of Financial Services. The watchdog wants to lower the maximum loan-to-value of uninsured home equity lines of credit to 65 percent from 80 percent.
“The federal government already instituted tougher guidelines for qualifying for HELOCs and lenders already use stricter lending guidelines, including net worth tests, property valuation tests, and credit scoring to ensure that HELOC borrowers are the best of the best,” Gord McCallum, owner of First Foundation Residential Mortgages, told MortgageBrokerNews.ca.
A new report from Equifax is pointing a finger in the same direction as brokers, arguing non-mortgage debt as the real threat to consumer solvency.
"It is not surprising to see consumer credit continue to increase given the significantly improved levels of consumer delinquencies and bankruptcies witnessed in the last year, coupled with record-low consumer borrowing rates," said Nadim Abdo, VP of consulting and Analysis for the credit bureau.
While Credit card debt continued its fall during the first quarter of 2012, decreasing by 2.1 per cent from the same period last year, The Equifax Report reveals total consumer indebtedness -- excluding mortgage debt – actually increased by 3.4 per cent compared to the time last year.
New loans opened in Q1 2012 were nearly 1 per cent higher than they were a year earlier. And the largest increase in outstanding balances was in auto finance loans and lease agreements, which grew by 10 per cent over the Q1 period for 2011.
Those highlights back up the concerns of mortgage professionals calling on banking regulators to shift their focus away from tightening mortgage lending rules and toward strengthening the underwriting on unsecured debt.
The argument may be loss on the Office of the Superintendent of Financial Services as it prepares to bring in a slew of new, more rigid guidelines for banks and other mortgage providers.
Of immediate concern to brokers is its intention to increase the equity requirements for homeowners seeking HELOC – something that could remove that option for Canadians in desperate need of debt consolidation.
“This guideline change (moving the equity minimum from 20 per cent to 35 per cent) would create an artificial crisis by removing the recourse some homeowners now have to consolidating unsecured, high-interest debt into secured, low-interest debt,” said Ad Lakhanpal, an Oakville-based broker with Mortgage Alliance. “Lenders are already asking borrowers questions about what they intend to use HELOC funds for to ensure it’s not being abused.”
The comments jive with those of other brokers reacting to proposed guideline changes now being floated by the Office of the Superintendent of Financial Services. The watchdog wants to lower the maximum loan-to-value of uninsured home equity lines of credit to 65 percent from 80 percent.
“The federal government already instituted tougher guidelines for qualifying for HELOCs and lenders already use stricter lending guidelines, including net worth tests, property valuation tests, and credit scoring to ensure that HELOC borrowers are the best of the best,” Gord McCallum, owner of First Foundation Residential Mortgages, told MortgageBrokerNews.ca.
Thursday 12 April 2012
Harbingers of doom
Andrew Coyne Apr 10, 2012 – 6:00 AM ET | Last Updated: Apr 10, 2012 11:55 AM ET
Even by Maclean’s standards, the cover was alarming. “You’re about to get burned,” screamed the headline, over a picture of a house that was literally on fire. “Canada looks like the us before its devastating housing crash — maybe even worse.” And the kicker, for those still hesitating: “Why it’s officially time to panic.”
This last was doubtless something of a little in-joke. For my old colleagues at Canada’s newsweekly, it is always time to panic, especially about house prices. The magazine’s editors inhabit a world beset by all manner of hitherto undetected demons, from more expensive groceries (“sudden shortages, riots over prices, the world food crisis is about to hit home”) to insomnia (“the truth about a modern epidemic”) to, well, “The Return of Hitler.”
But nothing, nothing frightens the magazine or, it is hoped, its readers, more than real estate. For years Maclean’s has been shuddering in terror of the imminent collapse of the Canadian housing market. From the relative calm of its late 2007 cover story (“Buy? Sell? Panic?”), the magazine soon picked up signals of the coming apocalypse. “House prices start to fall,” the magazine announced the following summer. By autumn, with the world financial crisis in full swing, so was Maclean’s. “Canada’s Looming Real Estate Crisis,” the cover shouted: “Why house prices may soon fall through the floor.”
As the months wore on, and the cataclysm failed to arrive, Maclean’s remained ever hopeful of a real collapse. But durned if prices, after a brief dip, resumed rising. By June 2008, a grumpy Maclean’s was warning readers “Don’t believe the housing hype,” insisting there are “plenty of signs that the Canadian housing market is still on some very shaky ground,” even if “average home prices are up more than 16 per cent this year.”
