Bank of Canada says third-quarter growth was worst since recession
BY JULIAN BELTRAME
OTTAWA – The Canadian economy likely suffered the worst quarter since the recession over the summer months, but Bank of Canada governor Mark Carney warns against taking too gloomy a view.
“I wouldn’t obsess about the third quarter,” Carney told reporters Wednesday after Canada’s central bank released its latest global economic outlook.
The bank conceded the economy likely continued to brake in the July-September months to 1.6 per cent growth — down from two per cent in the second quarter and the distant memory of the first quarter’s 5.8 per cent advance.
But Carney said Canadians should take a longer view and also take comfort that no matter how modest, at least activity is still positive.
“Two years ago, I (would have said) the economic picture we’ve just seen would have made the bank happy, would have made Canadians happy, given the alternative,” he said.
“We’ve recovered the jobs, we’ve recovered the lost output, we are doing better than virtually anybody else in the advanced world.”
Canada’s current rate of growth is about half the pace the bank had expected a few months ago, and even slower than the U.S., but Carney notes that there’s no comparison between the Canadian and U.S. economies.
While all and more of the about 400,000 jobs Canada lost during the recession have been recovered, the U.S. has only recouped about 15 per cent of their losses. And Canadian domestic demand is outpacing the U.S. by 20 per cent.
Dangers lurk, however, as the bank’s latest quarterly review makes clear.
Both the Canadian and global recoveries, as well as future growth projections, are more modest now than they were three months ago.
To accommodate those diminished expectations and increased risks, the bank on Tuesday suspended the monetary tightening cycle it began in June. Analysts think the bank’s key interest rate will stay at one per cent for many months.
The bank says in the balance it still believes the recovery will continue, but it highlights “important” risks, both internal and external, with the potential to upset the apple cart.
Canadian households are steeped in debt and could become a drag to the economy should housing prices collapse. Latest data shows debt-to-disposable income among households has reached a record 147 per cent.
“If there were a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy, such as consumption, given the high debt loads of some Canadian households,” the bank states.
Carney acknowledged keeping rates low for an extended period only increases the debtload risk, but said he believes consumer spending, including on housing, is tracking lower.
Coincidentally, the TD Bank also warned about household debt in a report Wednesday, saying one-in-10 households could find themselves in financial distress when interest rates rise. Fortunately, that many not be for some time.
Externally, the bank heightened its concerns over the growing friction in the world over currency manipulation, with advanced economies threatening to retaliate against China’s undervalued yuan.
The issue will be central to discussions at this week’s G20 finance ministers in Korea, but Carney suggested a solution will be slow and laborious.
Advanced economies, particularly the U.S., have long complained that China and other fast-growing Asian economies are artificially keeping their currencies below their true value in order to boost exports and discourage imports.
Although China has made some moves to increase the value of the yuan and hike domestic consumption, advanced economies believe those actions have not gone far enough.
Carney said as big a concern is that frustration will grow in advanced economies to such an extent that it will touch off a currency war, although he said China was the key.
“It’s not just China’s position ... but as part of rebalancing the global economy, increased flexibility of the (yuan) is absolutely essential,” the bank governor said.
Despite the challenges, the bank sees the Canadian economy advancing from the slow third quarter to a 2.6 per cent gain in the fourth, and an average 2.3 per cent in 2011, followed by 2.6 in 2012.
One encouraging signal is that businesses have begun to invest in new machinery and equipment, which should boost productivity going forward.
Another, said Carney, is that exports will turn from being a net drag on growth to a tiny positive sometime next year as global demand picks up.
Still, it’s going to be a slow, hard slog back to normalcy.
The economy is not nearly as strong as the bank thought it was in July. It calculates output gap — the slack in the economy — remains at 1.75 per cent, not 1.5 per cent as estimated in the previous review.
The bank’s best guess now is that the economy will eventually right itself, but won’t be firing on all cylinders for another two years.
The Canadian Press http://news.therecord.com/Business/article/797065
Thursday, October 21, 2010
Friday, October 1, 2010
Canadian economy goes into reverse in July
September 30, 2010
OTTAWA - The Canadian economy shrank in July for the first time in almost a year as tepid demand from a sluggish United States put the brakes on manufacturing and consumers kept a tight grip on their purse strings.
Real gross domestic product edged down 0.1 per cent, the first monthly decline since August 2009, Statistics Canada reported Thursday. Manufacturing, retail and wholesale trade, construction and forestry all posted decreases.
