Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Fixed Rates Move Up and Variable Rates Look Better By Comparison (Monday Interest Rate Update)

2013-06-17T09:03:10-04:00

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.

Five-year fixed-mortgage rates moved higher last week as lenders continued to respond to the recent run up in Government of Canada (GoC) bond yields, which have risen from a low of 1.13% on May 1, 2013 to a high of 1.63% on June 12, 2013.

Fixed-mortgage rates have been at ultra-low levels for a long time, so it’s not surprising that the vast majority of borrowers have been opting for the comfort and familiarity of the ‘banker’s favourite’ five-year fixed term (here is a post I wrote that explains why I call it that). But after the recent increases to five-year fixed rates, I think there is an increasingly compelling case to be made for the variable rate instead.

Here are five reasons why I think the five-year variable rate is worth a fresh look:

For much of the past year, the spread between five-year fixed and variable rates was less than 0.25%, which meant that it would take only one increase by the Bank of Canada (BoC) to make five-year variable-rate mortgages more expensive than their fixed-rate alternatives. After the latest round of fixed-rate increases, this spread is now greater than 0.50%, which gives variable-rate borrowers a wider ‘margin of safety’ between variable and fixed rates.
If you’ve recently agreed to purchase a home or have a renewal coming up, you need a mortgage at a specific future date. If the vagaries of bond-market investors happen to push up five-year GoC bond yields at the same time that you need a mortgage, opting for a five-year fixed rate locks in that short-term yield spike for the next five years. Conversely, variable rates don’t move until the BoC raises its overnight rate and this happens much less frequently, and on a more measured and considered basis.
When borrowers dismiss the variable-rate option, the most common justification I hear is that they’re worried they won’t be able to afford future rate increases. Most of these same borrowers are surprised to learn that they can only qualify for a variable-rate mortgage if they prove that they can afford a doubling of rates over the next five years. That’s because lenders now qualify variable-rate applicants using the BoC’s Mortgage Qualifying Rate (MQR) which currently sits at 5.14% (here is a post I wrote that explains the MQR in detail). If you can pass the MQR’s stringent test, then you should feel confident that you can afford substantial, and even unlikely, future rate increases. Variable-rate mortgages also come with the option to convert to an equivalent fixed rate term at any time with no penalty. While the conversion rates offered by different lenders can vary widely, this free lock-in option gives you the ability to eliminate further variable-rate risk.
1. Variable-rate mortgage prepayment penalties are limited to a maximum of three-months’ interest by any lender who is regulated under the Bank Act (which basically includes every lender except for credit unions and private lenders). Fixed-rate IRD penalties, in contrast, can be staggeringly high (see my post on the subject). If you think there is any chance that you will have to pay out your mortgage before the end of its term, consider that a variable-rate mortgage penalty could easily be thousands of dollars cheaper than a fixed-rate mortgage penalty.
2. Most economists are not forecasting an increase in the BoC’s overnight rate until the second half of 2014. The gap between now and then may not sound like much if you’re deciding how to structure your mortgage financing for the next five years, but consider that those same economists had been warning of imminent BoC rate increases up until the start of this year. In fact, most of our prominent economists seem to err on the side of being early, rather than late, on their forecasts for BoC rate increases. So if they’re now predicting that the next overnight rate hike won’t be until late 2014, then chances are good that it’ll be long after. In the meantime, the gap between now and whenever that moment arrives gives you time to bank the interest-cost savings. (Reminder: the best way to do that is to set your payments at the same level they would have been at if you had chosen a five-year fixed-rate mortgage – you’ll pay off your mortgage more quickly and get comfortable with a higher payment amount while you do it.)

Toronto Real Estate Roundup - June 14 2013

2013-06-14T16:26:56-04:00

Realosophy Team in Media Roundup, Realosophy News

New This Week from Realosophy.com

Condo News

Canada’s housing construction still booming, thanks mostly to condos (Toronto Star)

Sky-high Toronto condo numbers renew fears of overheated market (Globe and Mail)

Bank of Canada warning on Toronto condominium market focuses attention on investors (Toronto Star)

What sells condos? Grocery stores (Globe and Mail)

Other Real Estate News

Housing's Up, but Is Foundation Sound? (Wall Street Journal)

Home prices rise 2%: A crash isn’t forecast, but neither are big gains (Globe and Mail)

Firms leasing less office space in new Toronto towers (Globe and Mail)

Historicist: The Birth of Leaside (Torontoist)

Living With Less. A Lot Less. (New York Times)

Wraps come off plans for the Gardiner Expressway (Globe and Mail)

Startup drugs (Pando Daily)

Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email Realosophy

A Look Behind Canada’s Near Record-Breaking Employment Report (Monday Interest Rate Update)

2013-06-10T09:28:12-04:00

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.

