BEST CANADIAN GDP GROWTH IN SIX MONTHS LED BY MANUFACTURING COMEBACK

General 31 Jan

Real Gross Domestic Product (GDP) increased 0.4% in November, bouncing back from a disappointingly flat economy in October. The improvement reflected a rebound in most factory sectors as goods-producing industries rose 0.8% after declining 0.5% in October. November’s gain was mainly due to increases in the manufacturing and mining, quarrying and oil and gas extraction sectors. Maintenance shutdowns had depressed these areas in October. The services-producing industries rose 0.3%, led by the real estate and retail trade sectors.

Manufacturing posted its strongest growth in three years, indicative of an economy that continues to grow at an above-potential pace despite NAFTA uncertainties. Durable goods production surged, led by a 6.5% rise in the manufacture of transportation equipment. The auto sector was on fire following a 21.5% decline in the prior four months. Automotive vehicle assembly increased in part due to the return to production of some plant capacity following shutdowns in September and October. This increased activity was also a factor in the 8.7% rise in motor vehicle parts manufacturing in November. Chemical manufacturing bounced back as well.

On the services side, the real estate sector piloted the gain, mainly reflecting vigorous activity in real estate agencies and mortgage brokers. The output of offices of real estate agents and mortgage brokers (+4.0%) was up for the fourth consecutive month owing to increased home resale activity in Ontario and Alberta. However, the level of activity of this subsector remains below its March 2017 level, following provincial government changes to housing regulations in Ontario that came into effect in April of that year. Resales picked up in the fourth quarter in advance of the pending new mortgage qualification rules coming in at the start of 2018.

These data suggest that the Canadian economy will remain close to full-employment output as the Bank of Canada weighs higher interest rates. The fourth quarter growth in Canada was likely just shy of 2%. Growth will likely remain at around that pace in 2018. With inflation still well-behaved, the Bank of Canada’s Governor Stephen Poloz has said he will be cautious in assessing new data to determine future moves. The economy is quite sensitive to interest rate hikes because of elevated levels of household debt and the outsized role of housing in recent years.

Canada is headed for 3% growth for 2017, more than double the 2016 pace and expected to be fastest among Group of Seven nations. Other signs Canada’s economy is close to full output include the lowest jobless rate in modern records and consumer price inflation that’s close to the central bank’s 2 percent target.

The Bank is well aware of the risks associated with the NAFTA negotiations, although it appears the U.S. will not pull out of the deal and progress has recently been made at the Montreal meetings. Nevertheless, interest rates are widely expected to rise as monetary policy is gradually tightened.

U.S. News: Federal Reserve Decision
Today marks Janet Yellen’s last meeting as Fed Chair, with Jerome Powell taking the position when her term ends on Feb. 3. The Fed held rates steady at today’s meeting as was widely expected, but the policy statement signaled a rate increase in March, marking the sixth such hike since late 2015.

“The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,” the policy-setting Federal Open Market Committee said in a statement Wednesday in Washington, adding the word “further” twice to the previous language of the statement.

Powell takes over an economy that expanded at an annualized 2.6% pace in the fourth quarter, boosted by a rise in business investment and consumer spending. Tax cuts signed into law by Trump in December are also likely to increase growth in 2018, though the Fed and most analysts believe the lift will be temporary. There was no mention of the tax cut in the policy statement.

 

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

8 THINGS YOU CAN DO TO GET THE BEST RENEWAL

General 29 Jan

With 47 per cent of homeowners scheduled to renew their mortgages this year, 2018 is a year of change for lots of Canadians.
Here are the top 8 things you can do to get the best renewal:

1. Pull out your mortgage renewal now, and start early. When you are proactive instead of reactive you can see if there is anything on your credit score or lifestyle that we can modify to ensure you are positioned for the best renewal. You are only in a position to do this when you start early- in the last year of your mortgage you will have the most amount of options available. For example, there can be an inaccuracy in your credit report or you may be considering an income/job change that would impact your options. We can look at timing accordingly for you.

2. Do not just sign the renewal offered. Lenders can change the terms of your mortgage, and the renewal you are signing can cost you up to four per cent of your equity if you are with the wrong lender for your current life stage.