The reading appeared to reinforce what many economists have been saying in recent weeks: the Canadian economy is continuing to grow, but at a plodding pace.
“Consistent with faltering domestic demand and weak U.S. demand, manufacturing shipments fell the hardest in the month,” TD Bank economist Diana Petramala wrote in a note to clients.
“The weakness was widespread among the manufacturing industry with some positive offset from motor vehicle production and food and beverage manufacturing.”
Manufacturing decreased 0.7 per cent in July, with 11 of the 21 major groups retreating. Construction declined 0.5 per cent, forestry and logging receded by 4.6 after a double-digit increase in June and utilities declined 0.4 per cent.
The home resale market fell significantly for a third straight month, retail trade fell 0.5 per cent and wholesale trade edged down 0.2. At least part of the weakness in consumer discretionary spending was blamed on the effect of new harmonized sales tax regimes in three provinces.
“It’s not all that surprising that Canadian economic growth has started to unwind given the introduction of the harmonized sales tax (HST) in Ontario and B.C. and as the positive impact from stimulus spending is beginning to wane,” Petramala noted.
However, the dip was likely a temporary one and there were some signs of strength in the numbers, she said.
“The drop in residential construction was partially offset by a 0.3 per cent gain in non-residential construction, while the decline in retail trade was slightly tempered by modest gains in areas related to discretionary spending like clothing and footwear and general merchandise stores.”
Increases were recorded in the mining sector and, to a lesser extent, in some financial industries and the public sector. The mining sector rose 1.1 per cent in July, while the finance and insurance sector grew 0.1.
“If the respectable 35,000 job gain in August is any indication, positive economic growth should resume in August — albeit at a tepid pace.”
The Canadian Press
September 30, 2010
OTTAWA - The Canadian economy shrank in July for the first time in almost a year as tepid demand from a sluggish United States put the brakes on manufacturing and consumers kept a tight grip on their purse strings.
Real gross domestic product edged down 0.1 per cent, the first monthly decline since August 2009, Statistics Canada reported Thursday. Manufacturing, retail and wholesale trade, construction and forestry all posted decreases.
The reading appeared to reinforce what many economists have been saying in recent weeks: the Canadian economy is continuing to grow, but at a plodding pace.
“Consistent with faltering domestic demand and weak U.S. demand, manufacturing shipments fell the hardest in the month,” TD Bank economist Diana Petramala wrote in a note to clients.
“The weakness was widespread among the manufacturing industry with some positive offset from motor vehicle production and food and beverage manufacturing.”
Manufacturing decreased 0.7 per cent in July, with 11 of the 21 major groups retreating. Construction declined 0.5 per cent, forestry and logging receded by 4.6 after a double-digit increase in June and utilities declined 0.4 per cent.
The home resale market fell significantly for a third straight month, retail trade fell 0.5 per cent and wholesale trade edged down 0.2. At least part of the weakness in consumer discretionary spending was blamed on the effect of new harmonized sales tax regimes in three provinces.
“It’s not all that surprising that Canadian economic growth has started to unwind given the introduction of the harmonized sales tax (HST) in Ontario and B.C. and as the positive impact from stimulus spending is beginning to wane,” Petramala noted.
However, the dip was likely a temporary one and there were some signs of strength in the numbers, she said.
“The drop in residential construction was partially offset by a 0.3 per cent gain in non-residential construction, while the decline in retail trade was slightly tempered by modest gains in areas related to discretionary spending like clothing and footwear and general merchandise stores.”
Increases were recorded in the mining sector and, to a lesser extent, in some financial industries and the public sector. The mining sector rose 1.1 per cent in July, while the finance and insurance sector grew 0.1.
“If the respectable 35,000 job gain in August is any indication, positive economic growth should resume in August — albeit at a tepid pace.”
The Canadian Press
Wednesday, August 25, 2010
Tuesday, April 20, 2010
Bank of Canada maintains overnight rate target at 1/4 per cent; removes conditional commitment
OTTAWA, April 20 /CNW Telbec/ - The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.
Global economic growth has been somewhat stronger than projected, with momentum in emerging-market economies increasing noticeably. Exceptional stimulus from monetary and fiscal policies continues to provide important support in many countries. The recovery in the major advanced economies is still expected to be relatively subdued, reflecting ongoing balance sheet adjustments and the gradual withdrawal of fiscal stimulus commencing later this year. Despite recent progress, considerable uncertainty remains about the durability of the global recovery.
