Canada First Mortgage

Paul Vieira, Financial Post

Ottawa — Bank of Canada governor Mark Carney has had a busy time of it since taking over as the country’s central banker 27 months ago, mostly tackling the financial crisis, mapping out the road to recovery and reassuring Canadians that at the end of the day the bank’s extraordinary policies would work.

The one thing he has yet to do during his term, however, is raise interest rates. That might be about to change on Tuesday. If he does pull the trigger - and that is what most analysts expect - it won’t be after grappling with competing forces that convey two starkly different messages about the economic outlook.

“We are at point where it is a tug of war between structural issues that are facing the eurozone and a very strong economic cyclical backdrop,” says Stéfane Marion, chief economist at National Bank Financial.

Weighing on the governor are the economic data, which call out for a rate hike - as much as 50 basis points, some reckon. The data have been consistently strong and surprising to the upside. Job creation is in full swing, with a record 109,000 workers added to payrolls in April; consumers are buying up goods at a healthy pace, tax credits or not; corporate profits are rebounding to pre-recession levels; and inflation is creeping closer to the central bank’s preferred 2% target. The sterling fundamentals prompted the central bank last month to ditch its conditional commitment to keep its policy rate at a record low 0.25% until July, leading traders to price in a nearly 100% chance of a rate hike on June 1.

That was until sovereign debt worries exploded in Europe, once Greece formally asked for international help days after the last Bank of Canada rate decision. That sparked an across-the-board retreat in global equity markets, down 9.3% since the beginning of May, as traders sold stocks and poured into risk-averse U.S. treasuries and other government securities on fears that another credit crunch was at hand. Mr. Carney is likely aware of this better than most, given his capital markets background from Goldman Sachs.

The most worrying sign on Mr. Carney’s radar screen might be the small but steady increases in the cost of borrowing among banks, a signal European lenders are finding it tough to access cash from their peers on concern over how much Greek, Portuguese and Spanish debt they hold.

In the end, the consensus is Mr. Carney is leaning toward a rate hike - a modest one, though, of 25 basis points. The thinking is, an ounce of prevention now is worth a pound of cure later.

“We can’t look at things in a vacuum, because there are so many other factors besides Europe’s issues” says Jonathan Basile, an economist with Credit Suisse in New York who closely watches Canadian markets. “The truth is the macroeconomic evidence is outweighing the financial risks right now.”

The last time the Bank of Canada raised its benchmark rate was in July 2007, by 25 basis points to 4.5%. At the time, former governor David Dodge said the economy was operating above its production potential, and inflation was likely to stay above its 2% inflation target for longer than forecast.

Little did Mr. Dodge know that the U.S. subprime crisis would morph into the worst financial crisis since the Great Depression, roiling markets and economies around the world. This is why Europe’s recent fiscal woes have triggered a case of nerves, and might prompt Mr. Carney to rethink any rate move.

“The Bank of Canada wants to raise rates, but it doesn’t have a crystal ball,” CIBC World Markets said in a note to clients. “It can’t be certain that the recent financial market downturn isn’t going to morph into something more severe that would make a rate hike look out of place.”

There’s another school of thought, though, that suggests markets have overreacted to a regional problem. In this context, it is key to remember the Bank of Canada didn’t expect the eurozone to contribute much to global growth, envisaging only 1.2% expansion this year and 1.6% in 2011.

“The European picture will calm down and people will realize it is not as dramatic as being played out,” says Carlos Leitao, chief economist at Laurentian Bank Securities.

Yes, he acknowledges, the debt-ridden southern European economies have tough years ahead. But other countries, led by Germany and France, are going to capitalize on the lower euro and boost their exports to emerging economies and North America, which will help offset the drag from the so-called Club Med nations.

Besides Europe, Mr. Carney has other factors to consider.

Canada’s sovereign debt levels are indeed much better than the industrialized world, as our politicians like to remind us. But the amount of debt held by households, measured as a percentage of disposable income, stood at a historical high of 146% - of which 98% is mortgage related - at the end of 2009, rating agency DBRS estimates. That would put Canadian households ahead of the United States but behind Britain on this measure. A rate hike would signal it might be time to live more modestly and refrain from too much debt-financed consumption (which helped fuel those nasty asset bubbles that central banks may want to pay more attention to in the aftermath of the subprime debacle).

Mr. Carney’s other challenge is to explain why, and what’s ahead. He has come off a period where he provided extraordinary guidance to markets. Don’t expect similar language from the governor.

If anything, Mr. Marion warns the central bank should refrain from using the type of guidance the U.S. Federal Reserve deployed in 2004, when it signalled a period of “moderate” rate hikes were in the offing.