Fast forward through several more stories in the same vein and by this year the magazine and others were in even less doubt: Canada was in a housing bubble. Why, just look at the numbers. For starters, there’s the oft-repeated fact that Canadians are carrying debts worth 153% of their annual income. That’s true: but other countries’ citizens manage much heavier debt loads, from the spendthrift Swiss (200%) to the feckless Dutch (260%) to the profligate Danes (320%). We may be carrying almost as much debt as the Americans before the crash, but with nothing like the same risk factors, from subprime mortgages to small regional banks, that made their economy such a firetrap. And if we’re mentioning how Canadians’ debts have grown, we should surely also mention that their assets have as well: still five times as large as their debts.
Mortgage costs, interests and principal combined, are currently running at about 30% of disposable income — again, higher than a few years ago, but barely half what they were in the early 1990s. Yes, house prices were still rising as of year-end, but more slowly than before, as even the Maclean’s piece acknowledges — though somehow it cites this as evidence for its doomsday thesis. But then, what doesn’t? If prices were rising quickly, that would be proof of housing “mania.” If they fell a little, that would be the bubble starting to burst. And if they fell a lot? Look out below!
The truth is the real estate market is cooling slightly, helped by a modest tightening of lending regulations. It’s true that a rise in interest rates from current, historically low levels would put some homeowners in distress, but they’d have to spike a long way before the damage grew widespread — a concern, sure, but nowhere near as frightening as, say, the return of Hitler.
Posted in: Financial Post Magazine Tags: Canadian housing bubble, Maclean’s, real estate
Even by Maclean’s standards, the cover was alarming. “You’re about to get burned,” screamed the headline, over a picture of a house that was literally on fire. “Canada looks like the us before its devastating housing crash — maybe even worse.” And the kicker, for those still hesitating: “Why it’s officially time to panic.”
This last was doubtless something of a little in-joke. For my old colleagues at Canada’s newsweekly, it is always time to panic, especially about house prices. The magazine’s editors inhabit a world beset by all manner of hitherto undetected demons, from more expensive groceries (“sudden shortages, riots over prices, the world food crisis is about to hit home”) to insomnia (“the truth about a modern epidemic”) to, well, “The Return of Hitler.”
But nothing, nothing frightens the magazine or, it is hoped, its readers, more than real estate. For years Maclean’s has been shuddering in terror of the imminent collapse of the Canadian housing market. From the relative calm of its late 2007 cover story (“Buy? Sell? Panic?”), the magazine soon picked up signals of the coming apocalypse. “House prices start to fall,” the magazine announced the following summer. By autumn, with the world financial crisis in full swing, so was Maclean’s. “Canada’s Looming Real Estate Crisis,” the cover shouted: “Why house prices may soon fall through the floor.”
As the months wore on, and the cataclysm failed to arrive, Maclean’s remained ever hopeful of a real collapse. But durned if prices, after a brief dip, resumed rising. By June 2008, a grumpy Maclean’s was warning readers “Don’t believe the housing hype,” insisting there are “plenty of signs that the Canadian housing market is still on some very shaky ground,” even if “average home prices are up more than 16 per cent this year.”
Fast forward through several more stories in the same vein and by this year the magazine and others were in even less doubt: Canada was in a housing bubble. Why, just look at the numbers. For starters, there’s the oft-repeated fact that Canadians are carrying debts worth 153% of their annual income. That’s true: but other countries’ citizens manage much heavier debt loads, from the spendthrift Swiss (200%) to the feckless Dutch (260%) to the profligate Danes (320%). We may be carrying almost as much debt as the Americans before the crash, but with nothing like the same risk factors, from subprime mortgages to small regional banks, that made their economy such a firetrap. And if we’re mentioning how Canadians’ debts have grown, we should surely also mention that their assets have as well: still five times as large as their debts.
Mortgage costs, interests and principal combined, are currently running at about 30% of disposable income — again, higher than a few years ago, but barely half what they were in the early 1990s. Yes, house prices were still rising as of year-end, but more slowly than before, as even the Maclean’s piece acknowledges — though somehow it cites this as evidence for its doomsday thesis. But then, what doesn’t? If prices were rising quickly, that would be proof of housing “mania.” If they fell a little, that would be the bubble starting to burst. And if they fell a lot? Look out below!
