Central bank puts benchmark rate at 4.25%, says economy no longer needs the stimulus of low rates

Adelaide, Australia — the Globe and Mail-The Associated Press

Australia’s central bank raised its key interest rate Tuesday for a fifth time in six months and said the economy no longer needs the stimulus of low rates with unemployment lower than expected and housing sales robust.

The quarter percentage point rise took the benchmark rate to 4.25 per cent and followed a warning last week by the central bank governor that mortgage rates would continue to rise.

“It is appropriate for interest rates to be closer to average” because this year’s economic growth and inflation are likely to be near target levels, the Reserve Bank of Australia bank said in a statement.

Australia weathered the global downturn better than most developed countries and the economy grew at its fastest pace in nearly two years in the fourth quarter of 2009.

The central bank cited indications that lenders were more willing to lend, buoyancy in the housing market and lower unemployment than expected.

“With the risk of serious economic contraction in Australia having passed some time ago, the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker,” the bank said.

Federal Treasurer Wayne Swan said rates are still lower than they were before the global downturn and the central bank was making moves to bring them to normal levels.

“I know that is cold comfort for a lot of families and a lot of people in businesses,” he told reporters. “But that is the reality of a strengthening economy.”

http://www.theglobeandmail.com/report-on-business/economy/australia-boosts-key-rate/article1524458/   

 

Posted to FP: April 12, 2010, Jonathan Ratner

With most agreeing that a rate hike from the Bank of Canada is imminent, the talk now turns to the exact timing and extent of the central bank’s policy changes.

Governor Mark Carney made a “conditional” promise to keep the benchmark interest rate at 0.25% through the end of June 2010. However, one way to keep to this expiry date and provide markets with a jolt would be an initial rate hike of 50 basis points on July 20, according to Bank of America Merrill Lynch economist Sheryl King.

“Futures markets are only partially pricing in that possibility so it would be a shot across the bow to be sure,” she said in a note. “The strongest argument against this tack in our view is that the market would immediately rush to the conclusion that all future hikes will be similar in size.”

The economist thinks a 25 basis point hike on June 1 is the most likely scenario.

Meanwhile, Ms. King feels a 25 basis point hike on July 20 is the least likely scenario. She noted that this expectation is already fully priced into the Eurodollar and overnight index swap (OIS) markets. “If the Bank wants to elevate the risk premium in the bond market, validating market pricing cannot be the way they will go.”

The economist said that with growth running 40% faster than the Bank of Canada’s January forecasts, a rollover in unemployment and core CPI “frustratingly high,” there is justification to move a bit early. She added that moving early rather than large would help build up that needed risk premium without having 10-year notes move above the 6% mark that a normalized risk premium of 1.8% and a neutral overnight rate of roughly 4.5% would command.

The main arguement against a June 1 rate hike is that it comes ahead of the June 30 expiry commitment and puts the Bank’s credibility in the market at risk. Ms. King insists that credibility in achieving the central bank’s 2% inflation target is “very arguably the more important badge to maintain.”

“All along, the Bank has warned investors the commitment to not touch rates was not a promise and earlier rate hikes possible if conditions warranted.” http://network.nationalpost.com/NP/blogs/tradingdesk/archive/2010/04/12/when-will-the-bank-of-canada-raise-interest-rates-and-by-how-much.aspx

‘Orphan mortgages’ begin to surface

 John Greenwood, Financial Post   

 Rod and Joyce Marentette bought their house in Chatham, Ont., a month before getting married in 2005. The economy was booming and credit was plentiful, so even though they didn’t have a down payment and Rod had recently gone through a bankruptcy, there were plenty of mortgage companies willing to lend to them.

 

The house was $98,000 and with the additional legal fees the total price came to $100,000, all of which they were able to borrow from the mortgage company.

 

Things took a turn for the worse when Rod, who is 39, suffered a workplace injury and had to leave his job as a factory supervisor. But Joyce, 40, was determined to hold on to the house, taking on extra work to make ends meet. When Rod finally recovered two years later, he found a new job with a construction company. While the paycheque was lower, it took the financial pressure off.

