27 May

There will be no drastic drop in Canadian housing prices


Posted by: Kimberly Walker

Realtors to Canadians: Chill out

Steve Ladurantaye Real Estate Reporter

Globe and Mail Update

There will be no drastic drop in Canadian housing prices, the Canadian Real Estate Association said Thursday, because house prices will stabilize and climbing household income will make owning a home more affordable.

Responding to reports from some of the country’s largest banks that prices could see drops of as much as 10 per cent in the next two years as higher mortgage rates and rising prices make housing more expensive, the association said the naysayers are ignoring the cyclical nature of Canada’s real estate market.

“The relationship between average price and income has recently been cited as portending a U.S.-style correction in Canadian home prices,” said the association’s chief economist Gregory Klump. “However, such warnings ignore the longer-term relationship between prices and income, and disregard typical Canadian housing market cycle dynamics.”

The housing market has been key to Canada’s recovery, with average prices up 23 per cent from their recessionary lows at the end of April. The average price of a home at the end of April was $344,968, the highest on record and 7 per cent higher than before the recession

26 May

Loonie’s plunge signals long-term risk for Canadian and global economies


Posted by: Kimberly Walker

By Julian Beltrame, The Canadian Press

OTTAWA – The Canadian dollar plunged to its lowest level in eight months before recovering Tuesday, sending a clear signal that Europe’s debt crisis has the potential to reach across the Atlantic and impact Canada’s mending economy.

The loonie has lost about eight per cent of its value over the last month in reaction to fears in global equity and financial markets about the lasting imprint of government debt, and now a new risk — the threat of war on the Korean peninsula.

Over the weekend, the Bank of Spain had to bail out Cajasur — the second savings bank in that country to receive public money since March 2009. On Monday, four other Spanish savings banks announced plans to merge amid concerns over solvency in the sector.

Tension in Asia has also risen since last week after North Korea was accused of the sinking in March of a South Korean warship. Seoul has called for sanctions against the North.

The Canadian dollar closed down 0.94 of a cent at 93.46 cents US on Tuesday after bouncing off a low of 92.18 cents US earlier in the day.

The loonie is not alone in seeing its value eroded. Other commodity currencies have also taken a hit in the flight to dependable and liquid U.S. Treasury bills.

The short-term impact on the Canadian economy of frightened financial markets and a loonie closer to 90 cents than parity, ironically, may be mostly positive.

A weaker dollar will give a much-needed boost to manufacturers and exporters who prosper whenever they can sell their products abroad with a currency discount.

And the unsettling of financial markets has caused real interest rates to soften for mortgages and other loans. Many Canadian banks have dropped posted rates on five-year mortgages to below six per cent.

As a result, prospects that Bank of Canada governor Mark Carney will start hiking rates next Tuesday have gone from a virtual sure thing a month ago to a coin-flip today.

Export Development Canada’s chief economist, Peter Hall, welcomed the fact that the loonie’s wings have been clipped, saying that a dollar at par had the potential to take two or three points off economic growth next year — the equivalent of about $30 billion to $45 billion in output.

But the longer term implications may be that Canada’s recovery won’t go as smoothly as many had hoped. The loonie is acting as a proxy for the global economy: when the Canadian dollar is down, it means so are prospects for global expansion, say economists.

“Everything and anything that happens in the world affects Canada,” said TD Bank chief economist Don Drummond, noting Canada’s dependence on trade and on the prices of commodities it sells to the rest of the world.

The longer term outlook is that many governments, not just the poor cousins of Europe, will soon need to deal with debt burdens that cannot be sustained, and the ensuing clampdown on spending will stall the recovery.

Several economists, including David Rosenberg of Gluskin and Sheff, said the risk of a second downturn in key economies, including the United States as Washington withdraws stimulus spending, has become very real. Much like in 2008-09, Canada would become collateral damage, they said.

“For a small, open (and) commodity-sensitive economy whose entire recession in 2009 was imported from abroad and south of the border, the answer is yes,” Rosenberg said when asked whether a second dip is possible.

That still remains a minority view, although the TD’s Drummond puts the risk at about 20 per cent.

The key question is whether the European crisis is an overblown temporary crisis, or the precursor of government debt woes in the United Kingdom, the United States and other larger economies.

Scotiabank portfolio manager Andrew Pyle said he believes the fears over Europe will blow over in a matter of weeks, which will cause both oil prices and the loonie to recover to previous levels.

“I think people will be surprised to see how quickly that will happen. I wouldn’t be surprised to see us back to parity in July,” he said.