In retrospect, the Fed’s use of the word moderate “encouraged more financial excesses,” leading to the subprime bust, Mr. Marion says. “Carney doesn’t have to be brusque about it. He has the luxury to start slowly, and leave his options open,” from pausing should Europe deteriorate to hiking aggressively, by 50 basis points, if conditions warrant.

Mr. Carney reminded us recently that “nothing is pre-ordained” at the Bank of Canada. He’s likely to drive home that point on Tuesday, rate hike or not.
Read more: http://www.financialpost.com/news-sectors/story.html?id=3084621#ixzz0pVYuP0cD

by Diana Cawfield, Bankrate.com
Wednesday, May 19, 2010

When it comes to retirement, there is no shortage of opinions on the need for a hefty $1 million to carry you through your golden years. The demographic trend of living longer and more actively also means extending our financial lives, so suggestions of needing plumper nest eggs are common. Outliving our money is a big concern for many.

While a six-digit portfolio may be the target to meet the lifestyle choices of some people, there are more modest and more achievable financial targets for many others. If you are in the lifestyle camp that requires close to $1 million to retire, and you’re comfortable with that, both financially and personally, this article is not for you.

But if you are among the many other investors who will retire with far less than a million dollars, read on to find out how to make your funds last a lifetime.

Retirement less expensive than you think
According to Malcolm Hamilton, a consulting actuary with Mercer, in Toronto, we don’t read about the comfortable retiree a lot because it doesn’t fit the stereotype. “The stereotype,” he says, “is the extravagant lady spending, the impoverished senior or the poor boomer in the sandwich generation having to help the poor senior.”

Yet, people who are frugal - not miserly, notes Hamilton - and don’t like wasting money often find that they don’t spend anywhere near as much as they have saved.

It’s all based on what you’re used to. According to Hamilton, many people don’t increase their spending once they retire because they’re already doing what they like and it doesn’t cost them very much. “It becomes obvious when they’re 10 to 15 years into retirement that they’re just getting richer and richer, not poorer and poorer,” he says.

Hamilton points out that retirement offers a host of enjoyable, low-cost activities that include local community centres, subsidized courses and discounts on clubs and recreation. Then there’s a wide choice of free or affordable activities like walks in the park, playing cards with friends, or reading and watching television for armchair adventures.

The rule of $20
Other positive factors bode well for retiring with more modest means. “Canadians tend to be very conservative about their approach to finances anyway, and our banking system has certainly helped that and it’s given retirees right now a greater piece of mind,” says Patricia Lovett-Reid, senior vice-president at TD Waterhouse Canada.

In fact, according to her research, close to 70 per cent of Canadian retirees already say their retirement is exactly, or mostly, what they expected. “It’s the preretirees who worry about their retirement, because they’re not sure how much they’re going to need. So when they hear that you need a million dollars, it’s overwhelming.”

Lovett-Reid credits Russell Investments Canada for the helpful retirement Rule of $20. Essentially, for every dollar of annual income that you expect to need during your retirement, you need to have saved $20 by the time you retire, without inflation indexing.

For example, a couple heading into retirement with $400,000 of registered savings can expect it to generate $20,000 a year in retirement income. “Now, you combine that with an estimated $25,000 of Canada Pension Plan, or CPP, and Old Age Security, or OAS, and this couple is looking at a yearly retirement income of approximately $45,000,” says Lovett-Reid.

For illustrative purposes, Lovett-Reid says research from Statistics Canada indicates that the median household income for a married couple is $63,000 gross. Therefore, if you want to maintain, say, 70 per cent of that income, then a couple at age 65 would need just shy of $45,000 a year in retirement, pretax.

For individuals who fall short of a $400,000 portfolio - especially those with no company pension - you’re going to require $20,000 of income from your own savings a year to maintain close to that $45,000 in annual income.

“So you’re going to have to look at the co-mingling of all your income sources - registered retirement savings, tax-free savings accounts and nonregistered accounts,” says Lovett-Reid.

Three job descriptions in retirement
According to Keith Pangretitsch, director of national sales at Russell Investments Canada, to simplify the process of calculating income needs, “we always say every dollar a client has should have a job description.”

To that end, he earmarks three main job descriptions for retirement funds. The first is to cover essentials such as food, shelter, transportation expenses, taxes and any other expenses beyond your control.

The second job description, lifestyle, offers flexibility because it is a discretionary expense. You can choose how to use your money when it comes to entertainment, travel, clothing and eating out, along with many other lifestyle choices.