 

That’s when they got the call from the mortgage company. It was the year the credit crunch hit. The economy was in a tailspin and lenders around the world were scrambling for liquidity. The mortgage, they were informed, could not be renewed and as the company was closing its subprime business, they would have to find another lender.

 

But the little lenders who had been so eager for their business back in 2005 had disappeared. That left the big banks and insurance companies, but they wouldn’t lend either and the Marentettes quickly realized their dream of owning a home was about to become a nightmare.

 

It ends up that despite its squeaky-clean financial image, Canada does indeed have its own subprime-mortgage mess.

 

Industry insiders say that over the next few years the Marentettes’ story will play out over and over again across Canada, as an estimated 30,000 so-called “orphan mortgages” reach maturity. Unless the government takes action, this may trigger a flood of foreclosures.

 

In the wake of the financial crisis, the business of subprime loans has dried up. Prior to 2007, there were at least a dozen subprime lenders in Canada and it was the fastest-growing sector of the entire mortgage market, says Benjamin Tal, senior economist at CIBC World Markets, who pegged it at about 5% of the total market.

 

But most of those lenders, including players such as Xceed Mortgage Corp., GMAC Residential Lending and Wells Fargo, have either changed their business or closed up shop.

 

Meanwhile, the rules around home loans have been tightened. Earlier this year, the federal government raised the minimum down payment required for Canada Mortgage and Housing Corp. insurance.

 

The mortgage industry clearly has a problem on its hands.

 

“This thing is a wave and it’s just starting,” says Eric Putnam, formerly with a subprime lender, now managing director of Debt Coach Canada, a company that provides financial and bankruptcy advice to consumers.

 

Estimates vary on the total value of the subprime market in Canada.

 

No one knows for sure how big it really is because there is no central database tracking these mortgages.

 

But according to Ivan Wahl, chief executive of Xceed, one of the biggest players in Canada until it recently converted to a bank, the subprime market in this country grew to about $11-billion in 2006, the year before things started to implode.

 

Given that the total mortgages outstanding in Canada amount to around $1-trillion today, the subprime portion is not a huge slice.

 

But the vast majority were made toward the middle of the decade with terms of three and five years and they’re coming due over the next two years.

 

“Given the current environment it will be very difficult to finance these [people],” says Mr. Tal, who calls it “a big problem for specific borrowers but not one from a macro perspective.”

 

But the industry is so concerned about the situation that it recently approached the federal government with a request for a bailout.

 

According to Mr. Putnam and others, it wants the federal government to participate in a $1-billion fund to help finance the coming flood of orphan mortgages.

 

During the credit bubble, subprime lenders funded themselves through the asset-backed commercial paper market.

 

The loans they made were packaged up and sold to securitization pools and then to investors in the form of ABCP.

 

But when the commercial paper market froze up in the financial crisis, lenders were suddenly left without a way to fund their businesses.

 

“Investors are no longer willing to continue on and these mortgages were not insured by the Canada Mortgage and Housing Corp., so the borrowers are not going to be able to move to another lender in today’s environment,” Mr. Putnam says.

 

The definition of subprime depends on who you ask, but for practical purposes the term generally refers to high-interest loans made to people who are unable to get a better deal at one of the big banks. Many such borrowers are simply self employed entrepreneurs but a good part are people with bad credit histories.

 

In the United States, the subprime market took off in the run-up to the crisis, growing to more than 20% of total mortgages outstanding as the loans were packaged up into complex securities and sold to investors around the world. When real estate prices finally started to crumble the value of the securities cratered, ultimately destabilizing the global financial system.

 

Analysts say it’s difficult to draw comparisons between the U.S. subprime market and what happened in Canada. The market here never grew to more than a sliver of the total and, more important, the type of loans offered by Canadian players were more conservative than those offered by their peers south of the border.