But it’s the longer-term prospects that most worries Drummond. He says the perception that the situation will stabilize if the bailout of Greece and other countries works, or that things will implode if the bailout doesn’t work, is simplistic.

“Those countries (with large debts) aren’t getting out of this any time soon . . . easy bailout or not,” he said.


25 May

Canadian home prices up


Posted by: Kimberly Walker

Tuesday, 25 May 2010

Owning a home in Canada, except in Alberta, has become even more expensive, according to the latest housing report just release by RBC Economics Research.

The report says the costs of owning a home rose for the third straight quarter across all housing segments in the first quarter of 2010.

“Although home ownership became more costly in the first quarter of 2010, affordability measures are still moderately above the long-term average and below peak levels,” said Robert Hogue, RBC senior economist.  “We expect affordability to deteriorate throughout 2010 and 2011, but this should be limited as more balanced supply and demand conditions will take much of the steam out of the housing market,” he said.

The report projects the cost of owning a home will continue to rise and the main contributing factor is the expected interest rate hike.

In Quebec, housing affordability declined moderately, as well as in Ontario and Atlantic Canada. Alberta is the only province to show a drop home ownership costs.

25 May

New rules cuff some mortgages to banks


Posted by: Kimberly Walker

New rules cuff some mortgages to banks

Garry Marr, Financial Post 
A headlock would be the wrestling term to describe the hold Canadian banks will have on some consumers because of new, more strict mortgage rules.

We are already seeing the impact of the changes that came into effect on April 19, but were put in place well in advance by Canadian financial institutions. Consumers are increasingly selecting fixed-rate mortgages of five years or more because it’s easier to qualify for them.

On mortgages for terms of four years or less, including variable-rate mortgages, consumers must be able to pay based on the five-year fixed posted rate, which is now 6.1%. Go longer and you can use the rate on your contract, as low as 4.6%. No more than 32% of your gross income can cover principal and interest, property taxes and heat.

Peter Vukanovich, president of Genworth Financial Canada, the largest private provider of mortgage-default insurance, says only 5% of new high-ratio mortgages are going variable versus 15% just six months ago.

But there is another wrinkle to the new rules: Anybody shopping around for a better rate has to requalify based on their current credit situation. Stay with the same bank and there’s no check.

“It’s definitely a headlock and not a loophole because a loophole you can get out of,” says Vince Gaetano, a mortgage broker with Monster Mortgage.

There is a large percentage of Canadians who get a renewal notice from their bank and just sign on the dotted line. The Canadian Association of Accredited Mortgage Professional has found only 22% of Canadians switch banks at renewal time. A significant portion of the remaining 78% are sheep being led around by their financial institutions.

Those looking for some choice may find what was good enough to get into the market a month ago may not meet the test today.

Consider that as recently as two years ago, consumers were able to buy a house with no money down and a 40-year amortization schedule. If that consumer was making regular monthly payments, they would have paid down only 4.7% of their principal after five years. Today, that customer would still be high ratio and subject to requalifying if they switched banks.

“It’s not all of them, but a majority of first-time buyers with just 5% down or less won’t be able to qualify if they go to another bank,” Mr. Gaetano says. Many of those buyers were qualifying based on the three-year rate – about 200 basis points lower than the current qualification rate.

If house prices went down, something many in the real estate community have suggested could happen, that would be an even bigger blow for consumers. It would mean an even larger percentage of homeowners would still be considered high ratio upon renewal because they wouldn’t meet the test of having 20% equity in their home.

Marcel Beaudry, vice-president of ING Direct, says there is no question the new rules will have an impact on consumers looking to switch banks, but noted anyone who had a 40-year amortization and changed institutions also had to requalify and there hasn’t been a huge impact.

“There will be a segment of the population tied down by the new rules to their bank,” Mr. Beaudry says.

That’s a position nobody should be in.
Read more: http://www.financialpost.com/story.html?id=3057768#ixzz0owPZtf4I


21 May

Is that it for parity? By Andrew Flynn, The Canadian Press


Posted by: Kimberly Walker

TORONTO – The loonie has been living up to its name in recent weeks, swooping crazily from just above parity with the U.S. greenback to well below as it navigates a violently turbulent global economy.

The Canadian dollar’s latest move was a 2.12-cent retreat, as panicky currency traders looked for somewhere safe to park their cash while volatility rocks the world’s markets.