Last Friday the latest Canadian employment report was released by Statistics Canada and it smashed expectations. Not surprisingly, bond yields shot higher on the news and lenders increased their five-year fixed-mortgage rates shortly thereafter.

Let’s start by taking a look at the highlights from the latest employment report that got everyone so excited:

Our economy added a total of 95,000 new jobs in May. This is the second highest single-month result in the last thirty-five years (the highest was 95,100 new jobs in August, 2002).
Ontario accounted for roughly half of the new jobs with more than 50,000 new positions created.
The private sector accounted for almost all of the new jobs, adding 94,600 net new positions.
76,700 of the new jobs were full-time positions.

The immediate investor response to this employment report was predictable. Markets are made at the margin and an employment report that comes in ten times higher than the consensus forecast can certainly be expected to push bond yields higher over the short term.

Investors were quick to speculate that a surge in our monthly employment data may be a signal that our labour market is entering a tightening phase. Since there is an 80%+ correlation between rising labour costs and rising inflation, higher interest rates won’t be far behind if this tightening trend comes to fruition. But does this sudden spike in employment signal the onset of higher inflation or is it just a one-off blip?

As I read about the details in the report, I began to suspect the latter. Here are the factors that led me to that conclusion:

We have averaged 20,000 new jobs per month over the most recent twelve months but only 17,000 new jobs per month so far in 2013. That means that our average monthly job creation is still slowing, even when May’s robust employment data are factored in.
The experts I read estimate that at current levels, our average monthly job creation is consistent with a GDP growth rate of about 2%. While not terrible, that kind of growth rate isn’t likely to push our inflation rate much above where it is today.
While it was encouraging to see the private sector add a large number of net new jobs, we lost 105,400 private-sector jobs over the prior two months and we have seen almost no private-sector job growth over the most recent twelve months. Frankly, some sort of rebound in private-sector job creation was long overdue.
With our economy losing another 14,200 manufacturing jobs in May, we have now lost 100,000 manufacturing jobs over the last twelve months. Manufacturing jobs create a powerful multiplier effect which triggers job creation across our broader economy and this still-ailing sector is critical to our overall employment health.
In a tightening labour market we should see average incomes and average employee hours worked rising, but both measures were flat in May.
We saw 54,000 new jobs created in the 15 to 24 year-old age cohort, but there was no net job growth in the age cohorts from 25 to 54. Since younger people tend to work in lower-paying entry-level jobs, this type of job creation doesn’t suggest that a material uptick in overall consumer spending is around the corner.
There were 42,700 new construction jobs in May but that’s not a number that anyone I read saw coming - or expects to continue.
History has shown that spikes in the Canadian employment data tend to be anomalies with little subsequent follow through.

Five-year Government of Canada (GoC) bond yields rose nine basis points last week, closing at 1.57% on Friday. Interestingly, yields had been down four basis points by close of business on Thursday but surged fourteen basis points higher after Stats Can released its latest employment data. Lenders scrambled to raise their five-year fixed rates in response, so for the time being, borrowers are going to have to tolerate five-year fixed rates that are now slightly above the lowest in history.

Five-year variable-rate discounts are offered in the prime minus .45% to .50% range (which works out to 2.55% to 2.50% using today’s prime rate). Variable-rate mortgages are marginally more attractive now that the spread between five-year fixed and variable rates has widened somewhat.