That’s not to say that controlling discretionary expenses is an easy task. “I’ll put out an economics terms from my university days: We’re all utility-maximizing individuals. We all want to do more than less,” says Pangretitsch. So, you need to choose investments that will produce the amount of money you need.

While individuals vary greatly in risk tolerance and financial circumstances, a portfolio that offers a balance between risk and return is often necessary to generate growth of capital in retirement. “What we recommend is 60 per cent equity and 40 per cent fixed income to give you the growth that you need and to reduce the risk from equities,” says Pangretitsch.

The third job description is planning. “Most people, quite frankly, start planning too late,” says Pangretitsch. “I think the regulatory environment is good for folks to retire well, but we also need that added piece of financial planning to ensure that we’re on track. Retirement is far too complicated, with tax issues and reduced income issues, not to take it seriously.”

Diana Cawfield is an award-winning freelance writer, specializing in finance and health sciences.

By Julian Beltrame, The Canadian Press

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

http://ca.news.finance.yahoo.com/s/25052010/2/biz-finance-loonie-s-plunge-signals-long-term-risk-canadian.html

Emily Mathieu Business Reporter Toronto Star

Higher than expected rates of inflation and reports of record breaking retail sales means interest rate hikes will likely go ahead, according to a top economist with BMO Capital Markets. But domestic strength might not be enough to justify increases if the upheaval in global markets continues, said Porter.

“If the (Bank of Canada’s) decision was based solely on domestic factors, then this would be no questions asked, no debate,” said Doug Porter, deputy chief economist.

The central bank has long predicted rates would rise on June 1, but Porter said doubt over the future of global economic stability could cause them to go off course.

“It would take a very brave central bank indeed, I think, to raise interest rates in the face of the turmoil we are seeing in global financial markets right now.”

According to Statistics Canada’s Consumer Price Index, the core index advanced 1.9 per cent during the 12 months leading up to April, following a 1.7 per cent increase in March.

The boost in April was due mainly to a rise in prices for the purchase of passenger vehicles, passenger vehicle insurance premiums, property taxes, and food purchased from restaurants, the report showed.

The seasonally adjusted monthly core index rose 0.2 per cent in April, following a 0.3 per cent decline in March.

Consumer prices across the country rose 1.8 per cent in the 12 months leading up to April, following a 1.4 per cent increase in March. In Ontario, prices rose 2.2 per cent.

Porter said BMO has no plans to alter their position that rates will rise on June 1, but said that position could change if market upheaval continues into next week.

“If Canada were an island there would be no debate,” said Porter. “There is a very compelling domestic case for higher interest rates.”

Statistics Canada reported a 2.1 per cent increase in retail sales dollars in March, to $37 billion. Porter said earlier reports had predicted sales would be close to flat. “Instead we get one of the best gains on record.”

National energy prices rose 9.8 per cent between April and the same time the previous year, following a 5.8 per cent increase during the 12 months between March 2010 and the same time the previous year. Excluding the increase in energy the index rose 1.1 per cent, compared with a 1 per cent increase in March.

For the sixth month in a row, gas prices exerted the strongest upward pressure on the index. In April, Canadians paid 16.3 per cent more at the pump than they did the same time the previous year. That change follows a 17.2 per cent increase between March of this year and the same time in 2009.

Natural gas prices were up 3.3 per cent in April than the same time the previous year. Between March 2010 and the same time the previous year prices had dropped 22.4 per cent.

The cost of transportation was up 6.2 per cent in the 12 months to April and consumers paid a 5.6 per cent more for insurance premiums in April compared to the previous year.

Housing costs were up 0.8 per cent, after declining 0.7 per cent in March, with household utilities exerting the most upward pressure. The mortgage cost index fell 6.1 per cent, the report showed.

Food prices were up 1 per cent, following a 1.3 per cent increase in March. The 1 per cent rise, largely related to prices for food purchased in restaurants, was the smallest since March 2008.

Health care prices rose 3.3 per cent, the report showed. http://www.thestar.com/business/article/812567–rate-hike-not-guaranteed

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

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

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

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

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

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

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

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

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

Steve Ladurantaye

Globe and Mail

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Julian Beltrame, The Canadian Press

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Andrew Pyle, for Yahoo! Canada Finance
Thursday, May 13, 2010

Now that Europe appears to have bought itself some time from those vicious currency and bond speculators (and what a price tag, at a cool trillion dollars), individuals are also feeling a little more relieved about their finances.  And they are indeed quite eager to put May behind them.  Where investors were lulled into a sense of false security during April, as equity volatility fell to the lowest level since July 2007 (as measured by the VIX index), the spike in volatility this month knocked people off their chairs. True, the high in the VIX last week of just above 40 was still only 50% of the peak seen in November 2008; however, it has served as a wake-up call that there are as many risks out there as rewards.