In Canada, the economic recovery is proceeding somewhat more rapidly than the Bank had projected in its January Monetary Policy Report (MPR). The profile for growth is more front-loaded than that presented in the January MPR. The Bank now projects that the economy will grow by 3.7 per cent in 2010 before slowing to 3.1 per cent in 2011 and 1.9 per cent in 2012.
This profile reflects stronger near-term global growth, very strong housing activity in Canada, and the Bank's assessment that policy stimulus resulted in more expenditures being brought forward in late 2009 and early 2010 than expected. At the same time, the persistent strength of the Canadian dollar, Canada's poor relative productivity performance, and the low absolute level of U.S. demand will continue to act as significant drags on economic activity in Canada. The Bank expects the economy to return to full capacity in the second quarter of 2011.
The outlook for inflation reflects the combined influences of stronger domestic demand, slowing wage growth, and overall excess supply. Core inflation, which has been somewhat firmer than projected in January, is expected to ease slightly in the second quarter of 2010 as the effect of temporary factors dissipates, and to remain near 2 per cent throughout the rest of the projection period. Total CPI inflation is expected to be slightly higher than 2 per cent over the coming year, before returning to the target in the second half of 2011.
In response to the sharp, synchronous global recession, the Bank lowered its target rate rapidly over the course of 2008 and early 2009 to its lowest possible level. With its conditional commitment introduced in April 2009, the Bank also provided exceptional guidance on the likely path of its target rate. This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions and major downside risks to the global and Canadian economies. With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.
In accordance with the removal of the conditional commitment, there will be no additional term Purchase and Resale Agreements issued by the Bank.
Information note:
A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 22 April 2010. The next scheduled date for announcing the overnight rate target is 1 June 2010.
OTTAWA, April 20 /CNW Telbec/ - The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.
Global economic growth has been somewhat stronger than projected, with momentum in emerging-market economies increasing noticeably. Exceptional stimulus from monetary and fiscal policies continues to provide important support in many countries. The recovery in the major advanced economies is still expected to be relatively subdued, reflecting ongoing balance sheet adjustments and the gradual withdrawal of fiscal stimulus commencing later this year. Despite recent progress, considerable uncertainty remains about the durability of the global recovery.
In Canada, the economic recovery is proceeding somewhat more rapidly than the Bank had projected in its January Monetary Policy Report (MPR). The profile for growth is more front-loaded than that presented in the January MPR. The Bank now projects that the economy will grow by 3.7 per cent in 2010 before slowing to 3.1 per cent in 2011 and 1.9 per cent in 2012.
This profile reflects stronger near-term global growth, very strong housing activity in Canada, and the Bank's assessment that policy stimulus resulted in more expenditures being brought forward in late 2009 and early 2010 than expected. At the same time, the persistent strength of the Canadian dollar, Canada's poor relative productivity performance, and the low absolute level of U.S. demand will continue to act as significant drags on economic activity in Canada. The Bank expects the economy to return to full capacity in the second quarter of 2011.
The outlook for inflation reflects the combined influences of stronger domestic demand, slowing wage growth, and overall excess supply. Core inflation, which has been somewhat firmer than projected in January, is expected to ease slightly in the second quarter of 2010 as the effect of temporary factors dissipates, and to remain near 2 per cent throughout the rest of the projection period. Total CPI inflation is expected to be slightly higher than 2 per cent over the coming year, before returning to the target in the second half of 2011.
In response to the sharp, synchronous global recession, the Bank lowered its target rate rapidly over the course of 2008 and early 2009 to its lowest possible level. With its conditional commitment introduced in April 2009, the Bank also provided exceptional guidance on the likely path of its target rate. This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions and major downside risks to the global and Canadian economies. With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.
In accordance with the removal of the conditional commitment, there will be no additional term Purchase and Resale Agreements issued by the Bank.
Information note:
A full update of the Bank's outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 22 April 2010. The next scheduled date for announcing the overnight rate target is 1 June 2010.
Monday, March 29, 2010
Big banks raise mortgage rates in sign era of historically low rates ending
By Sunny Freeman (CP)
TORONTO — Three of Canada's biggest banks are increasing some of their residential mortgage rates effective Tuesday in the latest sign that consumers should prepare for the era of historically low rates to soon come to an end.
The changes affect closed mortgages with terms of three, four and five years at RBC Royal Bank (TSX:RY), Laurentian Bank (TSX:LB), and TD Canada Trust (TSX:TD). Rates for mid-term mortgages like these tend to reflect the banks' borrowing costs on bond markets.
Other banks are expected to follow suit.
The biggest increase announced Monday affects five-year mortgages. All three banks are hiking their posted rate by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.