The Bottom Line: When a key piece of economic data smashes expectations as our latest employment report did on Friday, investors tend to shoot first and ask questions later. While their initial reaction was to sell off GoC bonds, pushing their yields higher, I’ll be surprised if there is much follow through this week for the reasons listed above. If I’m right, then any uptick in bond yields and, by association, our mortgage rates will be short lived.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Ema il Dave

Toronto Real Estate Roundup - June 7 2013

2013-06-07T13:05:46-04:00

Realosophy Team in Media Roundup

Housing Market

Has Vancouver’s housing market hit bottom? (Financial Post)

This is not your 1990s housing market (Globe and Mail)

Sales, prices, listings down. What’s up with Toronto’s high-end homes? (Globe and Mail)

Why are home prices so high and when will they fall? (CBC News)

‘Downside risk’ in housing prices, led by Toronto condos: Scotiabank (Global News)

Toronto home sales fall in May but prices still rising (Globe and Mail)

Canadian homes among most overvalued in OECD ranking (Globe and Mail)

Other Real Estate News

2013 Mortgages: A Canadian Market Overview [Infographic] (Rate Hub Canada)

7 reasons your house may not be selling (Toronto Star)

Financial problems plague Bixi Toronto (Montreal Gazette)

Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email Realosophy

Dance Studio Found to be Thunderous Upstairs Neighbour

2013-06-07T11:46:09-04:00

Bob Aaron in Legal

One of the most common complaints from condominium residents is noise coming from neighbouring units. In the last 40 years, more than 100 condominium noise cases have gone to trial in Ontario courts.

The latest of these involves an application by Elizabeth Dyke against Metropolitan Toronto Condominium Corporation 972 to require the condominium to enforce its noise bylaws. The building is a 349-unit high-rise on Wellesley St. E. near Yonge St.

Earlier this year, Dyke was living on the 8th floor of the building with her daughter, and used a nearby unit as her law office (she has since retired).

In February, 2010, two new tenants moved into Ste. 911, the unit above the Dyke residence. The wife explained to Dyke that she was a professional dancer and sometimes used her condo as a practice area.

The noise from upstairs escalated over the months and by July, 2011 the tenant was using her unit as a full-time professional dance studio.

In August Dyke reported the nuisance to the police, and began complaining to the property manager.

During the fall of 2011, Dyke made numerous complaints to the management and security desk. Reports from the security personnel described the sound as similar to the constant banging of a hammer.

Despite Dyke’s requests and complaints, neither the condominium board nor the property manager ever sent a letter to unit 911 requesting that the noise - stop. There was no follow-up or communication with the tenants or owners of unit 911.

The noise continued and, in late 2011, and Dyke told the condo management that she was experiencing ill health effects and stress due to the constant noise above her.

Following a demand letter from Dyke to the condominium in October, 2011, the board’s lawyers responded that they had been unable to verify the intensity of the disturbing noise, despite several written reports to the contrary from their own security personnel.

Dyke finally moved out of the unit in December, 2011 due to the detrimental health effects from the noise and related stress. She had advised the condominium corporation in advance of the reasons she was moving, but no action was taken to reduce the noise so that she could move back in.

Dyke’s proceedings against the condominium came before Justice Edward Morgan this past January. The judge noted that the condominium rules prohibit noise transmission from one unit to another if it causes an annoyance or disruption. In the event the noise does not abate following written notice, the board is required to take action.

In his decision, Justice Morgan noted that in his view, the condominium corporation “has not satisfied this duty.” The corporation, he wrote, “has acted in a way which unfairly disregards the interests of (Elizabeth Dyke) in failing to take adequate steps to enforce its own rules.” Its actions amounted to “unfairly prejudicial conduct.”

The judge added that Dyke did not deserve absolute quiet in her condominium but that the board has a responsibility to enforce its rules in a balanced way. “It stands to reason,” he added, “that (Dyke) is entitled to live underneath a residential apartment unit, and not underneath a professional dance studio.”

The condo corporation was ordered to pay Dyke her out-of-pocket expenses of $40,325, plus a huge costs award of $19,500. Dyke’s claim for pain and suffering, mental anguish and distress, plus loss of comfort and quiet enjoyment, was deferred to a later hearing.

The case is a warning to condo residents that persistent noise will not be tolerated. It’s also a reminder to condominium boards and managers that failure to actively enforce compliance with their own rules and bylaws will come at a steep price.

Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron in Toronto and a past board member of the Tarion Warranty Corp. Bob specializes in the areas of real estate, corporate and commercial law, estates and wills and landlord/tenant law. His Title Page column appears alternate Fridays in The Toronto Star and alternate weeks on Move Smartly. E-mail bob@aaron.ca

Are Higher Mortgage Rates on the Way? (Monday Interest Rate Update)

2013-06-03T12:55:10-04:00

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.

When the Bank of Canada (BoC) met for the last time before Governor Carney leaves for the Bank of England, it did not change its interest-rate bias as I had speculated that it might in last week’s post. In fact, the BoC’s commentary was a little more general and more vague than usual.