For now, though, let’s assume there are no further shocks to the system for the coming weeks and that volatility subsides.  The focus for individuals and households should then return to their own fundamentals.  What does the job and income situation look like?  Are financial plans still intact?  And what about that mortgage coming due next month?

Ah, the dreaded mortgage decision.  Despite the signs of an impending rise in the general level of interest rates and warnings from government officials, I find that there is still a lack of conviction among Canadians as to whether they should lock in their mortgages at prevailing rates, versus holding on to a floating rate mortgage.  It’s therefore a good time to review the facts and fiction out there so that you can make a better educated decision.

Regardless of the recent jump in rates, we still look to be in the middle of a downward trend in mortgage rates since 1981.  You may remember that year, when five-year term rates were in excess of 22% in Canada. It came at the same time that North America fell victim to a painful double-dip recession.  Of course, inflation was also sitting around 12% at the time.  Many families lost their homes to be sure, but the threat posed by higher rates today is greater because of the fact that debt levels are much higher today than back then.  The increased leverage in the housing sector, to say nothing of general credit among individuals, increases the sensitivity to rates – something we saw so very clearly in the US housing sector from 2003 to 2006.

Today, floating rate mortgages are still trading at various spreads to the prime rate, which itself hasn’t budged from 2.25% since April of last year.  How much that spread is will depend on a host of factors, not the least of which is your credit score and perceived credit worthiness by your lender.  That said, whether you chose a floating versus fixed rate mortgage doesn’t matter anymore since the new federal regulations went into effect last month.  You must now meet the requirements or standards of a five-year term mortgage even if you want the adjustable rate variety.  In other words, if you’re not going to budget for the possibility of short-term rates rising to where prevailing five-year rates are today, the government has done it for you.

That five-year rate has been a bit of a bouncing ball over the past year.  In April 2009, the conventional five-year rate (or the posted rate) fell to a generational low of 5.25%, coinciding with the last quarter-point rate cut by the Bank of Canada.  Through the summer and fall of last year, the rate got as high as 5.85%, but then eased back during the early months of this year as equity markets got a little shaky and bond yields stabilized.  That all changed towards the end of the first quarter.  Economies were looking a lot better, equities picked up the pace and inflation fears began to creep back in the market.  There was also a definite shift in opinion as to when the Bank of Canada would start hiking rates, with the consensus focused on June 1st.  Since bond yields needed to price in this new anticipation, other rates went up in sympathy, including mortgage rates as well as GICs.  To give you an illustration, the five-year Government of Canada yield rose from about 2.4% in February to 3.2% in April. The five-year mortgage rate, which reached a low of 5.25% in March, shot up to 6.25% by late April.  The only relief for borrowers has been a paltry 15-basis-point reduction by banks in the past week to 6.10%.  Hardly a surprise when you consider the sharp drop in bond yields worldwide when it looked like contagion was going to put a recessionary grip on the world again.

But, have a look at where things are today.  Despite the recent mortgage cuts, bond yields are rising again as investors move money from fixed income to stocks (not what I’m necessarily recommending).  Assuming the European calm persists, economic fundamentals in North America continue to firm and China doesn’t upset the apple cart too much with its measures to rein in credit in that country, bonds will likely come under more pressure, sending yields higher.  This should pave the way for five-year mortgage rates in Canada to climb to 6.5% and then potentially to 7%.  Note, the high before the recession was only 7.5% - a level which could be reached this year under ideal economic conditions.

Now, some will say that it doesn’t matter where longer-term mortgage rates go, since short-term rates won’t likely climb to those levels.  This has some merit to it, as the prime rate only got as high as 6.25% prior to the recession.  Of course, with today’s spreads added on, the mortgage rate then for some would have been close to the 5-year rate. Whether or not short rates return to those levels depends on a number of things, including inflation, and with world governments still borrowing ridiculous amounts to fund fiscal spending, inflation cannot and should not be ruled out.

All this aside, the decision on which mortgage to chose ultimately comes down to a combination of expectations and emotion.  It might seem okay to assume that the stock market won’t experience another meltdown like in 2008-09, but few of us would be willing to throw 100% of our assets into the market on that call.  We need to sleep at night and therefore we apply balance to our portfolios.  The same holds true for our borrowing decisions.  I can come up with an economists’ tale of how interest rates will stay relatively low because of economic headwinds and the increased sensitivity to debt, but what if inflation fears overrule that view?