 

But there are nevertheless some disturbing parallels between the two markets. “Compared to what was going on in the U.S., it never got to the same level here, but having said that, they were going down the same slippery slope,” says Mr. Putnam.

 

“The Canadian population wanted to buy a home, that was the No. 1 goal.

 

“People were taking on high debt loads, stretching the amortization out as long as possible and lenders were looking at all the opportunities. It made sense when the market was hot, but of course, no one could foresee the problems.”

 

Exacerbating the situation, the early part of the decade saw the arrival of a number of U.S. players looking to get in on the Canadian market.

 

Because many of the players were not deposit-taking institutions, they qualified for looser regulations than banks and other traditional players.

 

That meant, for instance, that they didn’t need insurance for risky loans and they could lend in excess of the value of the property. Borrowers loved it at the time but in today’s post-crisis world, such loans are almost impossible to renew.

 

The good news for the Marentettes is that they succeeded in finding a new lender, though they’re still paying almost double the interest rate of a conventional mortgage.

 

Thousands of other subprime borrowers may not be so lucky.

 

“Hopefully, if they have been making their payments, they can qualify for [another mortgage],” says Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals.

Read more: http://www.financialpost.com/story.html?id=2785564&p=2#ixzz0knfwbZ8a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Julie Fortier, Financial Post 

OTTAWA – With the Canadian economy doing surprisingly well over the past six months, many see higher interest rates from the Bank of Canada in the not so distant future, but according to a report released Thursday from CIBC’s chief economist Avery Shenfeld, rates are likely to remain at a very low 2.5% through to 2011.

In CIBC World Markets’ latest Global Positioning Strategy report, Mr. Shenfeld lists several reasons for Bank of Canada Governor Mark Carney to keep interest rates subdued after July. He points out that the U.S. will probably have a more gradual approach to raising rates and if Canada gets too far ahead, that could send the Canadian dollar soaring.

“While factories are recovering in Canada alongside a global industrial revival, output remains nearly 20% below the pre-recession peak, and wages are now substantially above those stateside without the productivity gains to match. There’s only so much of a competitive challenge that non-resource exporters can take in short order,” Mr. Shenfeld said.

He also pointed out that inflation is not expected to rise much further and stimulus spending is expected to be reigned in by governments – including Canada’s – which will slow growth.

“If the U.S., the U.K., and Japan all move from huge stimulus to even modest restraint, Canada will feel it in our export prospects come 2011,” Mr. Shenfeld pointed out.

Mr. Carney has promised to keep interest rates where they are at 0.25% until the end of June. However, the latest reading of Canada’s economic growth showed the core inflation rate at 2.1% in February, far above the Bank of Canada’s forecast of 1.6% for the first quarter of the year. Many analysts believe the Bank of Canada will not wait until mid-2010 to raise rates.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2777584#ixzz0kYfL1zaB

 

 

By The Canadian Press

TORONTO – Prices for all key housing types were up more than 10 per cent across Canada in the first quarter, although some markets were hotter than others.

That’s according to a national real-estate survey by Royal LePage, which says the Canadian housing market will likely become more moderate as 2010 unfolds.

The survey found that, on a national basis, the average price of a detached bungalow in Canada rose to just over $329,000 in the first three months of this year – up 11 per cent from the first quarter of 2009.

Standard two-storey homes rose 10.3 per cent, to about $365,000, while condominium units increased by 10.9 per cent to just under $229,000.

Royal LePage, which is a national real-estate sales organization, says the national numbers don’t paint the whole picture, however.

It says some local markets, such as Vancouver and Toronto, may be overheated while most others have shown more moderate growth.

Have a great day!

News Release: April 6, 2010

BUYER’S MARKET CONTINUES IN FRASER VALLEY

(Surrey, BC) – With plenty of selection and relatively modest price increases, buyers are enjoying a healthy spring market in the Fraser Valley. The Board’s Multiple Listing Service® (MLS®) recorded 1,565 sales in March, an increase of 30 per cent over February’s sales and an increase of 56 per cent over the 1,006 sales processed March of last year.

