Canada First Mortgage

Paul Vieira, Financial Post

OTTAWA — With Bay Street convinced the Bank of Canada will maintain its pledge to wait until July to begin raising interest rates, the debate now turns to how aggressively the central bank should behave thereafter.

In the view of a paper prepared for the C.D. Howe Institute, the central bank should act with zeal. If it wants to get ahead of the inflation curve, the bank should raise its benchmark rate by 50 basis points at every scheduled rate announcement until the middle of next year, the paper said.

Michael Parkin, an economics professor at the University of Western Ontario and member of the think-tank’s monetary policy council, said “steep” increases would be required to make up for keeping the benchmark rate so low for so long.

The paper comes a week before the Bank of Canada’s next interest-rate statement, scheduled for March 2 and the same day Mark Carney, the bank governor, held an annual meeting with leading private-sector economists in Ottawa.

The bank cut its benchmark rate last year to a record low 0.25%, and made a pledge — conditional on inflation — to keep it there until the end of June in an effort to pump up the economy amid the financial crisis. Analysts say the move has worked. Figures on gross domestic product, to be reported next week, should indicate the economy grew roughly 4% in the fourth quarter, above the central bank’s own expectations. And inflation is closer to the bank’s 2% target earlier than envisaged, although analysts suggest price increases could lose some steam in the weeks ahead.

The main thrust of Mr. Parkin’s argument is the central bank needs to raise rates as aggressively in anticipation of the recovery as cut in response to the financial crisis. This would be in line with the Taylor rule, which dictates by how much a central bank should move its benchmark rate in response to inflation.

Based on the central bank’s own economic projections, Mr. Parkin calculated the future path of interest rates. “When the [benchmark] rate starts to rise, it must be on a steep upward path,” he wrote. Under the Taylor rule the benchmark rate should in fact, be higher than present levels. As a result, a target rate “somewhat higher” than what otherwise would be required might be necessary for the latter half of this year and all of next, he said, “to avoid inflation running above target.”

Economists indicate the central bank, if possible, will keep its pledge because reversing course now could damage its credibility.

Other analysts also signalled that they shared some of Mr. Parkin’s view.

“In order to move from an exceptionally low to low-rate environment, you need to move fast,” said Sébastien Lavoie, economist at Laurentian Bank Securities, which last fall indicated in a report Mr. Carney would need to entertain rate increases of up to a percentage point.

Michael Gregory, senior economist at BMO Capital Markets, said that by mid-2011 the benchmark rate would “have to be in proximity of being neutral.”

However, he added the central bank would have to take into account the strength of the loonie in determining the appropriate level of interest rates. The currency is likely to climb as the Bank of Canada moves ahead of the U.S. Federal Reserve, and perhaps more aggressively, Mr. Gregory said. http://www.financialpost.com/news-sectors/economy/story.html?id=2602124

By Paul Vieira, Financial Post

OTTAWA — Amid warnings about Canadian household debt levels and a possible housing bubble, Finance Minister Jim Flaherty said Tuesday the federal government would make it tougher for people to get a mortgage.

He said at an early Tuesday morning media conference that Ottawa would require all borrowers meet standards for a five-year fixed-rate mortgage, even if the buyer wants a variable rate mortgage. That is the key move announced Tuesday. Other rule changes unveiled would affect people looking to refinance their mortgages — lowering the maximum amount that can be withdrawn to 90 per cent from 95 per cent — and place a 20 per cent minimum down payment for government-backed mortgage insurance on non-owner-occupied properties.

But the Minister said the changes were not meant to stop a possible housing bubble, as some warned was upon us.

“There’s no clear evidence of a housing bubble, but we’re taking proactive, prudent and cautious steps today to help prevent one,” Flaherty said. “Our government is acting to help prevent Canadian households from getting overextended.”

The decision to adopt new mortgage rules emerged after nearly a week of dire warnings from prominent Canadians — such as money manager Stephen Jarislowsky and former Bank of Canada governor David Dodge — that the housing market was on the verge of possible trouble, as price increases were not sustainable and present mortgage rules were too lax.