The biggest concern for weeks has been the threat of economic instability in Europe, with the possibility that Greece might default on its debts. Even if it doesn’t — thanks in part to a $1-trillion European Union rescue package — similar troubles in other member countries could still stall the global economic recovery.

Despite the relatively robust health of the domestic economy, the loonie has now fallen nearly four cents in little more than a week and nearly seven cents since late April, when it hovered around parity with the U.S. dollar.

“Canada is as unaffected as a country can be but that’s not to say it’s completely unaffected, because ultimately as we learned in the credit crunch if things were to get really quite bad, you do see every country in the world sucked into this thing,” said Eric Lascelles, chief strategist at TD Securities.

“It’s not a statement whatsoever against Canada, against the Canadian economy or against the currency directly — it really is a natural consequence of crisis which generally results in a flight to safe-haven currencies and, rightly or wrongly, the U.S. dollar is that currency right now.”

While the loonie appears to be taking it on the chin, that doesn’t mean it won’t bounce right back up to parity when the hurricane of uncertainty dies down and traders climb out of their risk-aversion bunkers, Scotia Capital currency strategist Camilla Sutton wrote in a note to clients.

“Though we continue to believe that the medium-term outlook for the U.S.-Canadian dollar is intact for another run at parity, until risk aversion abates (the U.S. dollar) is vulnerable to a push higher” against the loonie, Sutton wrote.

While that shouldn’t have much impact on the Bank of Canada’s plans to raise interest rates, “we think the market is still highly sensitive to the Bank of Canada decision on June 1,” she added. That makes it a little less likely — somewhere around a 50-50 chance — that the central bank will raise rates from their rock-bottom 0.25 per cent on June 1, waiting instead to do so in July. http://ca.news.finance.yahoo.com/s/20052010/2/biz-finance-loonie-continues-sharp-decline-against-u-s-dollar.html

20 May

Canadian Dollar falls against US Dollar


Posted by: Kimberly Walker

Thursday, 20th May

All eyes were on the Canadian Dollar (CAD) on April 6th as it hit parity against the US Dollar (USD). However the run seems to be over as commodity prices drop off and the CAD falls to 0.9350.
Historically, commodity prices drive the CAD, no real surprise for this export led economy. Volatility is predicted for the commodities market as concerns over demand from Europe continue, this means a volatile time for the CAD in the coming days and weeks.

What does this mean for the many Canadian clients taking advantage of the affordable real estate in Florida at the moment? To put it simply – buy USD now!

Moneycorp can help your clients lock in the exchange rate today, even if they do need to take delivery of the funds for up to 2 years in advance. We will also ensure your clients get the most competitive rates and best possible service. 

If you have a client who needs to exchange their Canadian Dollars into US Dollars, call your Account Manager today on +1 407 352 5890. We will help your client and pay you a referral fee!


20 May

Selling Your Home With No Realtor – Save Thousands In Commission


Posted by: Kimberly Walker

Private sellers shaking up real estate industry Steve Ladurantaye

Globe and Mail

 Gordon Ives is the sort of customer who keeps real estate agents awake at night: a former customer.


Last year, after several years of trying to sell his Charlottetown home through an agent, the retired banker decided to change tack and find a buyer on his own. He calculated how much a conventional sale would cost him in commissions and sliced that much off his asking price. Four months later, it sold.


Net cost to him of selling it himself: zero. Net cost to the real estate industry: about $15,000 in lost commissions – and one client who is determined never to use an agent again.


“I hate to say this because I have some family members that are agents, but it’s really not that difficult to do if you’re comfortable dealing with people,” Mr. Ives says. “This is a wave that’s starting to build, and people have to realize that change is possible.”


Agents have long looked askance at people who wanted to sell their houses on their own, but those sellers were such a small part of the market that the industry rarely worried about them. That’s changing, and fast. Facing the erosion of their business model at the hands of a Competition Bureau that is intent on opening up the industry to new players, realtors are launching campaigns from coast to coast to discourage do-it-yourselfers and position themselves as the only sane way to sell a home.


The soft sell is being done on television, with an advertisement recently launched by the Canadian Real Estate Association that tries to show all the things an agent does to help – “Need staging advice? I do that too.” The hard sell is coming in other forms, as real estate boards ratchet up the rhetoric in a bid to win private sellers back.


In Nova Scotia, for example, homeowners who put their properties up for sale without the help of an agent can expect a scary letter to land in their mailbox, making sure they understand the hazards of going it alone. The letter, which comes from the Nova Scotia Association of Realtors, warns homeowners that they are “accepting with open arms increased risk of liability, threats to you and your family’s safety.”