The truth is the real estate market is cooling slightly, helped by a modest tightening of lending regulations. It’s true that a rise in interest rates from current, historically low levels would put some homeowners in distress, but they’d have to spike a long way before the damage grew widespread — a concern, sure, but nowhere near as frightening as, say, the return of Hitler.
Posted in: Financial Post Magazine Tags: Canadian housing bubble, Maclean’s, real estate
Wednesday 11 April 2012
Canada expects moderate growth in 2012: Flaherty
NEW YORK (Reuters) - Canadian Finance Minister Jim Flaherty said on Tuesday he expected Canada to post moderate growth this year, noting that the country's recovery remained fragile and Europe's sovereign debt crisis continued to pose risks to the global economy.
Flaherty also reiterated he had no plans to take further steps to rein in Canada's housing market, which some analysts say is overheating.
"I have no present plans to intervene in the housing market in Canada," Flaherty told reporters in New York.
"There has been some moderation in the market of late. I would prefer the market itself to correct to the extent a correction is necessary."
The government and central bank have been cautioning Canadians of the risks of taking on too much debt, particularly through mortgages, with interest rates low and home prices high.
Flaherty has tightened rules three times since 2008 in the mortgage insurance market but left them untouched in the federal budget released at the end of March.
The budget did propose enhanced supervision of the federal housing agency that issues mortgage insurance. Asked about that change, Flaherty said the Office of the Superintendent for Financial Institutions - Canada's banking regulator - as well as his Department of Finance was looking at the issue.
Flaherty said he expected Canada to see moderate growth this year, which was the basis for the government's recent budget.
The economy added a surprising 82,300 new jobs last month, the most since September 2008, while the unemployment rate fell to a six-month low of 7.2 percent.
"If we get stronger growth, that's terrific, but remember the economic recovery is fragile," said Flaherty.
"There are serious issues that persist in Europe, particularly with respect to Spain."
A weak auction of Spanish bonds last week rekindled investor fears over the extent of Europe's debt crisis.
Flaherty also reiterated he had no plans to take further steps to rein in Canada's housing market, which some analysts say is overheating.
"I have no present plans to intervene in the housing market in Canada," Flaherty told reporters in New York.
"There has been some moderation in the market of late. I would prefer the market itself to correct to the extent a correction is necessary."
The government and central bank have been cautioning Canadians of the risks of taking on too much debt, particularly through mortgages, with interest rates low and home prices high.
Flaherty has tightened rules three times since 2008 in the mortgage insurance market but left them untouched in the federal budget released at the end of March.
The budget did propose enhanced supervision of the federal housing agency that issues mortgage insurance. Asked about that change, Flaherty said the Office of the Superintendent for Financial Institutions - Canada's banking regulator - as well as his Department of Finance was looking at the issue.
Flaherty said he expected Canada to see moderate growth this year, which was the basis for the government's recent budget.
The economy added a surprising 82,300 new jobs last month, the most since September 2008, while the unemployment rate fell to a six-month low of 7.2 percent.
"If we get stronger growth, that's terrific, but remember the economic recovery is fragile," said Flaherty.
"There are serious issues that persist in Europe, particularly with respect to Spain."
A weak auction of Spanish bonds last week rekindled investor fears over the extent of Europe's debt crisis.
Tuesday 10 April 2012
When a longer amortization is better
In Toronto, a couple we’ll call John, 39, and Yvette, 40, are raising three children, ages 13, 9 and 7, on John’s $146,000 annual gross salary from his work as an electronics engineer and Yvette’s business as a part-time baby photographer, which pays her $4,800 a year after expenses. They came to Canada 14 years ago with no assets other than their educations and the ambition to do well in a new country.
They have a $519,000 house and financial and other assets of $79,000. They have $254,000 of debt, most of it in their $228,000 mortgage. For a couple that made a late start in building wealth, their net worth, $344,000, is a substantial accomplishment.
John and Yvette worry they need to do a lot more in the next decade to put the three kids through university. Their registered education savings plan is $20,000 — enough to get their eldest child through a year or two at a local university. Burdened by their mortgage, they see a crisis ahead.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with the couple. His strategy — beef up retirement savings by stretching out paydown of the mortgage and make the most of tax breaks provided by John’s RRSP, which currently has a balance of just $34,000.
