Higher interest rates on way, Carney warns
March 25, 2010
OTTAWA–Bank of Canada Governor Mark Carney has put Canadians on notice that today's rock-bottom borrowing costs are likely headed upwards by midsummer – if not sooner.
He acknowledged Wednesday that inflation and economic growth are rebounding faster than the bank predicted and left the door open for a rise in the central bank's trend-setting overnight rate more quickly than Canadians have expected.
Nearly a year ago, Carney decided to combat the recession by taking the unusual step of promising to keep the bank's overnight rate at a record low 0.25 per cent until the end of this June.
But, in a reminder that he has the option to hike rates sooner, he drove home the point on Wednesday that he has always said the bank would re-examine its stance if inflation – its main concern – threatened to get out of control.
The commitment to rock-bottom interest rates "is expressly conditional on the outlook for inflation," he reiterated in a speech to the Ottawa Economics Association.
"The bank has an unwavering commitment to price stability," Carney said.
"That means keeping inflation low, stable and predictable," he added.
Rising Bank of Canada rates cause commercial banks to follow suit, driving up borrowing costs for consumers, homebuyers and business. This slows economic expansion and cools inflation, but it is not without risks. Raising rates too quickly could slow Canada's rebound from the recession.
Economic growth and price increases have both exceeded expectations in recent months. The core inflation rate, which excludes volatile items such as gasoline, rose to 2.1 per cent in February, Statistics Canada said last week.
This is considerably more than had been predicted by Carney, who forecast that core inflation would average 1.6 per cent in the January-through-March period and not hit 2 per cent until the second half of this year. The bank's long-term goal is to head off runaway inflation, which it tries to do by manipulating interest-rate policy to keep price increases in the 2 per cent range.
With inflation rising, analysts have speculated that the bank might not wait until mid-year to raise interest rates.
But Carney was careful not to tip his hand, saying Canadians will have to wait until the bank's next interest-rate setting on April 20 for a decision. As for a reading of inflation dangers, the bank will publish its analysis in its quarterly report on April 22.
In the meantime, he warned Canadians that sooner or later interest rates will be rising now that the economy is recovering from the recession.
"We're not trying to give personal financial advice," he said at a news conference. But "certainly in any sort of major purchase or financing that individuals are considering, (they should) recognize that interest rates are at extraordinarily low levels" and will be going up, Carney said. Canadians should "think about your ability to service your debts if rates move to a more normal level."
While acknowledging inflation is "slightly firmer" than the bank forecast and economic expansion in the early months of this year is stronger than expected, Carney was guarded in his assessment of the outlook.
He pointed out that Canadians are dealing with "an economy that is just emerging from a very deep recession."
And he noted that the sharp rise in inflation in February may reflect a one-time phenomenon – the rise in accommodation costs during the Vancouver Winter Olympics.
Still, the fact Carney is not hinting at any changes to his year-old promise to hold the bank's overnight rate at 0.25 per cent until the end of June is an indication borrowing costs will likely be going up at mid-year, said CIBC World Markets economist Avery Shenfeld.
"By saying nothing about what happens after June, it starts to become a hint that rates will move up in July."
But it will be a tricky call for Carney because pushing up rates could strangle the economic rebound and drive up the value of the loonie on exchange markets, hurting the ability of exporters to sell goods in the key United States market.
"We're still in the relatively early stages of a recovery, and I think the bank probably should err on the side of trying to stimulate the economy," said United Steelworkers economist Erin Weir.
"The other big risk of raising interest rates too soon is that it could drive the Canadian dollar even higher, which of course would hurt export industries and could staunch the recovery."
JONATHAN'S OPINION
One issue of vital importance to all those that currently possess variable rates on their mortgage is, should you fix them?
In listening to a forecaster from BMO today, he mentioned that at this time next year, the prime rate will be 2% higher than it is today. This means that it will be at 4.25%. This will, in turn, force the fixed rates on, say a five year term, to reach at least 7%.