A homeowner taking on a mortgage of $250,000 at the new posted rate of 5.85 per cent over a 25-year amortization period would pay $1,577 per month. Prior to Tuesday's hike, that mortgage would have cost $1489 a month, or $88 less.
Many people applying for mortgages with decent credit history can negotiate better than posted rates.
The Bank of Canada is expected to begin raising lending rates this summer as it moves to fight growing inflationary pressures in the economy. The bank has kept its key overnight rate at a historic low of 0.25 per cent for more than a year to help stimulate the economy.
Rising rates present a dilemma for many homeowners who face decisions about whether to lock variable rate loans into fixed terms or ride it out and hope that rates will come down again in 2011 as the economy slows and inflationary pressures subside.
Potential homebuyers entering the market also must consider rising rates when they decide to bid on a house. Is it better to wait until rising rates have cleared out some potential bidders or will a flurry of buyers and sellers spooked by the prospect of higher mortgage costs affect the supply-demand balance?
Historically, staying short-term and flexible has been the best strategy, but banks usually advise that locking in at still-attractive longer-term rates of five years and more is always a good bet for many consumers who want to ease their risk.
If the current bank prime rate of 2.25 per cent rises by 2.5 percentage points to 4.75 per cent, a homeowner with a variable mortgage should expect to pay about 30 per cent more on their monthly mortgage, says Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.
"If that causes you discomfort then perhaps a fixed rate's where you want to be and if a fixed rate is where you want to be...if you're closing in the next six months, I suggest people do that quickly."
Generally, long-term fixed rates rise by about half of the variable rate, he said.
While the fixed versus variable decision is specific to each individual, McLister said if prime rates spike by more than 2.5 percentage point, odds are good homeowners will save money in a five-year fixed rate mortgage.
Potential homebuyers should get their pre-approval applications in fast and expect delays in pre-approvals due to increased application volumes, he said. And homeowners' with mortgages up for renewal would also be wise to lock in rates as far in advance as possible.
McLister said its difficult to tell if the bank prime rates will rise by 2.5 points, but he added the banks have embarked on a cycle of rate increases and rates in the near and medium term will continue to rise before falling again.
"They came down in the most recent rate cutting cycle by 4.25 (percentage points), so going up about half of that is definitely achievable," he said.
McLister added that most economists expect a half to one point increase in banks' prime rates by the end of this year.
But using recent history as a guide, its not likely rates will rise much higher than 2.5 per cent.
"When the rates go up three (percentage points) or so they don't stay there and go in a flat line. They go up and they go down."
Banks are competing more aggressively for mortgage clients than ever, but McLister noted that consumers should expect other banks to follow RBC and TD in the days ahead as banks often move rates in unison.
CIBC (TSX:CM) chief economist Avery Shenfeld said mortgage rates hikes are a trend consumers should expect to continue.
"Once the Bank of Canada starts pushing up short-term interests rates, and even in anticipation of that, it tends to spill out across the rest of the curve."
He predicts the Bank of Canada will gradually raise key lending rates this summer, resulting in an increase of 0.75 per cent to one per cent by the end of the third quarter.
That would raise the average prime rate at the banks from 2.25 per cent to three per cent, which could tack on three-quarters of a per cent to the rates of homeowners with floating mortgage rates, Shenfeld said.
"Consumers are forewarned that when they look at borrowing today they have to factor in potentially higher costs," he said.
"Consumers have to be aware in taking on debt at historically low interest rates that down the road they will be higher and have to leave room for their ability to pay those higher rates."
When the Bank of Canada lifts rates, part of its intention is to take the fire out of the most interest sensitive segments of the economy, including the housing market, which has seen a particularly strong recovery, Shenfeld said.
The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.
Shenfeld said the rate increase could help dampen the house price inflation seen over the past several months.
Gregory Klump, chief economist at the Canadian Real Estate Association, said even though mortgage rates are rising, they are still historically low.
"Even with interest rates expected to rise over the second half of this year, it's going to be a while before mortgage rates are basically neutral. Even with interest rates rising they're still going to be stimulative, just not as much."
"We're coming off emergency level rates, and clearly the emergency has passed."
Copyright © 2010 The Canadian Press. All rights reserved.
By Sunny Freeman (CP)
TORONTO — Three of Canada's biggest banks are increasing some of their residential mortgage rates effective Tuesday in the latest sign that consumers should prepare for the era of historically low rates to soon come to an end.