The couple has a take-home income of $8,450 a month. Their present allocations include $942 for their line of credit, $300 a month to RESPs and $250 a month to non-registered savings. $500 goes to their RRSP via a loan, and $1,625 goes to their mortgage. It’s the wrong allocation, Mr. Moran says. RRSPs should get top billing and a lot more of John’s savings.
Adjusting cash flows
The first step in reallocating savings should be to cash out their $1,000 tax-free savings account and put the money into the RRSP. After all, the TFSA produces no tax break today, for money going in is tax-paid. Also, it offers at most a $5,000 annual advantage plus whatever growth can be achieved. The RRSP, which has a limit more than five times as high in John’s case, generates a hefty tax break for John at his 45% tax rate.
Next, add non-registered savings of $250 a month to present $300-a-month contributions to the RESP. Take $74 from miscellaneous expenses and add it for a total $624-a-month contribution. That way, each child’s RESP gets about $2,500 a year and qualifies for the full Canada Education Savings Grant, the lesser of 20% of contributions or $500 a year.
John needs to catch up with his retirement savings. In this situation it actually makes sense to extend the amortization of their mortgage, which is 14 years, to 25 years and then use the money freed up by increased contributions to the RRSP. Tax refunds can be used to pay down the $25,000 line of credit and then to pay down the mortgage.
If amortized over 25 years, their mortgage payment will be reduced to $982 a month from $1,625, adding $643 a month to potential RRSP contributions. In turn, the $643 addition plus existing RRSP contributions of $500 a month will allow for total monthly contributions of $1,143 a month, or $13,716 a year. This is the RRSP-building strategy at work. John’s tax refund would then be about $6,200 a year, Mr. Moran estimates. John should direct contributions to a spousal plan for Yvette because pension-splitting, a feature of current tax law, could be impaired in the future by governments hungry for tax revenues, Mr. Moran warns.
John’s $25,000 line of credit has a current cost of $942 a month. That’s $11,304 a year. At this rate of paydown, the debt will be eliminated in about two years and they would then have $11,304 a year to use for the RRSP-maximizing strategy .
They can add the $11,304 a year to the annual $6,000 RRSP contribution they already make and tax refunds of $6,200 for a total contribution of $23,504 a year.The refunds generated will be about $10,337 a year. That money can go to mortgage paydown.
Financing retirement
Assuming a 3% average annual inflation-adjusted rate of growth of RRSP assets, their present savings pattern would see the couple build an RRSP of $235,300 by age 60. This way, their RRSPs could grow to $740,400 by the time John is 60. If they continue to contribute at John’s expanded rate, their RRSP balance would grow to $980,000 at John’s age 65. These are massive increases created by the pension building strategy.
It is reasonable to assume John will earn full CPP credits, currently $11,840 a year, and that Yvette, with a lower income, could qualify for 25% of the maximum or $2,960 a year, Mr. Moran says. At age 65, these benefits would total $14,800 a year.
John came to Canada at age 25. By 65, he will have the 40 years of residence needed for full Old Age Security benefits, currently $6,480 a year. Yvette, with one year’s less residence, would receive 39/40ths of the maximum benefit at 65, or $6,318 at current rates, for a total OAS benefit for the couple of $12,798 a year.
If John retires at age 60, and they spend their RRSP money evenly to his age 90, he and Yvette would have RRSP income of $37,774 a year. They could take CPP early, but that would cut their benefits buy 36% — a high price for early retirement. The implication is that they should work to John’s age 65 and begin retirement with full CPP benefits and OAS. If they do that, their age 65 $980,000 RRSP balance would yield an income of $56,249 for the next 25 years to John’s age 90, after which, all capital would be expended.
Adding up their RRSP distributions at John’s age 65 of $56,249 a year plus $14,800 CPP and $12,798 OAS, the couple will have $83,847 of retirement income before tax in 2012 dollars. If this pension income is split, they will have an average tax rate of perhaps 20%, leaving $67,078 a year, or $5,590 a month, to spend in 2011 dollars.
That’s two-thirds of present after-tax income, but their debts will be paid and the kids on whom John and Yvette currently spend $400 a month for activities, will have finished their first degrees. Their living costs, including food and clothing, will drop by perhaps $4,000 a month, leaving a net retirement cost of living of about $4,450 a month.
“I am confident that John and Yvette and their children will have the money that they need for school and retirement,” Mr. Moran says. “For new Canadians who started with nothing, that will indeed be an achievement.”