In the end, the Bank favoured a steady-as-she-goes approach as it begins to transition from outgoing Governor Carney to incoming Governor Stephen Poloz. With that in mind, I think it’s unlikely that Governor Poloz will make any significant changes to the Bank’s monetary policy right off the bat - so it now looks like the BoC’s upward interest-rate bias will be with us for a while yet.

The big story relating to Canadian mortgage rates last week was the continued surge in our five-year Government of Canada (GoC) bond yields, which have risen 33 basis points over the past month (from 1.15% on May 1, 2013 to 1.48% at close of business last Friday). To put that current yield level in perspective, over the past 12 months the five-year GoC bond yield has remained below 1.50% on all but a handful of days and we haven’t breached the 1.50% threshold since mid-February.

Marginal changes in bond yields are caused by many factors but I think the largest single influence on this recent GoC bond-yield run up has been a reduction in the fear premium that investors are willing to pay for AAA-rated assets that guarantee a return of capital. Fears of a systemic shock to the world economy, often referred to as a “tail-risk event”, have been on the wane of late. As a result, large institutional investors in search of greater returns have been rotating their massive portfolios out of ultra-safe, ultra low-rate government bonds and back into equity markets.

This selling pressure has pushed GoC bond yields up and we are now left to wonder whether this trend is just a temporary blip or the first signal that a long-term rise in our bond yields, and by association our fixed-mortgage rates, has now begun.

While there is no way to know for sure, if it’s true that the recent run up in five-year GoC bond yields is being primarily driven by diminished tail-risk fears then I don’t think we’ve seen the last of sub-1.50% yields.

Here is a look at the most pressing concerns that still surround the world’s four largest economies. These are the main reasons why I think that fear will push greed back out of the market’s driver’s seat before too long:

We haven’t seen many ominous headlines out of the euro zone lately but we also haven’t had any significant announcements about structural improvements and/or the kind of systemic changes that the region desperately needs in order to reverse its slow and still seemingly inexorable decline. Right now the euro zone’s leaders are stalling for time until the German elections in September, but no news is not the same as good news. The region is no better positioned to handle its next crisis, and I think that will be painfully evident soon enough.
The Bank of Japan (BoJ) has bet the proverbial farm on its latest monetary policy experiment and while markets have responded positively thus far, the experts I read believe that the BoJ has really just hit the accelerator on the country’s road to economic ruin. To demonstrate one of the many flaws in the BoJ’s approach with a simple example, consider that the BoJ is openly targeting 2% inflation, up from less than 0% today. If it reaches this target, Japanese government bond yields will surely rise by at least 2% and this would make the annual interest cost on Japan’s public debt equivalent to 80% of its total annual tax revenue.
Chinese growth has continued to slow of late, from 7.9% in the fourth quarter of 2012 to 7.7% in the first quarter of 2013. Analysts are forecasting a further decline, to 7.5%, in the second quarter of 2013, and that is a worrying trend because China has averaged 9.3% GDP growth since 2008 and has served as the world’s primary economic growth engine over that period.
While news out of the U.S. has been more encouraging of late, we are still witnessing its weakest recovery from recession since WWII, with GDP growth averaging about 2.0% over the past four years. This anemic growth has coincided with massive levels of federal government stimulus that has come at the cost of record debt and deficit levels. At the same time, the U.S. Federal Reserve has quadrupled the size of its balance sheet with several rounds of Quantitative Easing (QE), distorting market fundamentals and forcing investors to take on increasing levels of risk in search of higher returns. In this current “down is up” financial world, investors have tended to become more bullish in the face of bad U.S. economic news, believing that it increases the odds of more QE by the Fed. But if bad news is good news, does that mean that good news is bad news because it hastens the arrival of the day when the U.S. Fed must unwind its QE programs? And just how exactly will the Fed do this? The experts I read say that embarking on QE is as easy as squeezing toothpaste from a tube, but unwinding these programs is about as easy as trying to put that toothpaste back again. We have seen significant equity-market sell offs each time the Fed has even hinted that it may begin to taper its QE programs. An improving U.S. economy heightens the uncertainty, and fear, of what will happen when the Fed begins this process.

Five-year GoC bond yields surged 11 basis points last week, closing at 1.48% on Friday. More lenders increased their five-year fixed rates over the past week but sub-3% rates are still offered by lenders with excellent terms and conditions. Given this current upward pressure on fixed rates, borrowers who are in the market for this type of mortgage are well advised to lock in as soon as possible.