The Department of Finance in 2008 said Canada Mortgage and Housing Corp. would limit amortizations to 35 years and offer loan insurance on only 95 per cent of the loan value. The government’s housing agency had offered mortgage insurance on loans worth as much as 100 per cent of the home value and amortization periods of as many as 40 years since 2006.

Canadian home prices and resales will grow to records this year, boosted by low interest rates, the Canadian Real Estate Association said in a report last week. Canadian new-home prices rose 0.4 per cent in December from November, the sixth straight gain, according to government figures.

As recently as two weeks ago Flaherty said there was “no substantial concern” about the emergence of a housing bubble after meeting with private-sector economists. And in an interview with the Financial Post in late December, he said there was “no evidence” of asset bubble in real estate.

The following article is courtesy of Merix Financial…

Canadian real estate sales and prices are poised to set records this year, according to a new forecast that is bound to reignite calls in some quarters for tighter lending rules.

The Canadian Real Estate Association, which represents 100 boards across the country, said Monday it expects existing-home sales to reach 527,300, a 13.3% increase from a year ago and a 1.2% increase from the record high set in 2007.

The new-home market appears to be picking up steam, too. Canada Mortgage and Housing Corp. said there were 186,300 starts in January on a seasonally adjusted annualized basis, the highest level of new construction since October 2008.

Bank of Canada governor Mark Carney has warned about rising levels of household debt, which is reaching record levels. Finance Minister Jim Flaherty has suggested he is prepared to tighten mortgage requirements and continues to monitor the market.

“One of the legitimate concerns of the Finance Minister might be if you make qualifying for mortgage default insurance prematurely restrictive that it will quell housing activity even as erosion in affordability continues,” said Gregory Klump, chief economist with CREA.

There are have been some rumblings that the government is considering new rules that would require buyers who need mortgage insurance to have at least 10% down and amortize their mortgage over just 25 years instead of the current 35 years.

Anybody with less than a 20% downpayment must get mortgage insurance, if they are borrowing from a financial institution governed by the Bank Act.

Mr. Klump’s group contends the market is going to correct on its own in the second half of 2010. CREA has called for sales to drop 7.1% in 2011. The group says that while prices will rise by 5.4% in 2010, to a record high of $337,500, they will drop by 1.5% in 2011.

That view of the housing market is not out of step with some economists, who say that once interest rates rise and inventory levels increase, price increases will shrink. Year-over-year price increases in some markets, such as Toronto, have been around 20% for the past few months.

“There is still a sense of urgency to get into the market. The market will continue to be strong over the next few months,” said Benjamin Tal, senior economist with CIBC World Markets, adding he could see new construction also touching 200,000 starts before beginning to fall.

Part of that urgency in the housing sector is being driven by the introduction of the harmonized sales tax in Ontario and British Columbia on July 1. The tax would apply to real estate services and could increase the cost of buying a home by a few thousand dollars.

“It’s a factor fuelling a higher level of activity in Ontario and British Columbia,” Mr. Klump said. “What’s more Canadian than avoiding taxes?”

Elton Ash, vice-president of Re/Max of Western Canada, said he thinks the forecast put out Monday was a little optimistic for 2010, specifically the 4.2% price increase for British Columbia. “But I also think the market will be better in 2011 [than CREA].”

Mr. Ash is actually in favour of some measures to cool the market, like reducing the amortization period back to 25 years. But he wonders whether increasing the downpayment will take some people out of the housing market.

“I think leaving it at 5% would be okay,” Mr. Ash said.

Garry Marr, Financial Post 

Shannon Puddister figured he would probably need some flexibility when he took on his first mortgage, with an 18-month-old daughter already in tow and another child on the way.

The 32-year-old Toronto-based commercial litigation lawyer with Lerners LLP, bought his first home last year with his wife Deanna Webb. To deal with the financial strain of two children, they chose to amortize their mortgage payments over 30 years.

His payback plan should come as no surprise. For generations, Canadians have gone for 25-year amortizations but according to the Canadian Association of Accredited Mortgage Professionals, almost half of new borrowers now opt for a longer amortization.