3. Most people think the best rate is the best renewal – WRONG. The terms are most important and with all terms moving or selling is the only reason most people think they would ever break a mortgage- THIS is simply not the case, a change in the interest rate market, divorce, health, job change, investment opportunity and many other reasons would contribute to a future modification being beneficial for a consumer.

4. Take into consideration lender history. The lender can have a higher prime then anyone because they know the cost to leave outweighs staying the course. The lenders are very smart with their calculated risks- and this is not something they have an obligation to disclose.

5. Remember your lender has a bias – their job is to handcuff you so they can make as much profit off you as possible- don’t be a victim.

6. Do not shop each lender on your own, it takes points off of your credit score. All lenders have different rates based on your score and you want to position yourself to get the best. By using a mortgage professional, they can shop multiple lenders protecting your credit using only one application, while the rate variation can be on average a half a percent!

7. Don’t get sucked into the online rate shopping- any monkey can post a rate online and you can drive yourself crazy looking at something that does not exists. In today’s complex mortgage market there are significantly different rates based on – insured mortgage vs uninsured mortgage, switch vs refinance, purchase or renewal, principal residence vs rental, salary or self-employed, 600 credit score or 700 credit score, amortization of 20 years to 30 years, type of property condo vs house, and leased land or freehold. The variations can mean a difference in thousands of dollars. Like diagnosing a medical condition, you can’t go online, you do have to put in the appropriate application and supporting documents to verify which options are available to you that will result in the lowest cost in borrowing.

8. Remember your mortgage is the largest debt and investment most of us have, when you contact an independent mortgage professional, we are going to invest all the work and expertise and advise you in your best interest regardless if we get your business. We may after our review advise you to stick with your existing lender, or make another recommendation for you. We are only here to enhance your finances and save you money, and there is no cost for our service.

Angela Calla

ANGELA CALLA

Dominion Lending Centres – Accredited Mortgage Professional

SPLENDOUR OF THE PAST-OUR HOUSE MAGAZINE

General 26 Jan

Things to consider before you buy a heritage home

We’ve all walked by them at some point and marveled. It’s the character house that has to be at least 100 years old and is still standing. Your mind takes you to a different place. You start thinking about what life must have been like when it was built, the families that have lived there through the years. If the walls could talk, right? Most of us will just have to settle for our modern abodes. There are, however, a lucky few who, with a bit of patience and a love of the classics, call these heritage houses their homes.
Nestled in the older enclave of Queen’s Park in New Westminster, B.C., you’ll find Tony Sverdrup and his heritage beauty. The house, which spans 5,500 square feet, predates the First World War and has an interesting history. Built in 1911 by architects Gardner and Mercer, the craftsman-style home originally belonged to William B. Johnston. He owned Johnston’s Big Shoe House in New Westminster, a pioneer business in a city that at the time was still the bustling centre of the Lower Mainland region.
While the house at 212 Queens Avenue has a storied history, it was the architecture that really drew Sverdrup to the home. The building, which he bought in 2001, still boasts most of its original features, including the 10 foot-ceilings, oak floors, single-pane glass windows, wainscoting panels, wraparound staircase and a wood-burning fireplace. The kitchen is basically the only part of the house that’s not original.
“The thing about the heritage homes is each one is unique upon itself, in terms of quality of the build. You can’t replicate that in today’s buildings,” he tells Our House magazine. Whereas quick-built houses of the past 50 years can look dated quickly, hand-built homes tend to retain their grace and good bones. They’ve also seen it all and are therefore less likely to surprise you than a new build. Their foundations have settled. They’ve been through windstorms, floods and even earthquakes.
While it may have all the cool features you’d expect in a century-old gem, however, Sverdrup’s house has a few less desirable aspects that you don’t find in a modern home. There’s no insulation in the walls, so in a cold winter the heating bills can soar. Also, fixing or replacing even the simplest of hardware, like light switches, requires careful sourcing. As Sverdrup points out, you can’t just go to Home Depot to find these pieces.
“Basically it’s almost like a lifestyle; you’re constantly working on the house,” he says. “It will never be completed. Nothing is to code. Everything is the way they did back then.”
The home is not unique in either age or character. The street is lined with homes dating back to the late 1800s. While every city has its own way of dealing with its architectural legacy, in New Westminster, the city recently designated the entire neighbourhood a heritage conservation area. The policy means a heritage alteration permit is now required for changes to the front, sides or roofline of a house built before 1941, or any new residential construction in the neighbourhood. According to the city’s website, the purpose of the policy is to minimize the loss of historic houses and street character, while ensuring any new builds are appropriate to the existing character of the neighbourhood. If you are keen on owning a heritage home, in other words, you’d best to consult with your local municipality on the rules around such structures first.
Sverdrup sees both the pros and the cons of owning a heritage home under these restrictions. Homes that have been well cared for should provide more value, he says, but if the building’s dilapidated, tearing it down or even making major renovations can be problematic.
“Some people love it and some people wouldn’t love it. You have to be one who appreciates quality workmanship,” he says.
If you’re convinced that a century-old charmer is the right place to hang your hat, there are financial considerations too. Sharon Davis is a mortgage planner with Blue Tree Mortgages West in Coquitlam, B.C. She has some experience with heritage homes and used to think anything with a whiff of “heritage” was problematic, but not so much anymore.
There are generally three types of heritage designations to consider for financing, Davis notes.
• When a property is recognized as having some heritage/character/period significance but there are no restrictions on what the owner can do with it, there are typically no issues with financing and most lenders will entertain the mortgage.
• When the property must retain the outside exterior look, but the inside can be as modern as the owner chooses it to be, not all lenders will like this situation, but it shouldn’t be too troublesome to get financing.
• When the property and dwelling is on the city’s designated list, affecting both the inside and outside of the property, it can be tough to finance.
It’s always best to contact a Dominion Lending Centres mortgage specialist to help you through the process.
As for Sverdrup and his home, he has no intention to sell and buy something new. He would never be able to find anything else like it in the region for a price he could afford, he says. Instead, he sees the house like a classic car. It’s beautiful, but needs a lot of upkeep.