Today you can get a five year fixed mortgage rate at approximately 3.8%. In my opinion, rates are the lowest they've ever been, and they must go up in order to halt inflation.
If I were you, I would lock in today. If not, at least keep a keen eye on them.
Thursday, March 25, 2010
Wednesday, March 17, 2010
MARCH MID-MONTH HOUSING STATISTICS
TORONTO, MARCH 17, 2010
Greater Toronto REALTORS® reported 4,353 sales through the Multiple Listing Service® (MLS®) during the first two weeks of March. This represented a 70 per cent increase compared to the 2,562 sales recorded during the same period in 2009 when resale transactions had dipped markedly due to the recession. The mid-month sales total was also 16 per cent higher than the previous March midmonth high reached in 2006.
“The spring-like weather in the first half of March brought the first green sprouts of the recurring spring market. Every year, monthly sales climb steadily through May,” said Toronto Real Estate Board President Tom Lebour. "People are buying homes because they are confident in the current economic recovery and mortgage payments on the average priced home remain affordable."
The average price for March mid-month transactions was $440,153 – a 20 per cent increase over 2009. New listings within the Toronto Real Estate Board boundaries were up 34 per cent to 8,540.
"Look for double-digit annual price increases to cease later in 2010, as new listings rebound from the low levels experienced in 2009," said Jason Mercer, TREB's Senior Manager of Market Analysis. "Increased listings will give buyers more choice, resulting in less upward pressure on home prices.”
Jonathan's Opinion
Some might wonder how sales can increase at such as dramatic pase in such a short period of time. The reason is simple; there is an imbalance of supply and demand.
In general, when supply of products is larger than the demand of the same products, the selling prices must come down in order to entice those with little demand to buy the product anyway.
In real estate, the same principle applies.
From the end of 2008 to approximately the middle of 2009 all consumers were afraid to buy anything because of the recession. Then, in order to get us out of the recession, the government artificially decreased interest rates to a historical low.
What did this do?
This allowed consumers to borrow money at a very low rate, allowing for lowered monthly mortgage payments. When people (particularly first-time buyers) realized how "cheap" a house could be, everyone wanted one. Therefore an influx of consumers were ready to purchase houses and take advantage of these low rates. This meant that demand was very high.
But the problem was that no one was selling, allowing for very little supply. So demand was high, and supply was low...which is the formula for an increase in prices.
In the latter half of 2010, as interest rates begin to increase, and the HST tax becomes in effect, the demand for houses will undoubtedly decrease. There will be a more normal balance between supply and demand, which will cause prices to level off, and sales to cool down.
We must see this as a good thing, because housing prices were increasing too fast in too little time, which could have negative consequences on consumers.
Greater Toronto REALTORS® reported 4,353 sales through the Multiple Listing Service® (MLS®) during the first two weeks of March. This represented a 70 per cent increase compared to the 2,562 sales recorded during the same period in 2009 when resale transactions had dipped markedly due to the recession. The mid-month sales total was also 16 per cent higher than the previous March midmonth high reached in 2006.
“The spring-like weather in the first half of March brought the first green sprouts of the recurring spring market. Every year, monthly sales climb steadily through May,” said Toronto Real Estate Board President Tom Lebour. "People are buying homes because they are confident in the current economic recovery and mortgage payments on the average priced home remain affordable."
The average price for March mid-month transactions was $440,153 – a 20 per cent increase over 2009. New listings within the Toronto Real Estate Board boundaries were up 34 per cent to 8,540.
"Look for double-digit annual price increases to cease later in 2010, as new listings rebound from the low levels experienced in 2009," said Jason Mercer, TREB's Senior Manager of Market Analysis. "Increased listings will give buyers more choice, resulting in less upward pressure on home prices.”
Jonathan's Opinion
Some might wonder how sales can increase at such as dramatic pase in such a short period of time. The reason is simple; there is an imbalance of supply and demand.
In general, when supply of products is larger than the demand of the same products, the selling prices must come down in order to entice those with little demand to buy the product anyway.