“When we put together our budget, we looked at it as a cash flow issue. A longer amortization rate means a lower payment. I know that means you are paying more interest but from our perspective, entry level buyers with a kid, our plan was to get ourselves settled, push through with a first mortgage and, when we renewed our mortgage, shoot for a lower amortization,” said Mr. Puddister, whose wife gave birth to their second child this month.

Just 15 months ago, he could have opted for a 40-year amortization but Ottawa cracked down on those lengths and set the limit at 35 years. The government also demanded consumers have a 5% downpayment.

Last month Finance Minister Jim Flaherty seemed to renew debate on the subject, when questioned by reporters about the booming housing market that has rebounded sharply from lows reached in January.

“Well, we have to watch and we are watching and monitoring. As you know, we took steps a year or two ago to require at least a 5% down payment and to restrict the amortization period for insured mortgages but we’re watching that. Low interest rates obviously are having an effect on the strength of the housing market in Canada,” he said, warning “people have to make sure that the mortgages they take out today either have a fixed rate or they know that they’ll be able to handle increases in that mortgage rate later on.”

In his case, Mr. Puddister says there is no question a larger downpayment or shorter amortization requirement would have changed his buying decision dramatically. The other problem is today’s rates are so low, he can’t see himself trying to pay down his mortgage principal any faster.

“I’d rather dump it into an investment,” says Mr. Puddister, who is borrowing at about 2.25% based on today’s rates.

While Mr. Puddister may have the financial discipline to save and invest the money he is saving from low interest rates, mortgage broker Vince Gaetano says he is the exception.

“Only abut 5% of people take advantage of pre-payment privileges,” says Mr. Gaetano, adding once a consumer gets used to low monthly rate, they are loath to increase the payment even if it means knocking down principal faster.

“You get a mortgage for five years and then don’t think about it. Are you going to start making payments or are you going to take your vacation? I don’t think it would be so bad to take the maximum amortization down to 25 years because that way you would have some buffer room for making sure people qualify.”

CIBC World Markets senior economist Benjamin Tal says the bigger issue for consumers would probably be an increase in downpayment as opposed to a change to amortization schedules. Even though half of mortgage origination is said to be going for a longer amortization, Mr. Tal issued his own report that shows 40% of Canadians opt to make an extra month’s worth of payments each year.

Called accelerated bi-weekly payments, consumer make payments every two weeks instead of twice a month and the impact is considerable. “On a $250,00 mortgage with 5% rate amortized over 30 years, that works out to a de facto shortening of the amortization period by five years,” says Mr. Tal, adding if rates rose by 75 basis points, consumers could absorb the increase by simply stopping the accelerated payments.

Mortgage credit was up about 7% year over year when Mr. Tal wrote his report but he thinks dramatic changes to downpayment levels and amortization are not necessary at this point. “Be careful you don’t kill a fly with a hammer. You could derail the housing market for no good reason,” says Mr. Tal.

In real estate circles, many privately grouse about Mr. Flaherty’s overreaction to an improved housing market that still fell well short of records set in 2007. “You don’t want to see anything that affects the ability to purchase,” says Gary Friend, president of Canadian Home Builders’ Association. “You make changes and in a place like Vancouver where I am, it could have a significant effect. At the same time we respect the need for prudent credit conditions and smart borrowing.”

Low rates, low downpayments and long amortizations have made it easy for just about anybody to buy a home, says Ron Cirotto, who runs the website amortization.com. He sometimes wonders why everybody feels they must buy.

“What they’ve done with mortgages, it’s almost like the concept we had when I was coaching hockey. At one point it seemed like everybody got a trophy. The finalist, the semi-finalist. Everybody has to be winner, everybody has to have house even if they can’t afford it.”

Posted: February 01, 2010, 7:44 PM by Pamela Heaven

While Canada’s ability to sidestep the banking crisis has earned a slow drip of respect from the rest of world over the past year and half, it turned into a flood over the weekend.

On Monday, the most e-mailed story on the entire New York Times website was an economist advocating that the United States emulate Canada’s financial regulatory regime. It helps that the economist/columnist was Paul Krugman, Nobel prize winner and one of the most ardent critics of the way the U.S. government bailed out its big banks.