JEREMY DEUTSCH

Lead Writer

MORTGAGES WITH THE 20 PER CENT

General 25 Jan

There have been a lot of discussions around the new mortgage rules and I have had a few clients ask about what that means for them. Since stress testing on mortgages began last year, the biggest change this January will be for people who are putting more than a 20% down payment on their new homes.

What do the new mortgage rules mean for them?
The impact of the new mortgage rules as of January 1, 2018, will require all uninsured mortgage borrowers to qualify for their mortgage using the Bank of Canada five-year benchmark rate, or at their current rate plus an addition 2%. (Uninsured mortgage borrowers are typically those who purchase a new home with more than 20% of its total value.)The government is stress testing our current finances as a way to help prevent any unnecessary financial risks from Canadians. This change was primarily intended to help curb the housing bubbles in Toronto and Vancouver, but will affect homebuyers across the country, including those looking to qualify for a mortgage in Edmonton.

Why are new mortgage rules being introduced?
The revisions have been put in place to help ensure that uninsured borrowers can cope with higher interest rates. In the past, when there was a change in the market (increased interest rates, low employment, reduction in house values, etc.), Canadians were finding it difficult to keep up with their mortgage payments. In the past year, we have seen an increase in interest rates which has caused some concern with the government. The overnight rate – the interest rate set as the Bank’s policy interest rate, which influences mortgage rates, sat at a historically low 0.5% earlier in 2017  – has been raised 75 basis points by the Bank of Canada since July. A third rate hike took place this month. Although an unexpected surprise for many, the hike in interest rates is essentially providing Canadians with an opportunity to act more financially responsible. This new regulation will help make it more difficult for Canadians who were borrowing against the value of their homes to make new financial investments, thereby reducing the country’s financial risk.

Despite the changes to the new mortgage rules, people will still be looking to buy new homes with mortgages, but will be shifting their outlook on what they need. In Edmonton, where housing price are still very affordable, the shift may not be as difficult as in other markets. In a recent interview with BuzzBuzzNews, real estate broker and TalkCondo operator, Roy Bhandari said, “The new rules won’t slow sales. Instead, buyers will look at more affordable options on the market.”