Deanna Horn, president of the Board says, “March sales volumes can fluctuate as much as the weather, and this year’s reached the mid-point between the highs and lows seen over the last decade.

“However, available listings were near the peak, meaning buyers had lots to choose from and were clearly taking advantage of great buying opportunities.”

There were 3,395 new listings entered onto the MLS® in March, slightly higher than in March 2009, when 3,028 new listings were added. Altogether, there were 9,828 active listings on the MLS® at the end of March, on par with the 9,832 active listings one year ago.

The ratio of sales compared to active listings, which indicates the type of market, reached 16 per cent in March, representing a buyer’s market. This is up from last year’s 10 per cent but a far cry from the 25 per cent ratio in March 2007, when the Fraser Valley was in a seller’s market.

“Prices are closing in on the record highs we last saw in spring 2008, so it’s no surprise to see the increase in listings as sellers position themselves to move up or downsize into a smaller residence using their home equity for their purchase.”

In March, the benchmark price for Fraser Valley detached homes was $514,787, an increase of 11.9 per cent from the March 2009 price of $459,841.

The benchmark price of Fraser Valley townhouses in March was $326,307, a 10.3 per cent increase compared to $295,809 in March 2009. The benchmark price of apartments increased by 8.6 per cent year-over-year going from $227,188 in March 2009 to $246,673 in March 2010.

Information and photos of all Fraser Valley Real Estate Board listings can be found on the national, public web site www.REALTOR.ca. Further market statistics can be found on the Board’s web page at www.fvreb.bc.ca. The Fraser Valley Real Estate Board is an association of 2,990 real estate professionals who live and work in the communities of North Delta, Surrey, White Rock, Langley, Abbotsford, and Mission.

How the market will fix MLS rules

Comment Eamon Hoey, Financial Post 

The Commissioner of Competition recently made an application to the Competition Tribunal claiming that the Canadian Real Estate Association (CREA) uses control of the Multiple Listing Service (MLS) to impose exclusionary restrictions on the use of MLS.  

The commissioner claims CREA rules on MLS lessen or prevent competition and deny consumers the benefits of competition in the Canadian residential real estate services market. CREA maintains it has adopted the MLS rule changes proposed by the commissioner. However, the commissioner remains unsatisfied with CREA’s changes. It has sought redress from the tribunal.

The commissioner’s challenge hardly matters. Powerful external change drivers are already at work altering the way real estate agents conduct business. These external change drivers are a more disruptive force for change than the heavy hand of government.

Canada’s residential real estate industry structure is riveted around MLS. Until recently, CREA rules permitted only agents to place an MLS listing and required that the agent handle all phases of a sale. This included setting a list price for the property, preparing a written description of the home and uploading it to the MLS system, marketing the property, handling buyer inquiries, arranging showings and managing the transaction.

These rules limited the industry to one business model, restricting competition and service innovation. For example, the rules prevented flat fee and “à la carte” service. The MLS rule change adopted by CREA is a good first step that opens the way for service innovation, greater competition and consumer choice. It is only the beginning of more significant change to come to the sector.  

Technology, demographics, globalization and social and economic change drivers will have a more profound impact on the sector than enforcement of Canada’s competition laws. These change drivers, which will create opportunity for entrepreneurial organizations to innovate, will refocus the industry on the customer rather than on inward preservation of the status quo.

Consumers of residential real estate services have benefited only in a limited way from technology innovation. CREA began to convert MLS from a paper to an electronic system in 1995. While the world is swimming in a sea of technological innovation, the information available for public access on MLS is extremely limited.

For example, MLS does not provide access to listings for homes that have been sold and their closing price, agent fee information and the pricing history of a home. By contrast, U.S. purchasers of residential real estate services have an abundance of information found on real estate sites such as Zillow.com and Trulia.com, which give consumers enormous market power. These sites are effective competitors to Realtor.com, a National Association of Realtors site.