Mr. Krugman concludes that the U.S. will likely do very little to fix its banking system but “it won’t be because we don’t know what to do: we’ve got a clear example of how to keep banking safe sitting right next door.”

He writes that Canada was better at protecting consumers from predatory lending and that may, along with our supposedly more conservative nature,  be a big contributor to our financial stability.

In the Financial Times, Chrystia Freeland, the paper’s U.S. managing editor, hit on some of the same points as Mr. Krugman including repeating the commonly held assumption that we are too collectively dull as a nation to even create a bubble worth bursting.

Ms. Freeland, a Canadian, does add more depth than Mr. Krugman and actually talks to many of the leaders of Canada’s financial system. She runs through several of the possible reasons for our good fortune: a more prudent culture, better rules, regulators that talk to each other and a cozy, conservative mortgage market.
All of these topics have been covered extensively by reporters like John Greenwood, Paul Vieira and Theresa Tedesco in the Financial Post, but it’s nice to see two other prominent papers taking notice.
Grant Ellis, associate editor, Financial Post

Looks like a V shaped recovery afterall

Paul Vieira, Financial Post 

OTTAWA — Despite all the angst in financial markets over sovereign debt and the populist influence on banking reform proposals, the economies in the United States and Canada have chugged along the road to recovery at a pace that’s surprising even the most skeptical of analysts.

Data released Friday indicate U.S. GDP grew in the fourth quarter, an estimated 5.7%, at its fastest pace in six years. Meanwhile in Canada, data show November growth was stronger than expected, at 0.4%, while revisions to September and October figures indicate the economy was much stronger than earlier thought.

“It couldn’t have been that easy, could it?,” asked Stewart Hall, economist at HSBC Securities Canada, who in previous notes had expressed caution about a slow, uneven recovery. “Yet charting out the month over month GDP looks an awful lot like a “V” shaped recovery.”

Prior to the release of this data, markets had been consumed with worries in the aftermath of the financial crisis, be it the debt levels of industrialized countries; a slowdown in Chinese growth as Beijing looks to tighten credit conditions, and measures proposed by the U.S. White House that could scale back the size of U.S. banks, leading them in the meantime to restrict credit growth as given their uncertain future.

“One of the important lessons of the crisis was that it was often helpful to focus squarely on more comprehensible macro-cyclical dynamics than on the noise and complexity of these other areas,” Dominic Wilson, director of global macro and markets research for Goldman Sachs, said in a note this week.

“The latest focus on the banks might inadvertently restrict credit or tighten financial conditions in ways that do alter the macro path. But we think it makes sense to stay more focused on the economic news rather than shifting views too much on the basis of handicapping the twists and turns of possible legislation and the inevitable news from Washington.”

As for the nuts and bolts of the data, analysts had mixed views.

In the U.S., economists at Capital Economics argued the big estimated headline gain was largely due to inventory rebuilding – hence, there’s some skepticism that will kickstart a self-sustaining recovery.

But Dawn Desjardins, assistant chief economist at Royal Bank of Canada, said the U.S. data suggest “the consumer, after being in hiding the previous-six quarters, re-emerged in the second-half of 2009. … This was a reflection of rising confidence that the recession was ending, the effect of government programs and a very low interest rate environment. Going forward, we expect that consumer spending will remain positive but that increases will be moderate as the hangover from the buying binge in previous years constrains activity.”

It is not just the consumer. Business investment also surprised on the strong side, with growth of 2.9% after a 5.9% drop in the previous quarter. Investment in equipment and software jumped 13.3%, well above the 1.5% expansion in the third quarter. Net exports also added to U.S. GDP, in a sign that the country is beginning capitalize on its weaker currency and stellar productivity when it comes to trade.

In Canada, the surprisingly strong November data – and upward revisions to September and October – have economists indicating that the recovery is for real, with some now penciling in growth of at least 4% for the fourth quarter, or above the Bank of Canada’s own projections. And remember, the central bank’s forecast is at the upper end of market projections.

“This is one of the most convincing signs so far that the Canadian recovery is for real, and neatly dovetails with the robust U.S. GDP result,” said Douglas Porter, deputy chief economist at BMO Capital Markets.