Five-year variable-rate mortgages are available in the prime minus 0.45% range (which works out to 2.55% using today’s prime rate). If fixed rates continue to rise, variable-rate borrowers will have their courage tested because conversion rates, otherwise known as their ‘emergency fixed-rate parachute’, will rise as well. At times like this, I recommend that borrowers who originated their mortgage with an experienced mortgage planner check in with him/her before making any decision on whether to convert from a variable to a fixed rate.

The Bottom Line: The recent rise in five-year GoC bond yields has triggered small fixed-rate mortgage increases at several lenders. I think this run up has been primarily caused by the growing belief among investors that the world economy’s tail-risk threats are subsiding but, in my view, the world’s largest economies continue to face significant challenges. For that reason, I think our bond yields will head lower again, and that history is likely to show that this was really just a brief period of calm before the next storm.

Toronto Real Estate Roundup - May 31 2013

2013-05-31T12:55:20-04:00

Realosophy Team in Media Roundup

Real Estate News

How Canada's housing downturn threatens to shake up real estate commissions (Globe and Mail)

New Toronto tall building design guidelines aim to protect views of sky, sun, heritage (Toronto Star)

Proposed Walmart near Kensington Market has residents fuming (Toronto Star)

Worried about the housing market? Five strategies for peace of mind (Globe and Mail)

In Toronto, real estate prices pose a puzzle: Why so high? (Globe and Mail)

Ottawa’s retreat from mortgage market sends CMHC insurance sales tumbling (Globe and Mail)

Real Estate: Seller’s remorse can be a costly thing (Toronto Star)

Homeowners: Don’t be caught flat-footed when interest rates rise (Globe and Mail)

Realosophy Realty Inc. Brokerage is an innovative residential real estate brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email Realosophy

A Closer Look at Toronto’s Condo Market

2013-05-30T13:22:28-04:00

John Pasalis in Toronto Real Estate News and Condo Buying

If you’re a condo buyer in Toronto it’s certainly tough to make sense of what’s really happening in the market. In the same day one can read a story about the condo market being on solid ground thanks largely to the strong demand for condo rentals followed by a story about the condo boom coming apart at the seams.

I thought it would be worthwhile to expand on a post I wrote last month on the condo market, this time taking a closer look at actual numbers to give readers a better picture of what has actually been happening in Toronto’s condo market over the past year.

While most mainstream media outlets focus on reporting changes in sales and average prices there’s actually a more important metric that gives us a more accurate picture of how balanced the market is. The sales-to-inventory ratio is one of the key metrics we use when analyzing the market because it takes both supply and demand into account giving us a more accurate picture of how balanced the market is.

To see how this works, imagine that 500 condos sold in April and at the end of the month there were 1,000 condos available for sale. In this case the ratio of sales (500) to inventory (1000) would be 50%. This level of balance between supply and demand is roughly what we are seeing in Toronto’s freehold market. There are not enough homes coming on the market for sale to meet the demand from buyers. This is why we are still seeing a lot of bidding wars for Toronto houses.

Now imagine in May sales dropped to 100 and there were still 1000 condos available for sale at the end of the month. In this scenario the ratio of sales (100) to inventory (1000) would be 10%. This level of balance between supply and demand is similar to what we are seeing in many US cities. Weak demand relative to the number of properties available for sale.

The market is considered to be balanced when the sales-to-inventory ratio is between 15%-25%. Anything above 25% favours sellers and below 15% is a buyer’s market.

The chart below shows the sales-to-inventory ratio for detached houses and condo apartments in the Greater Toronto Area.

We can see that 2012 started off strong but by April the market started to slow down pretty rapidly. In September 2012 condo sales were down 29% and the sales-to-inventory ratio hit 19%. More importantly, since then we can see that the sales-to-inventory ratio for both housing types has been trending up.

This is important because if a market is in a state of decline, if there are way too many condos coming on the market for sale relative to demand, we would expect the sales-to-inventory ratio to trend down towards buyer’s market territory not up into seller’s market territory. While we did see a downward trend in 2012, much of that was driven by changes to Canada's mortgage rules which came into effect that summer pushing many buyer's out of the market temporarily.