Canadian consumers of real estate services have limited buying and selling information to place downward pressure on house prices and agent fees. It is just a matter of time until an entrepreneurial, innovative, technologically smart organization seizes the opportunity and challenges CREA’s lock on the residential real estate market.

Globalization is a significant change driver for most sectors of the economy. Many countries, particularly the United States, are experiencing significant stress in their residential real estate market. The healthy Canadian real estate sector is attractive to foreign organizations. These organizations seeking competitive advantage and differentiation will circumvent CREA rules and focus on the consumer’s need for a superior value proposition.

Demographics will affect the long-term health of the residential real estate market. Declining fertility, increased life expectancy and an aging population will change the structure of Canada’s population. A house will return to being a place to live rather than a get-rich-quick investment scheme. House prices will decline in the suburbs. Prices in the inner core of cities such as Toronto will stabilize. Demand for large homes will drop significantly.

By 2015, the residential real estate sector will decline as Boomers retire and downsize. This will be somewhat offset by a demand for country homes. New family formation will decline, resulting in reduced demand for new housing. In sum, demographics will negatively affect the residential real estate brokerage sector. The forecast is for a slow decline that will place pressure on the realtor’s value proposition, push for service innovation, and place downward pressure on agent fees.

The Commissioner of Competition’s task is to ensure that competitive forces determine market outcomes. This objective is often achieved through government intervention. However, intrusion in the market place is a quick fix that fails to have lasting effects and it requires long-term monitoring to ensure compliance. Companies soon learn how to game the system. Eventually the government watchdog is indiscernible from the “regulated” company.  

Evolving market demographics, technology, globalization and social change drivers are significantly more effective and more powerful in bringing about change than is government intervention. Change creates opportunity for innovative entrepreneurial organizations. It refocuses organizations away from internal concerns to external consumer needs. Entrepreneurial organizations will cause creative destruction in the sector, bringing innovative services and the benefits of competition to consumers, and greater competitive rivalry to the sector.

In the long term, the commissioner’s challenge will not matter.  

ehoey@hoeyassociates.com

Eamon Hoey is managing partner of Toronto-based Hoey Associates Management Consultants.

 

Canadian economy grows faster than expected in January

OTTAWA – The stalwart Canadian economy marched doggedly forward in January, growing faster than anticipated thanks to a healthy boost from a manufacturing sector that appeared to be in full rebound from the recession.

The month’s 0.6 per cent rise in real gross domestic product, reported today by Statistics Canada, was the biggest one-month lift in more than two years and just ahead of an economist consensus forecast of 0.5 per cent.

“The Canadian recovery is becoming more fully entrenched and is showing surprising strength, with the goods-producing sector in full rebound mode,” Douglas Porter, deputy chief economist for BMO Capital Markets, wrote in a note to clients.

“Importantly, the recovery looks to be broadening beyond the initial push in housing and consumer spending, as manufacturing has advanced for five straight months.”

The solid improvement will likely put more pressure on the Bank of Canada to raise interest rates in the next couple of months from their historic lows of 0.25 per cent.

Goods-producing industries grew 1.3 per cent, largely on the strength of manufacturing and construction, the agency said. After a 1.2 per cent gain in December, manufacturing was up 1.9 per cent in January, with 17 of 21 major groups advancing.

The construction sector advanced 1.7 per cent, on a four per cent increase in residential construction and a one per cent rise in engineering and repair work. Non-residential building construction bucked the trend, falling off a slight 0.5 per cent.

“These are unambiguously strong results, with GDP now rising at a whopping 6.9 per cent annual pace over the November-to-January period,” Porter said.

“And, the economy has already recouped more than half of its recession losses, with GDP now up by 2.7 per cent from last May’s low.”

The loonie rose following the announcement, moving up 0.43 cents to 98.52 cents US in morning trading.

Mining and oil-and-gas extraction also increased in January.

The production of services advanced 0.4 per cent, led by wholesale trade.

Retail trade, the finance and insurance sector, transportation and the public sector also rose.

Meanwhile, the output of real estate agents and brokers, some tourism-related industries as well as agriculture and forestry retreated.