They have a $519,000 house and financial and other assets of $79,000. They have $254,000 of debt, most of it in their $228,000 mortgage. For a couple that made a late start in building wealth, their net worth, $344,000, is a substantial accomplishment.
John and Yvette worry they need to do a lot more in the next decade to put the three kids through university. Their registered education savings plan is $20,000 — enough to get their eldest child through a year or two at a local university. Burdened by their mortgage, they see a crisis ahead.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with the couple. His strategy — beef up retirement savings by stretching out paydown of the mortgage and make the most of tax breaks provided by John’s RRSP, which currently has a balance of just $34,000.
The couple has a take-home income of $8,450 a month. Their present allocations include $942 for their line of credit, $300 a month to RESPs and $250 a month to non-registered savings. $500 goes to their RRSP via a loan, and $1,625 goes to their mortgage. It’s the wrong allocation, Mr. Moran says. RRSPs should get top billing and a lot more of John’s savings.
Adjusting cash flows
The first step in reallocating savings should be to cash out their $1,000 tax-free savings account and put the money into the RRSP. After all, the TFSA produces no tax break today, for money going in is tax-paid. Also, it offers at most a $5,000 annual advantage plus whatever growth can be achieved. The RRSP, which has a limit more than five times as high in John’s case, generates a hefty tax break for John at his 45% tax rate.
Next, add non-registered savings of $250 a month to present $300-a-month contributions to the RESP. Take $74 from miscellaneous expenses and add it for a total $624-a-month contribution. That way, each child’s RESP gets about $2,500 a year and qualifies for the full Canada Education Savings Grant, the lesser of 20% of contributions or $500 a year.
John needs to catch up with his retirement savings. In this situation it actually makes sense to extend the amortization of their mortgage, which is 14 years, to 25 years and then use the money freed up by increased contributions to the RRSP. Tax refunds can be used to pay down the $25,000 line of credit and then to pay down the mortgage.
If amortized over 25 years, their mortgage payment will be reduced to $982 a month from $1,625, adding $643 a month to potential RRSP contributions. In turn, the $643 addition plus existing RRSP contributions of $500 a month will allow for total monthly contributions of $1,143 a month, or $13,716 a year. This is the RRSP-building strategy at work. John’s tax refund would then be about $6,200 a year, Mr. Moran estimates. John should direct contributions to a spousal plan for Yvette because pension-splitting, a feature of current tax law, could be impaired in the future by governments hungry for tax revenues, Mr. Moran warns.
John’s $25,000 line of credit has a current cost of $942 a month. That’s $11,304 a year. At this rate of paydown, the debt will be eliminated in about two years and they would then have $11,304 a year to use for the RRSP-maximizing strategy .
They can add the $11,304 a year to the annual $6,000 RRSP contribution they already make and tax refunds of $6,200 for a total contribution of $23,504 a year.The refunds generated will be about $10,337 a year. That money can go to mortgage paydown.
Financing retirement
Assuming a 3% average annual inflation-adjusted rate of growth of RRSP assets, their present savings pattern would see the couple build an RRSP of $235,300 by age 60. This way, their RRSPs could grow to $740,400 by the time John is 60. If they continue to contribute at John’s expanded rate, their RRSP balance would grow to $980,000 at John’s age 65. These are massive increases created by the pension building strategy.
It is reasonable to assume John will earn full CPP credits, currently $11,840 a year, and that Yvette, with a lower income, could qualify for 25% of the maximum or $2,960 a year, Mr. Moran says. At age 65, these benefits would total $14,800 a year.
John came to Canada at age 25. By 65, he will have the 40 years of residence needed for full Old Age Security benefits, currently $6,480 a year. Yvette, with one year’s less residence, would receive 39/40ths of the maximum benefit at 65, or $6,318 at current rates, for a total OAS benefit for the couple of $12,798 a year.
If John retires at age 60, and they spend their RRSP money evenly to his age 90, he and Yvette would have RRSP income of $37,774 a year. They could take CPP early, but that would cut their benefits buy 36% — a high price for early retirement. The implication is that they should work to John’s age 65 and begin retirement with full CPP benefits and OAS. If they do that, their age 65 $980,000 RRSP balance would yield an income of $56,249 for the next 25 years to John’s age 90, after which, all capital would be expended.