If you have any questions, contact your trusted Dominion Lending Centres mortgage broker.

Max Omar

MAX OMAR

Dominion Lending Centres – Accredited Mortgage Professional
Max is part of DLC Capital Region based in Edmonton, AB.

WHAT IS A PROPERTY ASSESSMENT VS A HOME APPRAISAL?

General 24 Jan

It’s the time of year when many homeowners are getting their property assessments.

The real estate market is the single biggest influence on market values. Market forces vary from year to year and from property to property. The market value on an assessment notice may differ from that shown on a bank mortgage appraisal or a real estate appraisal because an assessment’s appraisal reflects the value at a different time of the year, while a private appraisal can be done at any time.

Use your Assessment as a starting point for the value of the property your planning your home purchase… Do not rely on a provincial assessment for the exact value of the property you’re considering purchasing. Markets can change quickly both increasing and decreasing in value depending on the area.

What is a Home Appraisal?
An appraisal is a document that gives an estimate of a property’s current fair market value.

Often there is no connection between a provincial assessment and appraised value. This is why lenders want an appraisal – an independent evaluation of the properties value at this moment in time.

Primarily home appraisals are completed at the request of a lender. Lenders want to know the value of a property in the current market before they are willing to lend against the home.

The appraisal is performed by an “appraiser” who is typically an educated, licensed, and heavily regulated third party offering an unbiased valuation of the property in question, trained to render expert opinions concerning property values.

When an appraisal is done, consideration is given to the property, the home, its location, amenities, as well as its physical condition.

Appraisals may also be required when an owner has less than 20% down payment and needs mortgage default insurance.

Who pays for the Home Appraisal?
Typically, the borrower pays the cost of the appraisal, and upon completion, the appraisal goes directly to the lender (does not go into the home buyer’s hands).

I know it sounds odd, but brokerages, lenders and appraisers cannot just show the buyer the appraisal on a property, even though the borrower paid for it.

Think of an appraisal as an administrative fee for finding today’s current value of the property
You need a Home Appraisal since the lender doesn’t want to lend on a poor investment and the appraisal helps the buyer decide if the property is worth what they offered (especially in hot markets like Vancouver & Toronto).

Why don’t you get a copy of the appraisal?

The appraiser considers their client to be the lender (the reason the appraisal was ordered). The lender has guidelines for the appraisal, and the appraiser prepares his report according to those parameters.

The lender is free to share the appraisal with the borrower, but the appraiser cannot share it. This is because the lender is the client… NOT the borrower!! It doesn’t matter who pays for the appraisal.

Sometimes an appraisal can come in lower than the purchase price, causing angry calls to the Appraisal Institute of Canada (AIC), and the answer they give is: the Brokerage or Lender is the client of the appraiser, and as such has ownership of the report.

One of the main reasons the buyer pays for the appraisal, is that if the mortgage doesn’t go through, the lender does not want to be on the hook for paying for the appraisal and not getting the business.

Lenders are also aware that home buyers could take the appraisal and shop it around with other Lenders to try and get a better deal.

It is rare for Lenders to share the report. With most appraisal companies, the appraisal is only provided after the closing of the mortgage transaction and must have the lender’s approval.

After the funding of your mortgage, some mortgage brokers will refund the appraisal fee or sometimes the lender may agree to reimburse the cost of the appraisal.

While a lender does not have to release the entire appraisal, there are some pieces of information that remain the personal property of the buyer, and PIPEDA legislation guarantees them access to that. However, any information on the report that does not relate to the property itself (such as the neighboring properties or other data about the community) would come off the report before the lender provided it.

Some other reasons for getting an Appraisal:

  • to establish a reasonable price when selling real estate
  • to establish the replacement cost (insurance purposes).
  • to contest high property taxes.
  • to settle a divorce.
  • to settle an estate.
  • to use as a negotiation tool (in real estate transactions).
  • because a government agency requires it.
  • lawsuit

Getting your home ready for an Appraisal:
The appraiser report involves a report including pictures of the home and property with the appraiser’s value of the property, along with a short summary of how that information was derived.