The volume of wholesaling activity increased 2.9 per cent with all wholesaling trade groups posting gains except apparel and alcohol and tobacco.

Value added in the retail trade sector rose 0.8 per cent in January.

Significant increases were registered in building and outdoor home supplies stores, home furnishings stores as well as food and beverage stores. Declines were recorded at new- and used-car dealers and at gasoline stations.

Porter added that early statistics for the month of February also look promising, with the gain of 60,000 full-time jobs, housing starts up six per cent and auto sales at their highest level in almost two years.

“Given today’s results, and the fact that February is shaping up well, first-quarter GDP growth looks set to easily surpass our recently revised call of a gain of 4.7 per cent (let alone the Bank of Canada’s latest estimate of 3.5 per cent), with growth on track for 5 ½ per cent even if the next two months come in at just up 0.2 per cent.”

The Canadian Press  http://news.therecord.com/Business/article/691423

Higher interest rates could be coming sooner, says Bank of Canada governor

By Julian Beltrame, The Canadian Press

OTTAWA – Canadians could be facing higher interest rates sooner than previously thought as a result of stubborn inflation and stronger economic growth, Bank of Canada Mark Carney said Wednesday.

Carney did not declare higher rates were on the way, but issued his clearest signal to date that his year-old commitment to keep the policy rate at the record 0.25 per cent until July was “expressly conditional” on inflation remaining tame.

In a speech to a business audience, the bank governor noted that both underlying core inflation and economic growth have grown slightly stronger, although broadly proceeding as expected.

The tip-off to economists was that he changed his language on his conditional commitment on interest rates, which has led to historically low rates for both consumers and businesses in Canada and helped the country recover from recession.

“This commitment is expressly conditional on the outlook for inflation,” he told the Ottawa Economic Association.

It was the first time Carney has undercut the commitment in such pointed language.

Later, Carney downplayed the significance, joking with reporters that he needed to used different words to keep the media’s attention.

But economists said the distinction was significant.

“They still have considerable latitude, but the changes that would be required to their forecast are consistent with hiking rates sooner than markets are anticipating,” said Derek Holt, Scotiabank’s vice-president of economics. He said Carney may move as early as June 1.

But Holt stressed that Carney’s overall message to Canadians is that rates will remain low by historical standards for some time.

“No matter what, we emerge from this with lower rates at the end point of the hiking campaign than in past cycles. He’s saying the outlook is clouded with risks and there’s a number of reasons to expect growth to be lower than past cycles.”

Core inflation – which excludes volatile items like energy – has been stubbornly sticky the past few months, with the index rising to 2.1 per cent in February. That’s the first time it has been above the central bank’s target of two per cent in more than a year.

And Carney pointed out that the economy has performed better than he thought when the bank issued its last forecast in January, predicting growth of 2.9 per cent this year. Since then, several private sector economists have increased their projections and Carney is expected to do the same at the next scheduled forecast date on April 22.

At a news conference following his speech, Carney warned against reading in too much optimism in his assessment.

“It wasn’t that rosy a message,” he said.

He cautioned that low U.S. demand and the high Canadian dollar, which was trading below 98 cents US on Wednesday but still high by recent standards, were acting as “significant drags” on the economy.

On a longer term basis, Carney’s message to Canadians was positively dark, warning that the country needs to address its “abysmal” productivity record and that the world needs to follow through with reforms to address global imbalances, particularly China’s undervalued currency.

Carney calculated that unless the country improves its productivity or output per unit of work, Canadians can expect to lose a total of $30,000 in real income over the next decade.

“Canada does underperform,” he said. “We are not as productive as we could be. Our potential growth is slowing. Moreover, this is occurring as the very nature of the global economy … is under threat.”

Canada’s productivity has advanced a meagre 0.7 per cent annually over the last decade, he noted, less than half the rate in the U.S. and half the rate Canada managed between 1980 and 2000.

He placed the blame on the doorstep of Canadian business, which he said needs to make much bigger investments in equipment and machinery and in information technologies.