Adding up their RRSP distributions at John’s age 65 of $56,249 a year plus $14,800 CPP and $12,798 OAS, the couple will have $83,847 of retirement income before tax in 2012 dollars. If this pension income is split, they will have an average tax rate of perhaps 20%, leaving $67,078 a year, or $5,590 a month, to spend in 2011 dollars.
That’s two-thirds of present after-tax income, but their debts will be paid and the kids on whom John and Yvette currently spend $400 a month for activities, will have finished their first degrees. Their living costs, including food and clothing, will drop by perhaps $4,000 a month, leaving a net retirement cost of living of about $4,450 a month.
“I am confident that John and Yvette and their children will have the money that they need for school and retirement,” Mr. Moran says. “For new Canadians who started with nothing, that will indeed be an achievement.”
Thursday 5 April 2012
Flaherty calls on banks to ‘fix’ mortgage market
Canada’s finance minister said on Wednesday he would rather not tighten mortgage rules again to curb high household debt and that banks themselves are taking on that job by becoming more strict with their lending criteria.
Jim Flaherty said he has seen signs of moderation in the Toronto condominium market and expects to see a similar trend in Vancouver, one of the country’s hottest real estate markets.
“Part of that is based on what I’m being told by people who build condominiums, and also what I’m being told by some of our banks about their standards becoming more stringent with respect to their loans for condominium development,” Flaherty told reporters in Vancouver after making a speech there.
Flaherty said it was up to markets to “fix” the housing and debt problem, not the government.
“I’ve tightened up the mortgage insurance market three times … I really don’t want to do it again,” he said.
“And I’m glad that some of the banks – at least one of the bank executives yesterday indicated that he agreed that actually the banks should exercise prudence and not rely on government to do it for them,” he said.
Bank of Nova Scotia Chief Executive Rick Waugh said on Tuesday that the simmering housing market gives reason for caution, but that it’s up to the country’s banks, rather than the government, to manage the risks of their massive mortgage portfolios.
Several other bank executives – Toronto-Dominion CEO Ed Clark in particular – have said they would welcome further government moves on mortgages.
The government and central bank have been warning Canadians of the dangers of taking on too much debt, particularly through mortgages, at a time of historically low interest rates and high housing prices. The ratio of debt to personal disposable income hit a record high last year and has moderated somewhat since then.
Despite some resemblance to the U.S. housing market prior to the crash, most economists expect a soft landing in Canada.
Flaherty has tightened rules three times since 2008 in the mortgage insurance market but left them untouched in the federal budget last week, to the surprise of many.
The budget did propose enhanced supervision of the federal housing agency that issues mortgage insurance. Flaherty said the banking regulator, the Office of the Superintendent for Financial Institutions, was studying the matter.
Jim Flaherty said he has seen signs of moderation in the Toronto condominium market and expects to see a similar trend in Vancouver, one of the country’s hottest real estate markets.
“Part of that is based on what I’m being told by people who build condominiums, and also what I’m being told by some of our banks about their standards becoming more stringent with respect to their loans for condominium development,” Flaherty told reporters in Vancouver after making a speech there.
Flaherty said it was up to markets to “fix” the housing and debt problem, not the government.
“I’ve tightened up the mortgage insurance market three times … I really don’t want to do it again,” he said.
“And I’m glad that some of the banks – at least one of the bank executives yesterday indicated that he agreed that actually the banks should exercise prudence and not rely on government to do it for them,” he said.
Bank of Nova Scotia Chief Executive Rick Waugh said on Tuesday that the simmering housing market gives reason for caution, but that it’s up to the country’s banks, rather than the government, to manage the risks of their massive mortgage portfolios.
Several other bank executives – Toronto-Dominion CEO Ed Clark in particular – have said they would welcome further government moves on mortgages.
The government and central bank have been warning Canadians of the dangers of taking on too much debt, particularly through mortgages, at a time of historically low interest rates and high housing prices. The ratio of debt to personal disposable income hit a record high last year and has moderated somewhat since then.
Despite some resemblance to the U.S. housing market prior to the crash, most economists expect a soft landing in Canada.
Flaherty has tightened rules three times since 2008 in the mortgage insurance market but left them untouched in the federal budget last week, to the surprise of many.
The budget did propose enhanced supervision of the federal housing agency that issues mortgage insurance. Flaherty said the banking regulator, the Office of the Superintendent for Financial Institutions, was studying the matter.