For those looking to put a household budget together that allows for an extended uninterrupted sleep, the five-year term option is still the best bet.  There is also what I call a ‘sticker shock’ factor to keep in mind here.  If rates at both ends of the spectrum climb over the next several years, those already acclimatized to a higher borrowing rate will find it less ‘shocking’ upon renewal than the individual with a floating rate mortgage that has to see a continual erosion of their monthly payment towards interest.  In other words, the person with the longer and fixed-term mortgage will arrive at the principal amount that was anticipated.  The adjustable rate mortgagor will not.

My final point on this has to do with opportunity cost.  If the view of rising interest rates turns out to be false, and rates fall or stay flat, then this probably means the economy isn’t so hot.  I would suggest in that event that there will be bigger concerns on the household budget than the extra couple of percentage points in interest.   In short, this is not a time for aggressive offense, but a good shield.

By Julian Beltrame, The Canadian Press

OTTAWA - Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians’ appetite for spending money they don’t have.

A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.

That’s $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.

“This report is another indication of Canadians’ readiness to consume today and pay later,” says association president Anthony Ariganello.

“The concern is do they understand the full cost of paying later?”

The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.

Most Canadians don’t yet share that concern. The accountants’ survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.

But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.

The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.

The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.

The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.

The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.

Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.

BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada’s decision to slash rates to historic lows during the recession.

“That’s why we did not experience a great recession,” he noted. “That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem.”

But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.

Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike. http://ca.news.finance.yahoo.com/s/11052010/2/biz-finance-recession-didn-t-slow-canadian-s-spending-report.html

; ‘Housing starts have risen 80% from their cyclical lows’

Derek Abma, Financial Post

If record job gains from April weren’t enough to convince you the Canadian economy is on solid ground, a few more measures are coming down the pipe over the next week that could support the case.

“In Canada, we’re in the home stretch of reports on what was evidently a very strong first quarter, and the early news on Q2,” CIBC World Markets chief economist Avery Shenfeld said in a research note on Friday, which followed Statistics Canada’s report that 108,700 additional people found work last month– about four times what was expected.

Today, Canada Mortgage and Housing Corp. reports its April housing-start figures. Economists anticipate an annualized rate of 205,000, up from a revised figure of 200,900 in March. The last figure marked a small decline from the previous month, on a seasonally adjusted basis, but things have come a long way since the market bottomed out at 112,000 in April 2009.

“To date, housing starts have risen a massive 80% from their cyclical lows, retracing over half of the peak-to-trough drop,” Millan Mulraine, senior strategist with TD Securities, said in a report released on Friday.

Mr. Mulraine, who’s forecasting a start level of 210,000 for April, attributes some of the current strength to homebuyers looking to avoid the new harmonized sales taxes taking effect in Ontario and British Columbia in July. He also noted that April was warmer than usual, helping along construction efforts.

Another big report comes Wednesday in the form of merchandise trade data for March. Economists anticipate a Canadian surplus — the amount exported minus what’s imported — of $1.6-billion, up from $1.4-billion in February. If right, it would mark the fourth straight surplus.

CIBC World Markets economist Krishen Rangasamy credited improved economic conditions globally as probably helping Canada maintain it trading-surplus streak in March, including greater demand for vehicles in the United States.

“The merchandise trade report for March will likely add to earlier data that presages (Canadian economic) growth of around 5.7% (annualized) for the first quarter,” Mr. Rangasamy said. “But the party won’t last forever for exporters, given the lagged effects of a strong Canadian dollar and the expected slowdown in the U.S. economy later in the year.”

Speaking of the auto industry, Statistics Canada on Friday will release data on domestic new-vehicle sales for March. A 4% monthly decline is expected following an 8.1% jump in February.

The federal agency will also release March figures for manufacturing sales that day. A one% rise in the value of factory transactions is expected by economists after the slim 0.1% gain in February.

“Canadian manufacturing-sector activity has been on a breathtaking run lately, with sales rising for six consecutive months on the back of strong domestic and foreign demand,” Mr. Mulraine said.

Mr. Mulraine is in line the consensus of economists in his March manufacturing forecast, citing transportation equipment as well as products made of petroleum and coal as helping to fuel the gains.

Besides these reports, a number of Canadian companies, such as George Weston and Jazz Air, will release quarterly earnings. As well, the United States will see data on March wholesale trade toomorrow, its own March trade data on Wednesday and April retail sales on Friday.

Read more: http://www.financialpost.com/story.html?id=3007517#ixzz0nWZkq2Sr