Canadian workers have about half the information and communication technology at their disposal as their American counterparts, he said, adding that changes must be make quickly because the landscape of the global economy has shifted and it requires a “big response.”

Carney also said a key to future prospects for the Canadian and global economies is adoption of the G20 framework for economic sustainability. That will require addressing global imbalances which, in part, are caused by fixed currencies like China’s yuan which are kept artificially low to boost exports and discourage imports.

He produced a chart showing that unless the G20 measures are adopted, global growth will be about one percentage point lower in the next five years than it might otherwise be. The worse case scenario is a prolonged global recession that triggers protectionism, deepening the crisis. The irony, he said, is that China loses out in the long run as well.

Carney is the second Canadian policy-maker in as many days to warn about the devalued yuan. On Tuesday, Finance Minister Jim Flaherty said Canada will push the issue at the upcoming G20 meetings in Toronto in June. A revaluation of the yuan would likely lead to adjustments in other fixed currencies in Asia, economists said.

The U.S. has taken the lead in pressuring China on the yuan, but so far the emerging economic superpower has dismissed such calls and said it would move on its own schedule.

“An adjustment in global exchange rates is part and parcel of global rebalancing,” said Carney. “What’s at stake here is enormous and the adjustment of those real, effective exchange rates of all major currencies is an important component of rebalancing.” http://ca.news.finance.yahoo.com/s/24032010/2/biz-finance-higher-interest-rates-coming-sooner-says-bank-canada.html

Consumer credit experts call on homebuyers to exercise caution

The Canadian Press

TORONTO — Potential homebuyers spurred into action by fears of an imminent interest rate hike may be better off to wait and avoid bidding wars that can prove even more costly, according to consumer credit experts.

Laurie Campbell, executive director of Credit Counselling Canada, says Canadians already feeling societal pressure to be homeowners are more likely to engage in bidding wars and overspend when they hear that their ability to fulfil that “North American dream” could soon erode.

“We’re not only enticed by agents and those who market mortgages and the whole concept but … society as a whole,” she said.

The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.

“They’re overpaying for houses because they’re all trying to get into the market before interest rates go up,” Campbell said. “Especially right now with this whole time bomb of interest rates, for sure there’s a lot of people out there thinking they better get in the market today.”

Two bank surveys released Wednesday found that potential homebuyers are feeling pressure to buy homes sooner, but are worried about their ability to pay for their homes when mortgage rates rise.

The Bank of Montreal said as many as one-third of respondents in a homebuyers survey believe their expectation that housing prices would increase, and interest rates would soar, left an impression on their decision to make a purchase in the short term.

About 15 per cent of potential homebuyers said they have been in bidding wars, and for those who had their housing bids rejected, 14 per cent believe it caused them to overspend on their next offer.

“There’s definitely a sense of urgency among home buyers,” said Lynne Kilpatrick, senior vice-president of personal banking at BMO.

“While we encourage Canadians to pursue their home ownership dreams, we recognize it’s easy to get caught up in the emotions of the purchase and this can lead to stretching one’s budget too thin.”

Meanwhile, Royal Bank’s annual home ownership survey found about 64 per cent of mortgage holders are concerned about higher rates over the next year. Almost three-quarters of homeowners, 73 per cent, felt strongly that homebuyers needed to think ahead to ensure they will still be able to make their mortgage payment if rates rise.

The bank said six in 10 mortgage holders said they had taken advantage of current low interest rates to pay more principal on their loans.

Most economists say low interest rates are behind the continued strength in the housing market and expect the Bank of Canada to raise interest rates in late spring or early summer.

The cost of servicing a mortgage fell 5.8 per cent in February as a result of record-low interest rates, but with many Canadians taking on ever larger mortgages in expensive markets across the country, higher rates could create problems for some.

BMO’s senior economist, Sal Guatieri, says that with a cooler housing market “just around the corner,” prudence may be a good choice for many new entrants. http://news.therecord.com/Business/article/688274