9 tips for high value home appraisals

Most lenders have an approved appraiser list which requires appraisers to have the appropriate designation. Lenders tend to reject appraisals that are ordered directly by property owners. Lenders want the appraisal to be ordered by the broker or the lender, primarily to avoid potential interference from the property owner.

Home Appraisal Costs
Appraisal costs do vary. Most home appraisals start around $350 (plus tax) but they can go much higher depending on how expensive the home is, complexity of the appraisal and how easily the appraiser can access comparable data.

Are you thinking of buying a home? As you can tell there is lots to discuss, call a Dominion Lending Centres mortgage professional to have a chat!

Kelly Hudson

KELLY HUDSON

Dominion Lending Centres – Accredited Mortgage Professional
Kelly is part of DLC Canadian Mortgage Experts based in Richmond, BC

MORTGAGE BROKER VALUE

General 23 Jan

 

Not surprisingly, borrowers often default to their own Banker. And why not? It’s an established and comfortable relationship. Perhaps it’s viewed as the path of least resistance. But is it the right lender for the borrower’s current specific needs? Perhaps not.

More sophisticated borrowers may be of a size or scale that they have their own internal resources in finance, quite capable of securing the required financing. They are likely only in the market infrequently however, and almost certainly not fully knowledgeable as to all of the financing sources available.

Aren’t all Lenders pretty much the same?

Borrower’s may think that all institutional lenders are pretty much the same. Offering comparable rates, and standardized borrowing terms. This is rarely the case. Lender’s often prefer one asset class over another. They may have a particular need for one type of loan. A specific length of loan term may be desirable, for funds matching purposes. Real Estate risk is a fact for real estate lenders. How they mitigate this risk differs however. It may be stress testing interest rates during the approval process. Sophisticated risk pricing models may be used, having regard to previous loss experiences. The lender may rely significantly on collateral value, or guarantees. The conditions precedent to funding will often differ from lender to lender.

A real world example

I had the pleasure last year in advising a client who had 3 sizable real estate assets, in 3 quite distinct asset classes. The borrower’s loan amount requirements were significant, however they were flexible on loan structure. Accordingly, I sought out competitive, but differing deal structures. My goal was to provide a competitive array of options. A number of “A” class lenders were approached, several/most of whom this particular borrower had no previous experience with. I shortened the list to 5 lenders, and received Term Sheets from each.

Each Offer was competitive on a stand alone basis, but they differed quite substantially, in the following ways:

  • Loans were either stand alone, or blanket loans, or some combination.
  • Length of terms offered, differed by asset class.
  • There was as much as a 75 bps rate difference, from highest to lowest Offer.
  • The amortization period depending upon asset class, ranged from 15 to 25 years.
  • Loan amounts on individual assets differed as much as 20%.
  • Third party reporting requirements differed between lenders.
  • There were a combination of fixed vs. floating rate loan structures.
  • Recourse was limited by some lenders, on select assets, or waived entirely, upon a higher rate structure.

Leverage Your Knowledge

These variances are striking, yet each of the 5 lenders were considering the precise same asset, at the same time, with common supporting information from which to base their analysis. How was the borrower to know which Offer to exercise? As a Broker, I can add value by helping the borrower to consider both their immediate and longer term strategic requirements, in the context of their overall real estate portfolio needs. This was precisely how this borrower landed on the most appropriate Offer for their particular circumstances. In this particular case we presented different, yet competitive, and uniquely structured options for the borrower’s consideration.

Consider a Dominion Lending Centres Mortgage Broker when next in the market for financing. Leveraging a Broker’s knowledge is a tremendous value proposition.

Allan Jensen ALLEN JANSEN

Dominion Lending Centres – Accredited Mortgage Professional
Allan is part of DLC The Mortgage Source based in Ottawa, ON.

HOW MORTGAGE BROKERS HELP YOU GET APPROVED BY ‘A’ LENDERS

General 22 Jan

Every year Canadian families are caught in unexpected bad circumstances only to find out that in most cases the banks and the credit unions are there to lend you money in the good times, not so much during the bad times.

This is where thousands of families have benefited over the years from the services of a skilled mortgage broker that has access, as I do, to dozens of different lending solutions including trust companies and private lending corporations. These short-term solutions can help a family bridge the gap through business challenges, employment challenges, health challenges, etc.