The changes affect closed mortgages with terms of three, four and five years at RBC Royal Bank (TSX:RY), Laurentian Bank (TSX:LB), and TD Canada Trust (TSX:TD). Rates for mid-term mortgages like these tend to reflect the banks' borrowing costs on bond markets.
Other banks are expected to follow suit.
The biggest increase announced Monday affects five-year mortgages. All three banks are hiking their posted rate by six-tenths of a per cent to 5.85 per cent from 5.25 per cent.
A homeowner taking on a mortgage of $250,000 at the new posted rate of 5.85 per cent over a 25-year amortization period would pay $1,577 per month. Prior to Tuesday's hike, that mortgage would have cost $1489 a month, or $88 less.
Many people applying for mortgages with decent credit history can negotiate better than posted rates.
The Bank of Canada is expected to begin raising lending rates this summer as it moves to fight growing inflationary pressures in the economy. The bank has kept its key overnight rate at a historic low of 0.25 per cent for more than a year to help stimulate the economy.
Rising rates present a dilemma for many homeowners who face decisions about whether to lock variable rate loans into fixed terms or ride it out and hope that rates will come down again in 2011 as the economy slows and inflationary pressures subside.
Potential homebuyers entering the market also must consider rising rates when they decide to bid on a house. Is it better to wait until rising rates have cleared out some potential bidders or will a flurry of buyers and sellers spooked by the prospect of higher mortgage costs affect the supply-demand balance?
Historically, staying short-term and flexible has been the best strategy, but banks usually advise that locking in at still-attractive longer-term rates of five years and more is always a good bet for many consumers who want to ease their risk.
If the current bank prime rate of 2.25 per cent rises by 2.5 percentage points to 4.75 per cent, a homeowner with a variable mortgage should expect to pay about 30 per cent more on their monthly mortgage, says Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends website.
"If that causes you discomfort then perhaps a fixed rate's where you want to be and if a fixed rate is where you want to be...if you're closing in the next six months, I suggest people do that quickly."
Generally, long-term fixed rates rise by about half of the variable rate, he said.
While the fixed versus variable decision is specific to each individual, McLister said if prime rates spike by more than 2.5 percentage point, odds are good homeowners will save money in a five-year fixed rate mortgage.
Potential homebuyers should get their pre-approval applications in fast and expect delays in pre-approvals due to increased application volumes, he said. And homeowners' with mortgages up for renewal would also be wise to lock in rates as far in advance as possible.
McLister said its difficult to tell if the bank prime rates will rise by 2.5 points, but he added the banks have embarked on a cycle of rate increases and rates in the near and medium term will continue to rise before falling again.
"They came down in the most recent rate cutting cycle by 4.25 (percentage points), so going up about half of that is definitely achievable," he said.
McLister added that most economists expect a half to one point increase in banks' prime rates by the end of this year.
But using recent history as a guide, its not likely rates will rise much higher than 2.5 per cent.
"When the rates go up three (percentage points) or so they don't stay there and go in a flat line. They go up and they go down."
Banks are competing more aggressively for mortgage clients than ever, but McLister noted that consumers should expect other banks to follow RBC and TD in the days ahead as banks often move rates in unison.
CIBC (TSX:CM) chief economist Avery Shenfeld said mortgage rates hikes are a trend consumers should expect to continue.
"Once the Bank of Canada starts pushing up short-term interests rates, and even in anticipation of that, it tends to spill out across the rest of the curve."
He predicts the Bank of Canada will gradually raise key lending rates this summer, resulting in an increase of 0.75 per cent to one per cent by the end of the third quarter.
That would raise the average prime rate at the banks from 2.25 per cent to three per cent, which could tack on three-quarters of a per cent to the rates of homeowners with floating mortgage rates, Shenfeld said.
"Consumers are forewarned that when they look at borrowing today they have to factor in potentially higher costs," he said.
"Consumers have to be aware in taking on debt at historically low interest rates that down the road they will be higher and have to leave room for their ability to pay those higher rates."
When the Bank of Canada lifts rates, part of its intention is to take the fire out of the most interest sensitive segments of the economy, including the housing market, which has seen a particularly strong recovery, Shenfeld said.
The hot housing market is being driven, in part, by an influx of consumers willing to pay a premium for home ownership before interest rates rise.
Shenfeld said the rate increase could help dampen the house price inflation seen over the past several months.
Gregory Klump, chief economist at the Canadian Real Estate Association, said even though mortgage rates are rising, they are still historically low.
"Even with interest rates expected to rise over the second half of this year, it's going to be a while before mortgage rates are basically neutral. Even with interest rates rising they're still going to be stimulative, just not as much."