Wednesday 4 April 2012
The Canadian economy back to normal
With the release of Finance Minister's new budget, we can safely say now that there are no immediate changes to the mortgage rules, however, as we already knew, interest rates will start to increase as the economy continues to grow. There were few surprises in Jim Flaherty's budget, with an emphasis on reducing the deficit, which is not a bad thing. We will be being saying goodbye to the lowly penny and to retirement at 65.
The Government's plan to increase the age you can receive retirement benefits is going up to 67 years of age from 65. This is a reflection of the changing demographic and on a personal finance note, it would be a good time to ensure you have a financial strategic plan. Depending on your age, you have some options: either you work for an extra two years; or you save to cover off the amount you would have received in those two years, approximately $6400 each year.
Moving on to the economy in general, the latest headlines tell us that the inflation rate rose up a notch in February due to higher gas and food prices. Core inflation - the underlying pressure on consumer goods, excluding volatile items such as energy and fresh foods - rose two notches to 2.3 per cent, above the Bank of Canada's 2-per-cent target line. Payroll is only slightly outpacing the inflation rate but employment rates are improving.
The spring housing market is heating up; house prices are balancing out except in sweltering hot cities like Toronto and Vancouver.
And the Bank of Canada may raise the prime lending rate later this year.
What does it all mean? The economy is getting back to normal.
Since the U.S. housing downturn in 2007 most economic news worldwide has been negative, punctuated with terms such as "economic crisis", " roller-coaster markets", "financial panic," and "heightened level of uncertainty".
If we take a snapshot of the world today we find that equity markets have calmed down - the stock exchanges are up and down but the volatility has eased.
The talk of a European collapse has muted.
The U.S. economy is improving and the Federal Reserve is much more upbeat with its reports.
In Canada, the economic waters have calmed considerably. We probably won't see a housing bubble burst; the West is booming again and interest rates are going to rise later this year or in early 2013.
The big news coming out of Ottawa is not about staving off financial ruin but the same old stuff like fighting deficits, battles over health care transfers, trade issues and some controversies like robocalls.
Pretty much back to normal!
The Government's plan to increase the age you can receive retirement benefits is going up to 67 years of age from 65. This is a reflection of the changing demographic and on a personal finance note, it would be a good time to ensure you have a financial strategic plan. Depending on your age, you have some options: either you work for an extra two years; or you save to cover off the amount you would have received in those two years, approximately $6400 each year.
Moving on to the economy in general, the latest headlines tell us that the inflation rate rose up a notch in February due to higher gas and food prices. Core inflation - the underlying pressure on consumer goods, excluding volatile items such as energy and fresh foods - rose two notches to 2.3 per cent, above the Bank of Canada's 2-per-cent target line. Payroll is only slightly outpacing the inflation rate but employment rates are improving.
The spring housing market is heating up; house prices are balancing out except in sweltering hot cities like Toronto and Vancouver.
And the Bank of Canada may raise the prime lending rate later this year.
What does it all mean? The economy is getting back to normal.
Since the U.S. housing downturn in 2007 most economic news worldwide has been negative, punctuated with terms such as "economic crisis", " roller-coaster markets", "financial panic," and "heightened level of uncertainty".
If we take a snapshot of the world today we find that equity markets have calmed down - the stock exchanges are up and down but the volatility has eased.
The talk of a European collapse has muted.
The U.S. economy is improving and the Federal Reserve is much more upbeat with its reports.
In Canada, the economic waters have calmed considerably. We probably won't see a housing bubble burst; the West is booming again and interest rates are going to rise later this year or in early 2013.
The big news coming out of Ottawa is not about staving off financial ruin but the same old stuff like fighting deficits, battles over health care transfers, trade issues and some controversies like robocalls.
Pretty much back to normal!
Tuesday 3 April 2012
8 Real Estate Investing Tips
The real estate investment market is robust and competitive!
According to the National Association of Realtors, 23% of all real estate sales were either investment property or second-home purchases.If you are thinking about investing in real estate, here is some advice from 'other' investors on what you need to think about first!
Buy the best location you can afford – location sells!
If the area turns around, you may be able to make more money in a lesser location, however it's a lot more work and you can increase your risks that the area my deteriorate even more.
Pay for good talent
Your property is no place for your relatives or friends to practice their carpentry skills.
Buy small and stay small
Stick with smaller units and don't go overboard with upgrades, etc. as tenants may not be able to afford your rental property. Make sure the property will rent in line with overall rentals in the area.