In real estate, the same principle applies.
From the end of 2008 to approximately the middle of 2009 all consumers were afraid to buy anything because of the recession. Then, in order to get us out of the recession, the government artificially decreased interest rates to a historical low.
What did this do?
This allowed consumers to borrow money at a very low rate, allowing for lowered monthly mortgage payments. When people (particularly first-time buyers) realized how "cheap" a house could be, everyone wanted one. Therefore an influx of consumers were ready to purchase houses and take advantage of these low rates. This meant that demand was very high.
But the problem was that no one was selling, allowing for very little supply. So demand was high, and supply was low...which is the formula for an increase in prices.
In the latter half of 2010, as interest rates begin to increase, and the HST tax becomes in effect, the demand for houses will undoubtedly decrease. There will be a more normal balance between supply and demand, which will cause prices to level off, and sales to cool down.
We must see this as a good thing, because housing prices were increasing too fast in too little time, which could have negative consequences on consumers.
Tuesday, March 9, 2010
Harmonized Sales Tax (HST)
How the Ontario HST Will Impact You in 2010
By Randy Selzer
The Ontario Government recently enacted legislation which will implement the much-dreaded HST Tax. This new tax will take effect on July 1, 2010. The HST tax will effectively combine the Provincial Sales Tax of 8% percent with the Federal GST Tax of 5% percent, to create a new "harmonized" total tax of 13% percent. This new tax will be applicable to many real estate services which, until now, only had one or the other tax applied. The HST will result in a 13% tax on new home construction, but my post today will concern those ancillary costs pertaining to the buying and selling of resale residential real estate properties in Ontario...
First, the good news....there is no HST tax payable on the sale of a resale home (residential). So the single largest dollar amount exchanged is not taxable under HST.
However, under the harmonized sales tax (HST), home buyers and sellers will have to pay extra tax on a range of services associated with the real estate transaction: services such as legal fees, moving costs, real estate commissions and home inspection fees. Currently, consumers only pay the 5% Goods and Services Tax (GST) on these services.
In a nutshell, after July 1, 2010, if you are a seller, there will be a 13% percent tax payable on the real estate commission you pay - currently there is only the 5% percent GST payable on this fee. Your lawyer's fee will also be subject to the 13% percent HST, as will the cost of a Condominium Status Certificate.
If you are a buyer, any Home Inspection you pay for will be subject to the 13% percent HST. And so will the cost of movers hired. In addition, the cost of the CMHC premium for "high-ratio" mortgages has traditionally been taxable for PST - this amount will now be taxable for the full 13% percent HST.
So one can see that, with the introduction of the HST, whether you are buying or selling a Resale Home in Ontario, costs will be going up.
A press release from the Ontario Real Estate Association earlier this year summarized some of these changes which will take place - the example that they used was for a resale house priced at $360,000, and it was determined that the HST would add over two thousand dollars in new taxes to closing costs. Please note, these taxes are in addition to the Land Transfer Taxes which exist for both the Province and the City of Toronto. OREA calculated that, in total, the HST would add $313 million annually in new taxes to resale home transactions.
The HST Ontario Tax will add to the cost of buying and selling a resale home. Many market watchers are predicting a flurry of activity leading up to the July 1, 2010 implementation date, as buyers and sellers both try to avoid paying the tax.
By Randy Selzer
The Ontario Government recently enacted legislation which will implement the much-dreaded HST Tax. This new tax will take effect on July 1, 2010. The HST tax will effectively combine the Provincial Sales Tax of 8% percent with the Federal GST Tax of 5% percent, to create a new "harmonized" total tax of 13% percent. This new tax will be applicable to many real estate services which, until now, only had one or the other tax applied. The HST will result in a 13% tax on new home construction, but my post today will concern those ancillary costs pertaining to the buying and selling of resale residential real estate properties in Ontario...
First, the good news....there is no HST tax payable on the sale of a resale home (residential). So the single largest dollar amount exchanged is not taxable under HST.