The key to taking on these sorts of mortgages is always in having a clear exit strategy, which in some cases may be as simple as a sale deferred to the spring market. Most times, the exit strategy involves cleaning up credit challenges, getting consistent income back in place and moving the mortgage debt back to a mainstream lender. Or as we would say in the business an ‘A-lender’.

The challenge for our clients over the last few years has been the constant tinkering with lending.

Guidelines by the federal government and the changes of Jan. 1, 2018 represent far more than just ‘tinkering’.

This next set of changes are significant, and will effectively move the goal posts well out of reach for many clients currently in ‘B’ or private mortgages. Clients who have made strides in improving their credit or increasing their income will find that the new standards taking effect will put that A-lender mortgage just a little bit out of reach as of the New Year.

There is concern that the new rules will create far more problems than they solve, especially when it seems quite clear to all involved that there are no current problems with mortgage repayment to be solved.

Yet these changes are coming our way fast.

Are you expecting to make a move to the A-Side in 2018?

It just might be worth your time to pick up the phone and give your Dominion Lending Centres Mortgage Specialist a call today.

Tracy Valko

TRACY VALKO

Dominion Lending Centres – Accredited Mortgage Professional
Tracy is part of DLC Forest City Funding based in London, ON.

9 REASONS WHY PEOPLE BREAK THEIR MORTGAGES

General 18 Jan

 

Did you know that 60 per cent of people break their mortgage before their mortgage term matures?

Most homeowners are blissfully unaware that when you break your mortgage with your lender, you will incur penalties and those penalties can be painfully expensive.

Many homeowners are so focused on the rate that they are ignorant about the terms of their mortgage.

Is it sensible to save $15/month on a lower interest rate only to find out that, two years down the road you need to break your mortgage and that “safe” 5-year fixed rate could cost you over $20,000 in penalties?

There are a variety of different mortgage choices available. Knowing my 9 reasons for a possible break in your mortgage might help you avoid them (and those troublesome penalties)!

9 reasons why people break their mortgages:

1. Sale and purchase of a home
• If you are considering moving within the next 5 years you need to consider a portable mortgage.
• Not all of mortgages are portable. Some lenders avoid portable mortgages by giving a slightly lower interest rate.
• Please note: when you port a mortgage, you will need to requalify to ensure you can afford the “ported” mortgage based on your current income and any the current mortgage rules.

2. To take equity out
• In the last 3 years many home owners (especially in Vancouver & Toronto) have seen a huge increase in their home values. Some home owners will want to take out the available equity from their homes for investment purposes, such as buying a rental property.

3. To pay off debt
• Life happens, and you may have accumulated some debt. By rolling your debts into your mortgage, you can pay off the debts over a long period of time at a much lower interest rate than credit cards. Now that you are no longer paying the high interest rates on credit cards, it gives you the opportunity to get your finances in order.

4. Cohabitation & marriage & children
• You and your partner decide it’s time to live together… you both have a home and can’t afford to keep both homes, or you both have a no rental clause. The reality is that you have one home too many and may need to sell one of the homes.
• You’re bursting at the seams in your 1-bedroom condo with baby #2 on the way.

5. Relationship/marriage break up
• 43% of Canadian marriages are now expected to end in divorce. When a couple separates, typically the equity in the home will be split between both parties.
• If one partner wants to buy out the other partner, they will need to refinance the home

6. Health challenges & life circumstances
• Major life events such as illness, unemployment, death of a partner (or someone on title), etc. may require the home to be refinanced or even sold.

7. Remove a person from Title
• 20% of parents help their children purchase a home. Once the kids are financially secure and can qualify on their own, many parents want to be removed from Title.
o Some lenders allow parents to be removed from Title with an administration fee & legal fees.
o Other lenders say that changing the people on Title equates to breaking your mortgage – yup… there will be penalties.

8. To save money, with a lower interest rate
• Mortgage interest rates may be lower now than when you originally got your mortgage.
• Work with your mortgage broker to crunch the numbers to see if it’s worthwhile to break your mortgage for the lower interest rate.