Inspect the property for 'what it can be'
Take a different view of possible renters and you can sometimes locate a bargain that no one else recognizes.Run the numbers
The money coming in – the money going out, and consider the depreciation costs that will come up.
Buy a building with a tenant in mind already.
You may know someone who is self-employed and may need some extra space to expand their business. The lease will pay the expenses while property values increase.
Have a plan when your tenants move
Create a list of repair people to clean up and repair the property when a tenant moves. Every day the property is vacant it costs you money.
Avoid buying a unique property
Choose houses that would appeal to the average family so it will be easier to sell when you are ready to do so.
Before you invest, learn all you can about the rental market, tax benefits and renovation costs. It is easier than you might think to create a real estate investment plan and get started.
Monday 2 April 2012
Banks can absorb hit to housing market: Ed Clark
John Greenwood
Despite soaring mortgage lending, Canadian banks are strong enough to absorb any hit that might result from a potential real estate correction, said Ed Clark, chief executive of Toronto-Dominion Bank.
Unlike U.S. banks, lenders on this side of the border did not get involved in the kind of risky practices that helped drive the U.S. housing boom of the previous decade and that ultimately caused so much carnage when the crisis hit in 2008, Mr. Clark told shareholders at TD’s annual meeting.
Canadian banks didn’t require government bailouts and were able to go out into the markets and raise significant capital to fortify their balance sheets over the last few years.
If the housing market corrects, the big banks are strong enough “that they could absorb that hit,” he said.
In answer to a shareholder question, Mr. Clark acknowledged that there are “slightly different views” about where the housing market is headed, but he noted that “we all think that Canada is not at risk of a U.S.-style meltdown.”
Even if real estate does correct, the drop won’t be as severe as the U.S. experience and banks will be prepared to absorb any potential losses owing to their strong capital positions.
Bank of Canada Governor Mark Carney has warned that elevated consumer debt levels represent the biggest domestic risk to the financial system.
Mr. Clark said Canadian policy makers are faced with a “classic macro-economic dilemma” as they try to deal with quickly rising consumer debt levels. On the one hand there is a need to keep interest rates low to maintain the economic recovery but it’s those low rates that are causing consumers to go out and take on more debt.
Ottawa has been responding by tightening the rules around mortgage lending, most recently with the introduction of proposed new requirements around underwriting and disclosure from the Office of the Superintendent of Financial Institutions.
Mr. Clark said OSFI’s draft rules would need “some tweaks” to make them “practical and implementable,” but in general “we are doing the right thing” to make sure the situation doesn’t get out of control.”
Despite soaring mortgage lending, Canadian banks are strong enough to absorb any hit that might result from a potential real estate correction, said Ed Clark, chief executive of Toronto-Dominion Bank.
Unlike U.S. banks, lenders on this side of the border did not get involved in the kind of risky practices that helped drive the U.S. housing boom of the previous decade and that ultimately caused so much carnage when the crisis hit in 2008, Mr. Clark told shareholders at TD’s annual meeting.
Canadian banks didn’t require government bailouts and were able to go out into the markets and raise significant capital to fortify their balance sheets over the last few years.
If the housing market corrects, the big banks are strong enough “that they could absorb that hit,” he said.
In answer to a shareholder question, Mr. Clark acknowledged that there are “slightly different views” about where the housing market is headed, but he noted that “we all think that Canada is not at risk of a U.S.-style meltdown.”
Even if real estate does correct, the drop won’t be as severe as the U.S. experience and banks will be prepared to absorb any potential losses owing to their strong capital positions.
Bank of Canada Governor Mark Carney has warned that elevated consumer debt levels represent the biggest domestic risk to the financial system.
Mr. Clark said Canadian policy makers are faced with a “classic macro-economic dilemma” as they try to deal with quickly rising consumer debt levels. On the one hand there is a need to keep interest rates low to maintain the economic recovery but it’s those low rates that are causing consumers to go out and take on more debt.
Ottawa has been responding by tightening the rules around mortgage lending, most recently with the introduction of proposed new requirements around underwriting and disclosure from the Office of the Superintendent of Financial Institutions.
Mr. Clark said OSFI’s draft rules would need “some tweaks” to make them “practical and implementable,” but in general “we are doing the right thing” to make sure the situation doesn’t get out of control.”
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