“Realtors protect you and your family from any ill-intended strangers that will come in to your home under the pretense of wanting to buy,” the letter advises, before it goes on to warn of lower sale prices and longer sale times.


It’s a new position for the industry, which is used to having a near-monopoly on sales in Canada. It is widely accepted that about that 90 per cent of all home sales in Canada take place through the Multiple Listing Service maintained by the country’s real estate boards and CREA.


But that number is an educated guess, because there is no database that includes both houses sold by agents and those sold privately. And as technology makes selling on your own easier than ever, there’s little doubt that the estimate is increasingly out of date.


While selling privately has always been an option for anyone willing to try their luck after reading a few books, it has been aided by the emergence of services like PropertyGuys.com, which launched in 1998.


The business is built on the assumption that every part of a real estate transaction can be handled by an industry professional for a flat fee. PropertyGuys helps link up sellers with appraisers who can set prices and lawyers who can handle paperwork. The time is right for owner-led sales to take more market share, argue the company’s founders, because technology makes it easier than ever to find information and compile databases that can help both buyers and sellers handle transactions without a lot of middlemen.


Starting out of his basement in Moncton, Ken LeBlanc built a national network of franchises that guide homeowners through the process of selling their homes. While the number of listings is minuscule (about 10,000) compared to what’s offered by real estate agents through their Multiple Listing Service (236,397 at the end of April), they say the proportion of listings that result in sales is about the same, at near 50 per cent.


“You’d be amazed how many people around the country still think it’s illegal to sell your house on your own,” he says.


For sellers, the fees range from a few hundred dollars to a few thousand, depending on the amount of hand-holding required, but it has been enough to push PropertyGuys to profitability. When they began selling franchises in 2005, the asking price was less than $5,000. Today, the top price is closer to $50,000, and the business has grown to include 110 franchises from coast to coast.


The biggest gains have come on the East Coast, though the company is also taking a larger share of Northern British Columbia. Ontario is a tougher market to penetrate, because the number of agents in large metro centres such as Toronto makes it initially difficult for franchises to stand out.


Kenny Singleton owns the PEI franchise, and has seen his business grow to the point that he handles about 30 per cent of all sales in Charlottetown. He’d be small player in any other part of the country – only 1,404 houses sold on the island last year. But on the island, it makes private sellers a force to be reckoned with.


His first year was the hardest. Almost every prospective customer “heard around town” that the franchise was on the brink of bankruptcy, he said. He has also had to fight for many of his listings – personal relationships run deep, and almost everyone is either related to or friends with someone who sells real estate professionally.


“That holds up for a while, but there comes a point where people realize that it doesn’t make sense to spend $20,000 to sell your house,” he said. “That’s a realization that hits people after a while, and we’ve been here a while.”


He’s convinced selling privately is a better model – and scoffs at the idea that agents will get you a better price. A house will sell at the point where buyers and sellers intersect on price. Anything else is just superficial, he says.


“If you’re looking for a two-bedroom house and I have a three-bedroom house, there’s no real estate agent in the world that will be able to close that sale,” he said. “Price is what matters, and once you agree on that, then it’s a very simple process.”


His optimism is based largely on demographics. Real estate agents on PEI tend to be middle aged or older, and growing out of touch with a younger generation that prefers online options and is more comfortable with the idea of private sales than their parents would have been.


“These kids aren’t going to use an agent,” he says. “That’s just the way this is going. The agents are older and the buyers are younger, and they’ve had the Internet their whole lives.”


Of course, real estate agents see things differently. It’s hardly a straightforward transaction, and there are significant perils to someone who makes a mistake.


“Some people don’t understand the services we provide and it’s important we help them get a better sense of the value we provide,” says Karen Edwards, president of the Nova Scotia Association of Realtors.


The problem with private sales is that you don’t know what you don’t know, says the president of the Prince Edward Island Real Estate Board. Jim Carragher insists a lot of his new business comes from private sales gone bad.


“I’m telling you that it is so terribly sad when I get that phone call at the 11th hour from someone who was trying to sell their home who suddenly realizes they have made a terrible mistake,” he says. “Their deal falls through, they already bought something unconditionally. I try to help, but I tell you sometimes it’s just too late to undo the damage.”

































19 May

Friday’s inflation rate expected to open door to interest rate hikes: economists


Posted by: Kimberly Walker

Friday’s inflation rate expected to open door to interest rate hikes: economists  By Julian Beltrame, The Canadian Press

OTTAWA – Canadians likely have only two weeks left to enjoy historically low interest rates.