"We're coming off emergency level rates, and clearly the emergency has passed."
Copyright © 2010 The Canadian Press. All rights reserved.
Friday, March 26, 2010
Canadian homebuyers pressured to enter market sooner on rising prices, mortgages
(CP) – 1 day ago
TORONTO — Recent first-time homebuyers say they felt pressure to enter the market as they contended with jitters about rising home prices and higher mortgage rates.
The Bank of Montreal says as many as one-third of respondents in a homebuyers survey believe their expectation that housing prices would increase, and interest rates would soar, left an impression on their decision to make a purchase in the short term.
"There's definitely a sense of urgency among home buyers," said Lynne Kilpatrick, senior vice-president of personal banking at BMO.
"While we encourage Canadians to pursue their home ownership dreams we recognize it's easy to get caught up in the emotions of the purchase and this can lead to stretching one's budget too thin."
The results come as Royal Bank released its own homeownership survey on Wednesday which showed that a majority of Canadians expect to see higher mortgage rates over the next year.
RBC's annual homeownership survey said 64 per cent of Canadians expect high rates, with about the same number of mortgage holders concerned about higher rates.
Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning this summer to fight inflationary pressures in the economy.
With many Canadians taking on larger and larger mortgage debt in expensive markets across the country, higher rates could create financial problems for some homeowners.
In the Royal Bank survey, three-quarters, or 73 per cent of homeowners, feel strongly that homebuyers need to think ahead to ensure they will still be able to make their mortgage payment if rates rise.
The bank says six-in-10 mortgage holders say they have taken advantage of current low interest rates to pay more principal on their loans.
Eighteen per cent of homeowners say they've made a lump sum payment on their mortgage and 16 per cent have doubled their payment to reduce their principal.
While 84 per cent of mortgage holders believe they are doing an excellent or good job of paying down their mortgage, 49 per cent say their mortgage is larger than they thought it would be at this stage in their life.
Marcia Moffat, RBC's head of home equity financing, says the best advice for homeowners is to review their mortgage holdings with a financial adviser to position themselves for any changes.
BMO's senior economist Sal Guatieri added that a cooler housing market is "just around the corner."
Yet "with rising interest rates expected, and the introduction of the Harmonized Sales Tax in Ontario and B.C., prudence may be a good choice for many new entrants in the housing market."
(CP) – 1 day ago
TORONTO — Recent first-time homebuyers say they felt pressure to enter the market as they contended with jitters about rising home prices and higher mortgage rates.
The Bank of Montreal says as many as one-third of respondents in a homebuyers survey believe their expectation that housing prices would increase, and interest rates would soar, left an impression on their decision to make a purchase in the short term.
"There's definitely a sense of urgency among home buyers," said Lynne Kilpatrick, senior vice-president of personal banking at BMO.
"While we encourage Canadians to pursue their home ownership dreams we recognize it's easy to get caught up in the emotions of the purchase and this can lead to stretching one's budget too thin."
The results come as Royal Bank released its own homeownership survey on Wednesday which showed that a majority of Canadians expect to see higher mortgage rates over the next year.
RBC's annual homeownership survey said 64 per cent of Canadians expect high rates, with about the same number of mortgage holders concerned about higher rates.
Economists expect the Bank of Canada to raise interest rates by between half a percentage point and a full point over several months beginning this summer to fight inflationary pressures in the economy.
With many Canadians taking on larger and larger mortgage debt in expensive markets across the country, higher rates could create financial problems for some homeowners.
In the Royal Bank survey, three-quarters, or 73 per cent of homeowners, feel strongly that homebuyers need to think ahead to ensure they will still be able to make their mortgage payment if rates rise.
The bank says six-in-10 mortgage holders say they have taken advantage of current low interest rates to pay more principal on their loans.
Eighteen per cent of homeowners say they've made a lump sum payment on their mortgage and 16 per cent have doubled their payment to reduce their principal.
While 84 per cent of mortgage holders believe they are doing an excellent or good job of paying down their mortgage, 49 per cent say their mortgage is larger than they thought it would be at this stage in their life.
Marcia Moffat, RBC's head of home equity financing, says the best advice for homeowners is to review their mortgage holdings with a financial adviser to position themselves for any changes.
BMO's senior economist Sal Guatieri added that a cooler housing market is "just around the corner."
Yet "with rising interest rates expected, and the introduction of the Harmonized Sales Tax in Ontario and B.C., prudence may be a good choice for many new entrants in the housing market."