However, under the harmonized sales tax (HST), home buyers and sellers will have to pay extra tax on a range of services associated with the real estate transaction: services such as legal fees, moving costs, real estate commissions and home inspection fees. Currently, consumers only pay the 5% Goods and Services Tax (GST) on these services.
In a nutshell, after July 1, 2010, if you are a seller, there will be a 13% percent tax payable on the real estate commission you pay - currently there is only the 5% percent GST payable on this fee. Your lawyer's fee will also be subject to the 13% percent HST, as will the cost of a Condominium Status Certificate.
If you are a buyer, any Home Inspection you pay for will be subject to the 13% percent HST. And so will the cost of movers hired. In addition, the cost of the CMHC premium for "high-ratio" mortgages has traditionally been taxable for PST - this amount will now be taxable for the full 13% percent HST.
So one can see that, with the introduction of the HST, whether you are buying or selling a Resale Home in Ontario, costs will be going up.
A press release from the Ontario Real Estate Association earlier this year summarized some of these changes which will take place - the example that they used was for a resale house priced at $360,000, and it was determined that the HST would add over two thousand dollars in new taxes to closing costs. Please note, these taxes are in addition to the Land Transfer Taxes which exist for both the Province and the City of Toronto. OREA calculated that, in total, the HST would add $313 million annually in new taxes to resale home transactions.
The HST Ontario Tax will add to the cost of buying and selling a resale home. Many market watchers are predicting a flurry of activity leading up to the July 1, 2010 implementation date, as buyers and sellers both try to avoid paying the tax.
Friday, March 5, 2010
2010 Federal Budget
Yesterday at 3:30pm eastern, our Finance Minister Jim Flaherty, announced what the Canadian budget would be for the next 5 years. Click on the link below for a breakdown of this budget. When you are in this page, focus on the right hand column entitled "Budget Highlights"
http://www.bnn.ca/15921.html
Jonathan's Opinion
What I gather from this is that within the next year, our government will spend approximately $49.2 billion on things that should help with our economic recovery.
Everything that the stimulus money is being spent on is very important, but what people have to understand is that all this money will have to be repaid between 2011 and 2015. If you look at how much has to be paid back within each year, the average is about $13.5 billion per year.
How can we possibly come up with that kind of money?
- Our taxes will have to go up. (HST is one form of increase)
- Our insurance premiums will have to go up. (Most businesses will have to pay higher employment insurance premiums to pay for the increasing support that has gone to the legions of unemployed, many of whom have still not found jobs)
- Our interest rates will go up.
How does this affect the real estate market?
Overall, if taxes increase, premiums increase, and interest rates increase, Canadians will generally have less money. Therefore, they will also spend less money on items because borrowing money will be too expensive due to the increase in interest rates, and saving money will be more enticing because the higher interest rates will yield a better return on their money iif they have it in GIC's or their savings account.
When people have less money to spend, they will not buy many things, especially expensive things, such as houses. If not many people are buying houses, demand decreases. If demand decreases, prices of houses will also decrease.
Therefore, I do believe that a correction in housing prices into 2011 is inevitable. How much of a correction is unpredictable for now.
http://www.bnn.ca/15921.html
Jonathan's Opinion
What I gather from this is that within the next year, our government will spend approximately $49.2 billion on things that should help with our economic recovery.
Everything that the stimulus money is being spent on is very important, but what people have to understand is that all this money will have to be repaid between 2011 and 2015. If you look at how much has to be paid back within each year, the average is about $13.5 billion per year.
How can we possibly come up with that kind of money?
- Our taxes will have to go up. (HST is one form of increase)
- Our insurance premiums will have to go up. (Most businesses will have to pay higher employment insurance premiums to pay for the increasing support that has gone to the legions of unemployed, many of whom have still not found jobs)
- Our interest rates will go up.
How does this affect the real estate market?
Overall, if taxes increase, premiums increase, and interest rates increase, Canadians will generally have less money. Therefore, they will also spend less money on items because borrowing money will be too expensive due to the increase in interest rates, and saving money will be more enticing because the higher interest rates will yield a better return on their money iif they have it in GIC's or their savings account.