With global markets beginning to stabilize following the recent fears over a Greek debt default, economists say the pieces are falling into place for the Bank of Canada to move off its emergency 0.25 per cent rate on June 1.

Economists — and markets — have already pencilled in a doubling of the policy rate in two weeks. But that is only a beginning say analysts who believe governor Mark Carney will keep on hiking rates through the rest of the year.

Even the TD Bank, which only a few months ago was advising Carney to wait until at least the third quarter of 2010, is now calling for an incremental hike beginning in June.

The reason, says the bank’s director of forecasting Beata Caranci, is that the Canadian economic recovery is well ahead of schedule with what looks like two consecutive quarters of five per cent and beyond growth, a jobs recovery more robust than predicted with another 109,000 added in April, and inflation — the key indicator for the central bank — heading toward two per cent.

“The bank is looking a year or year-and-a-half out, and they are looking at an output gap that is not going to be there anymore, so they’ve got to start adjusting now to get the interest rate at what would be considered more neutral,” she explained.

“And if they don’t go now, it could mean we see bigger adjustments down the road,” she added.

Higher rates are meant to slow down excessive borrowing and head off asset bubbles like an overheated housing market, which the central bank has already highlighted as a risk. Cheap money is also seen as destabilizing in the long term, much as happened in the United States in the early part of the decade and eventually led to the most recent crisis.

Economists caution that the anticipated hikes by the central bank should not be seen as an attempt to slow down activity, but merely as moving to a more traditional posture. With inflation at near two per cent, the current 0.25 per cent level is actually a negative interest rate, they note.

The TD Bank and many others believe Canada’s policy rate will hit 1.5 per cent by year’s end, more in line with inflation.

Carney gave a strong hint last month that he was preparing to move, surprising observers by dropping his year-long conditional pledge not to hike rates until at least July.

He has since added an element of doubt into expectations by noting that he considered the very act of removing the conditional commitment to have been a policy tightening measure. The rate-hiking narrative took another detour earlier this month with the recent turmoil in equity and financial markets over government debt issues in southern Europe — that added new uncertainty to the global recovery scenario.

But unless Europe again flares up in a major way, the only question remaining for Carney will likely be answered Friday with the release of April inflation data by Statistics Canada, say economists.

The consensus is that headline inflation will rise to 1.6 per cent and core underlying inflation — the index the central bank closely watches — will edge up to 1.8 per cent.

Those numbers are still below the bank’s two per cent target but economists say they are worried because inflation is digging in at a time when the economy is still operating far below capacity, and at a time when the Canadian dollar is near parity.

That is not the case in the U.S., where inflation is actually heading south and could once again approach zero by year’s end.

“Even with the current volatility in financial markets, the Canadian story remains intact as underlying fundamentals continue to improve alongside strong corporate and household balance sheets,” write Scotiabank economists Derek Holt and Karen Cordes Woods in forecasting an interest rate hike.

Bank of Montreal economist Douglas Porter says there is still a chance Carney will wait until July 20, or even later, especially if the European crisis threatens to leak into North American credit markets, or if there’s a big downward surprise in underlying inflation Friday.

Increasing rates in Canada, especially since the U.S. is likely to keep its policy rate at zero until 2011, will put added upward pressure on the Canadian dollar, which will further depress the country’s manufacturing and exporting sectors.

But Caranci believes the dollar impact will be minor, because markets have already priced in several moves by Carney ahead of the U.S. And the loonie’s recent dip below parity to about 96 cents US has partly removed an important impediment to act on rates for the Bank of Canada, she adds. http://ca.news.finance.yahoo.com/s/18052010/2/biz-finance-friday-s-inflation-rate-expected-open-door-interest.html


11 May

Time to lock in that mortgage rate?


Posted by: Kimberly Walker

Andrew Allentuck, Financial Post  Published: Thursday, May 06, 2010

Taking on a mortgage is a big commitment. Every buyer who uses a mortgage has the choice of floating or going with a fixed rate that often costs a couple of percentage points higher per year. Today, for example, one can get variable rates at an average rate of 2.34% while five year closed rates average 5.27%, according to Fiscal Agents Financial Services Group in Oakville, Ontario. Negotiated rates can be lower.

If rates never changed very much, there would be no contest – the floating rate deal would win. But rates do rise and fall and therein lies the borrower’s dilemma.