Thursday, March 11, 2010
75 years on, Bank gets it right on inflation
William Watson, Financial Post
Seventy-five years ago Thursday the newly constituted Bank of Canada took over responsibility for Canada's currency. It was supposed to have done so 10 days earlier but British American Bank Note Co. was late with its initial delivery of cash.
Since 1935, when the Bank came into being, prices in Canada have risen 16-fold. What costs $100 now would have cost just $6.25 then. It makes you wish the banknotes had been delayed a lot longer.
Those numbers, by the way, are from the very handy inflation calculator on the Bank of Canada's website. You don't really want your central bank to be good at tracking inflation. You want it to be good at crushing it. The bank took about 50 years to catch on, but it's now reasonably good at what it's supposed to do.
To be fair, in evaluating its performance the important question is "compared to what?" Until 1935, money matters were handled by the currency branch of the Department of Finance, which handed out "Dominion notes" in exchange for gold, and vice versa, and occasionally encouraged the private banks to take on more liquidity by lending them notes against financial securities, though charging them interest of 5% for the privilege. Many banks also issued their own notes, which caused problems when the public lost confidence in a given bank.
During the Depression, elite opinion became convinced that Finance should give responsibility for money and monetary policy over to a more expert and independent central bank of the sort most other countries now had, the United States since 1913.
On July 31, 1933, Prime Minister R. B. Bennett empanelled a five-person Royal Commission-two Brits, including its chair, Lord Macmillan, two bankers and the premier of Alberta. It held its first meeting eight days later and reported 50 days after that. In a 3-2 split, with a majority of the Canadians and, politically conveniently, both bankers opposed, it recommended the institution of a privately-owned central bank. (Mackenzie King was to nationalize it in 1938.)
Just a year and two days after the commission's appointment Parliament approved the Bank of Canada Act. There was no national productivity problem then: things got done. Two months later Prime Minister Bennett named the first Governor, Graham Towers, assistant to the general manager of the Royal Bank and a Montrealer trained in economics at McGill by none other than Stephen Leacock and seven months after that the Bank made its first transactions.
In the crisis of the last two years the Bank has ventured into what it sees as unorthodox areas of lending and investment. But it began in unorthodoxy. In 1936 it bailed out Alberta and Saskatchewan when they threatened to (and in Alberta's case eventually did) default on their bonds. In 1938 Governor Towers took charge of the newly-created Central Mortgage Bank, which was designed to help struggling mortgage-holders. During the war the Bank supervised exchange controls and Towers did secret planning for how to keep finance going if the Nazis over-ran Britain. (Make the Canadian dollar the Empire's new reserve currency was one possibility).
The worst inflations of our central bank era occurred in the late 1940s and the 1970s. In both cases it's easy to sympathize with the governor of the day. During the war, Canadians lent their government hundreds of millions of dollars in Victory Bonds. Most such bonds paid 3% or less. Had the Bank done what it probably should have and raised interest rates to stem the postwar boom, the value of all those bonds would have crashed: If new bonds pay 6% what are old bonds that pay 3%? Half their original value. Towers, who had run several Victory Bond campaigns, felt a moral obligation not to destroy bond-holders' savings. Ironically, the inflation that resulted may have induced him to leave the Bank. In 1935 his salary had been a majestic $30,000 a year. By 1955, when he quit, it was $50,000 but only $25,641 in inflation-adjusted 1935 dollars. And taxes were a lot higher.
The inflation of the 1970s is also understandable. Keynesian textbooks didn't say what a central bank was supposed to do when a cartel jacked up the price of oil by several hundred percent. The stagflation that followed stumped policymakers. Milton Friedman's monetarism did have a theoretical answer: keep the growth of money low and constant and inflation will be low and constant. Send a steady flow of liquidity into one end of the hose that is the economy and you'll get a steady flow of real economic activity out the other end. It's certainly plausible. But when Bank Governor Gerald Bouey tried it in the late 1970s it didn't work. The hose turned out to be unpredictably elastic. Sometimes it sucked up liquidity and produced no growth. Other times just a little liquidity brought gushing growth.
Not until the late 1980s and the governorship of the, at the time, much disliked Governor John Crow, did the Bank start directly targeting inflation with a clearly defined "reaction function" (if inflation does X, we do Y: everybody got it?).
That strategy worked pretty well for two decades. Between 1990 and 2010 prices increased by only 50%. That's not fantastic but no 20 years since 1935 have been better.
After three score years and 15 the Bank seems finally to have figured things out. Let's all tip our hats to R. B. Bennett.