9. Pay the mortgage off before the maturity date
• YIPEE – you’ve won the lottery, got an inheritance, scored the world’s best job or some other windfall of cash!! Some people will have the funds to pay off their mortgage early.
• With a good mortgage, you should be able to pay off your mortgage in 5 years, there by avoiding penalties.

Some of these 9 reasons are avoidable, others are not…

Mortgages are complicated… Therefore, you need a mortgage expert!

Give a Dominion Lending Centres mortgage specialist a call and let’s discuss the best mortgage for you, not your bank!

Kelly Hudson

KELLY HUDSON

Dominion Lending Centres – Accredited Mortgage Professional

BANK OF CANADA RAISES RATES CAUTIOUSLY

General 18 Jan


As was widely expected, the Bank of Canada announced another quarter-point interest rate increase this morning, saying that more hikes are ahead. According to Governor Stephen Poloz, the “big cloud” over the Canadian economy is the uncertainty associated with NAFTA and he cautioned that it would be some time before interest rates return to normal levels as some monetary stimulus remains warranted.

The Bank of Canada increased the target overnight interest rate to 1.25%, its highest level since the global financial crisis marking the third rate hike since July. The move comes in the wake of unexpected labour market tightening and strong business confidence and investment. The Canadian economy is bumping up against capacity constraints as the jobless rate has fallen to its lowest level in more than 40 years.

Inflation is just shy of the 2.0% target level and wage rates are rising, albeit at a relatively moderate pace.

Exports have been weaker than expected. NAFTA uncertainty is “weighing increasingly” on Canada’s economic outlook as cross-border shifts in auto production are already beginning.

Consumption and housing will slow due to higher interest rates and new mortgage guidelines. According to today’s Monetary Policy Report (MPR), “growth of household credit has slowed somewhat since the first half of 2017, even though some households may have pulled forward borrowing in anticipation of the new B-20 guidelines related to mortgage underwriting from the Office of the Superintendent of Financial Institutions (OSFI). This slowing is consistent with higher borrowing costs due to the two policy rate increases in 2017.” Home sales increased considerably in the fourth quarter in advance of the tightening OSFI mortgage rules implemented beginning this year.

The MPR goes on to comment that “residential investment is now expected to be roughly flat over the two-year projection horizon. The rate of new household formation is anticipated to support a solid level of housing activity, particularly in the Greater Toronto Area, where the supply of new housing units has not kept pace with demand. However, interest rate increases, as well as macroprudential and other housing policy measures, are expected to weigh on growth in residential investment, since some prospective homebuyers may take on smaller mortgages or delay purchases.”

With higher interest rates, debt-service costs will rise, thus dampening consumption growth, particularly of durable goods, which have been a significant driver of spending in recent quarters.“Elevated levels of household debt are likely to amplify the impact of higher interest rates on consumption, since increased debt-service costs are more likely to constrain some borrowers, forcing them to moderate their expenditures.”

While global oil price benchmarks have risen in the past quarter or so, Canadian oil prices have been flat. Transportation constraints facing Canadian oil producers have held down the price of Western Canada Select oil, leaving it just below October levels. Canadian oil producers have trouble getting oil to the U.S. market, and with no East-West pipelines, they cannot export oil to markets outside of the U.S. This has been a long-standing negative for the Canadian economy.
Markets have been expecting three rate hikes this year, taking the overnight rate to 1.75% by yearend. This level is considerably below the Bank of Canada’s estimate of the so-called neutral overnight rate, which is defined as “the rate consistent with output at its potential level (approximately 1.6%) and inflation equal to the 2.0% target.” For Canada, the neutral benchmark policy rate is estimated to be between 2 .5% and 3 .5%. The need for continued monetary accommodation at full capacity suggests policymakers aren’t anticipating a return to neutral anytime soon.

The Bank’s revised forecasts for inflation and real GDP growth are in the following table. The numbers in parentheses are from the projection in the October Monetary Policy Report. Today’s MPR forecasts that inflation will edge upward while economic growth slows from the rapid 2017 pace (3.0%) to levels more consistent with long-term potential (1.7% to 1.8%).

The Bank of Canada’s future actions will continue to be data dependent. The next policy announcement is on March 7.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.