Borrowers with kids and an aging car fear that their ability to pay interest rates twice or thrice the current floating rates are limited. “The test is liquidity and risk tolerance,” says Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C. “People with ample liquidity can afford to take a chance on rising mortgage rates. It follows that those who lack liquidity feel some pressure to avoid drastic interest rate increases.”

The point is not merely academic, for Canada, in spite of recent mortgage rate increases, is still at a relatively low point of rates over the last four decades. “There is more room for rates to go up than down,” Moran points out.

The cost of making a decision to float or go fixed varies with the rate differences.

In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice. “Over the long run, homeowners really do pay extra for fixed rate mortgages,” they concluded.

The reason is intuitive. Lenders do not want to take the chance that when they have to refinance a loan that they will be stuck paying more than they are getting.

Mismatching what they lend with the cost of what they borrow can cut their profits and even lead to insolvency. So lenders attach what amounts to an interest rate insurance fee and bundle that into the price of money they lend on fixed terms.

Milevsky and Walker confirmed this explanation. “The study showed that a positive Maturity Value of Savings [the value of investing the difference between floating and fixed mortgages in 91-day T-bills] was positive the majority of the time, so the homeowner saved by using a variable-rate mortgage.”

The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008. Put another way, floating allowed borrowers to cut the time it would take to pay off the mortgages by a year or more, in some cases as much as five years on 15-year amortizations.

Rational calculation and personal feeling are, of course, different things. A person with a fixed income and a great deal of debt may be reluctant to put a rate casino between himself and the lender and will therefore go with certainty, even at a high price.

It is also a matter of experience. “First time buyers tend to pay close attention to the cost of the mortgage,” says Laura Parsons, Areas Manager of Specialized Sales – which includes mortgages, for the BMO Financial Group in Calgary. For them, the appeal of locking in is relatively high. Their mortgages are new, the amounts they owe are higher than they would be 10 or 15 years in future when the mortgage is substantially reduced, and their incomes, often early in their adult lives, are lower than they will be in future.

“First time home buyers are net debtors and they don’t want to endanger their finances,” suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver.

There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind.

“The buyer can take a variable rate mortgage but set payments higher than the minimum required” says Parsons. “That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise.”

Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the “5% CashBack Mortgage,” implicitly acknowledges that fixed rate loans can be more costly than variable rate ones.

For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal.

Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO’s analysis shows, “fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now.”

So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much.

There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. “The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates,” she explains..

BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO’s economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them.

10 May



Posted by: Kimberly Walker

At this time it is important to put the Greek situation in perspective. Will we be talking about Greece 12

months from now? Clearly, no one can predict how the stock and bond markets will react in the coming

weeks to developments in Europe. After all, as we all know, in this kind of situation the market is driven by

emotions (panic?), not fundamentals.

It is not enough to say that the impact of the crisis will be limited due to the fact that Greece is an insignificant

player in the global economic arena. After all, Thailand which originated the Asian debt crisis of 1997 is not

exactly an economic giant. The more important focus should be on the shape of the global economy at the eve

of the crisis. And in this context note that the crisis is occurring in an environment of a recovering global

economy while the EU’s bailout of Greece implicitly guaranteeing the debt of larger economies such as Spain

and Italy. The drivers of global growth now include China and India, which are less vulnerable to Europe’s

downturns. At the same time, Latin America and Southeast Asia enjoy much stronger government finances

and more moderate exchange rate. These factors reduce their sensitivity to economic shocks. Furthermore,

Greece, Portugal and Ireland don’t have the trade or capital market gravity of their larger European neighbors.

The Greek crisis will end up being an important event in the history of sovereign debt, but its impact on the

global economy will be minimal. More important focus should be on the fact that the crisis is an exaggerated

preview of what we should expect to see down the road from other countries. After all, Greece is not the only

country that is facing a mountain of debt. Yes, the magnitude is different but the direction is the same. In

Greece, they call it austerity measures, in North America it will be called reduced spending and higher taxes.

The point is that fiscal policy will work as a clear negative for overall economic growth. In Canada, for example,

a government that was responsible for no less than 40% of overall economic growth during the past decade

will start acting as a negative for economic growth in the second half of 2010 and beyond. The fiscal drag in

the US will be much more significant.

Accordingly, while the Bank of Canada will probably proceed with its plans to raise rates come June or July, the

upcoming fiscal challenge suggests a very gradual approach. As for the stock market, any significant sell-off in

the coming weeks should be seen as a buying opportunity.

Benjamin Tal

Senior Economist