William Watson, Financial Post
Seventy-five years ago Thursday the newly constituted Bank of Canada took over responsibility for Canada's currency. It was supposed to have done so 10 days earlier but British American Bank Note Co. was late with its initial delivery of cash.
Since 1935, when the Bank came into being, prices in Canada have risen 16-fold. What costs $100 now would have cost just $6.25 then. It makes you wish the banknotes had been delayed a lot longer.
Those numbers, by the way, are from the very handy inflation calculator on the Bank of Canada's website. You don't really want your central bank to be good at tracking inflation. You want it to be good at crushing it. The bank took about 50 years to catch on, but it's now reasonably good at what it's supposed to do.
To be fair, in evaluating its performance the important question is "compared to what?" Until 1935, money matters were handled by the currency branch of the Department of Finance, which handed out "Dominion notes" in exchange for gold, and vice versa, and occasionally encouraged the private banks to take on more liquidity by lending them notes against financial securities, though charging them interest of 5% for the privilege. Many banks also issued their own notes, which caused problems when the public lost confidence in a given bank.
During the Depression, elite opinion became convinced that Finance should give responsibility for money and monetary policy over to a more expert and independent central bank of the sort most other countries now had, the United States since 1913.
On July 31, 1933, Prime Minister R. B. Bennett empanelled a five-person Royal Commission-two Brits, including its chair, Lord Macmillan, two bankers and the premier of Alberta. It held its first meeting eight days later and reported 50 days after that. In a 3-2 split, with a majority of the Canadians and, politically conveniently, both bankers opposed, it recommended the institution of a privately-owned central bank. (Mackenzie King was to nationalize it in 1938.)
Just a year and two days after the commission's appointment Parliament approved the Bank of Canada Act. There was no national productivity problem then: things got done. Two months later Prime Minister Bennett named the first Governor, Graham Towers, assistant to the general manager of the Royal Bank and a Montrealer trained in economics at McGill by none other than Stephen Leacock and seven months after that the Bank made its first transactions.
In the crisis of the last two years the Bank has ventured into what it sees as unorthodox areas of lending and investment. But it began in unorthodoxy. In 1936 it bailed out Alberta and Saskatchewan when they threatened to (and in Alberta's case eventually did) default on their bonds. In 1938 Governor Towers took charge of the newly-created Central Mortgage Bank, which was designed to help struggling mortgage-holders. During the war the Bank supervised exchange controls and Towers did secret planning for how to keep finance going if the Nazis over-ran Britain. (Make the Canadian dollar the Empire's new reserve currency was one possibility).
The worst inflations of our central bank era occurred in the late 1940s and the 1970s. In both cases it's easy to sympathize with the governor of the day. During the war, Canadians lent their government hundreds of millions of dollars in Victory Bonds. Most such bonds paid 3% or less. Had the Bank done what it probably should have and raised interest rates to stem the postwar boom, the value of all those bonds would have crashed: If new bonds pay 6% what are old bonds that pay 3%? Half their original value. Towers, who had run several Victory Bond campaigns, felt a moral obligation not to destroy bond-holders' savings. Ironically, the inflation that resulted may have induced him to leave the Bank. In 1935 his salary had been a majestic $30,000 a year. By 1955, when he quit, it was $50,000 but only $25,641 in inflation-adjusted 1935 dollars. And taxes were a lot higher.
The inflation of the 1970s is also understandable. Keynesian textbooks didn't say what a central bank was supposed to do when a cartel jacked up the price of oil by several hundred percent. The stagflation that followed stumped policymakers. Milton Friedman's monetarism did have a theoretical answer: keep the growth of money low and constant and inflation will be low and constant. Send a steady flow of liquidity into one end of the hose that is the economy and you'll get a steady flow of real economic activity out the other end. It's certainly plausible. But when Bank Governor Gerald Bouey tried it in the late 1970s it didn't work. The hose turned out to be unpredictably elastic. Sometimes it sucked up liquidity and produced no growth. Other times just a little liquidity brought gushing growth.
Not until the late 1980s and the governorship of the, at the time, much disliked Governor John Crow, did the Bank start directly targeting inflation with a clearly defined "reaction function" (if inflation does X, we do Y: everybody got it?).
That strategy worked pretty well for two decades. Between 1990 and 2010 prices increased by only 50%. That's not fantastic but no 20 years since 1935 have been better.
After three score years and 15 the Bank seems finally to have figured things out. Let's all tip our hats to R. B. Bennett.
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