When people have less money to spend, they will not buy many things, especially expensive things, such as houses. If not many people are buying houses, demand decreases. If demand decreases, prices of houses will also decrease.
Therefore, I do believe that a correction in housing prices into 2011 is inevitable. How much of a correction is unpredictable for now.
Tuesday, March 2, 2010
New Mortgage Rules
OTTAWA -- Jim Flaherty, the Finance Minister, says he is targeting "reckless" speculators who buy up multiple condominium units in the country's biggest cities with new rules introduced yesterday that will make it tougher for Canadians to get a mortgage....
Read entire article at http://www.nationalpost.com/scripts/story.html?id=2569008
Jonathan's Opinion:
Do you remember what happened near the end of 2008 in the U.S.? The sub-prime mortgage meltdown happened! It was so devasting to all major developed nations worldwide, that it almost lead to what some economists were calling, "the greatest depression".
This occured (in a nutshell) because of the lack of consumer savings, and excessive consumer spending. The worst part is that the consumers were spending BORROWED MONEY.
Lets look at this in a step by step, easy-t0-understand fashion:
Why were consumers borrowing, and spending?
Because interest rates were so low, and it was therefore cheap to borrow money.
How were consumers borrowing this money?
They borrowed against the equity in their house. (e.g. if your house is worth $500,000 and you have a $400,000 mortgage, this means that there is $100,000 of equity in your home. Banks would lend up to 95% of that equity. So in this case, the bank would lend you $95,000)
What did consumers do with this money?
They spent in on cars, vacations, clothes, cell phones, TVs, etc.
Why didn't consumers save their money, and only use it if they really needed too?
They thought that real estate prices would never fall, and they could therefore always borrow against their houses, and never be out of money.
Boy were they ever wrong!
And we all know what happened next. U.S houses lost as high as 70% of their values in just one year. There were millions of foreclosures, and bankruptcies.
I don't know about you, but I see the same thing starting to happen here in Canada. We have extraordinarily low interest rates, consumer debt levels are the highest they have ever been, and real estate prices are at their all-time highs.
If we do not want to see the same fate as the U.S., then mortgage regulations like the ones announced by our finance minister are not hurting us...rather, they are saving us.
I just hope it is not too late!!
Read entire article at http://www.nationalpost.com/scripts/story.html?id=2569008
Jonathan's Opinion:
Do you remember what happened near the end of 2008 in the U.S.? The sub-prime mortgage meltdown happened! It was so devasting to all major developed nations worldwide, that it almost lead to what some economists were calling, "the greatest depression".
This occured (in a nutshell) because of the lack of consumer savings, and excessive consumer spending. The worst part is that the consumers were spending BORROWED MONEY.
Lets look at this in a step by step, easy-t0-understand fashion:
Why were consumers borrowing, and spending?
Because interest rates were so low, and it was therefore cheap to borrow money.
How were consumers borrowing this money?
They borrowed against the equity in their house. (e.g. if your house is worth $500,000 and you have a $400,000 mortgage, this means that there is $100,000 of equity in your home. Banks would lend up to 95% of that equity. So in this case, the bank would lend you $95,000)
What did consumers do with this money?
They spent in on cars, vacations, clothes, cell phones, TVs, etc.
Why didn't consumers save their money, and only use it if they really needed too?
They thought that real estate prices would never fall, and they could therefore always borrow against their houses, and never be out of money.
Boy were they ever wrong!
And we all know what happened next. U.S houses lost as high as 70% of their values in just one year. There were millions of foreclosures, and bankruptcies.
I don't know about you, but I see the same thing starting to happen here in Canada. We have extraordinarily low interest rates, consumer debt levels are the highest they have ever been, and real estate prices are at their all-time highs.
If we do not want to see the same fate as the U.S., then mortgage regulations like the ones announced by our finance minister are not hurting us...rather, they are saving us.
I just hope it is not too late!!
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