In late 2012 when condo sales were down nearly 30% for several months, there were a fair number of headlines about the start of the decline in Toronto’s condo market. It’s encouraging to see the market swing back into seller’s market territory so quickly showing that the market for condos in Toronto remains balanced.

While the condo market as a whole appears to be doing well in Toronto, I can’t say that all neighbourhoods are performing equally well.

One of the things we do at Realosophy is look at sales metrics like the sales-to-inventory ratio at the neighbourhood level to help our clients understand how balanced the resale market is in each area. If the resale market is already pretty competitive and there are relatively few new condos under construction then you’re probably making a good investment buying in that area. On the flipside, if the resale market in a particular neighbourhood is currently in buyer’s market territory and there are thousands of units currently under construction nearby, you may want to avoid that area.

It’s fine to look at market statistics at the city level if you want a good overall feel for how the market is performing but if you’re actually looking at buying a condo and you want to make an informed decision you need to look at the market statistics for the neighbourhood and condo you’re buying in.

John Pasalis is the President and Broker of Realosophy Realty Inc. Brokerage in Toronto. A leader in real estate analytics and pro-consumer advice, Realosophy helps clients buy or sell a home the right way. Email John

Why Flaherty's policies are hurting Toronto's condo market

New Realosophy Workshop Alert!

Since I started writing about Toronto’s real estate market from a consumer’s perspective nearly six years ago, I have heard from many buyers who have run into problems with their home purchase. Unfortunately, many buyers contact me when things have already gone wrong, but I have done my best to advise them on how to best manage their situation.

I’ve consolidated all of these "lessons learned" into a list of Top 10 Pitfalls that Every Home Buyer Should Know. We’ll be running our first workshop in a couple of weeks to share the Top Ten Pitfalls and answer your specific questions. Sign up below to reserve a spot or learn more.

Out With the Old Bias, In With the New Bias? (Monday Interest Rate Update)

2013-05-27T11:00:49-04:00

Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News

Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.

When the Bank of Canada (BoC) meets this Wednesday I think there is a good chance that it will remove the interest-rate tightening bias that it has kept in place, in one form or another, for more than a year now.

Simply put, the cost of maintaining that tightening bias now clearly outweighs the cost of removing it.

When BoC Governor Mark Carney first started warning Canadians that our borrowing rates would rise more quickly than most were expecting, he cited rising household debt levels, and more specifically, increased borrowing against residential real estate, as the primary threats to our domestic economy. He acknowledged this most recently in a speech last week, saying that the BoC’s rate-tightening bias was designed “to complement efforts of the federal government and OSFI to achieve a constructive evolution of household debt.”

Over the past several months however, our rate of household debt growth has fallen precipitously and Governor Carney said in the same speech that he now “expects residential investment to decline further from historically high levels”.

If it’s true that the BoC and the federal government now believe that the combined threat of housing and credit bubbles is off the boil, their next big worry must surely be our faltering economic growth. And if increased consumer spending isn’t regarded as a healthy form of economic stimulus because it will re-accelerate our household borrowing rates, then businesses are going to have to take up the charge. In the words of Governor Carney, “the challenge for Canada is to rotate the sources of growth toward net exports and business investment.”

So why hasn’t this happened? After all, this isn’t the first time that Governor Carney has implored businesses to use either their cash-rich balance sheets or the BoC’s ultra-low borrowing rates to invest in productivity enhancements and expansion.

For starters, businesses are nervous. Especially exporters with U.S. customers who are grappling with the challenges inherent in our lofty Loonie. There are many factors that have pushed the Loonie higher against the Greenback such as our stronger government balance sheets, our less onerous future health care and pension liabilities, not to mention our lower unemployment and inflation rates, which still imply that GDP growth should be higher in Canada than in the U.S. going forward (despite current short-term trends). But the BoC’s rate-tightening bias has also contributed to the Loonie’s rise and that’s where the main incentive to remove it lies.

Somewhat surprisingly, Governor Carney actually disagrees with the view that a strong Loonie hurts our economy. Instead he argues that it provides a net benefit through higher commodity prices, and that the free flow of jobs and trade between provinces allows our economy to adjust on the fly when the Loonie appreciates. Most economists disagree with him, however, and it has been speculated that new BoC Governor Stephen Poloz’s background as the former head of Export Development Canada (EDC) makes it a good bet that he will favour a weaker currency in an effort to stimulate export growth. When sales are up, goes the other side of the argument, businesses will start investing and they won’t need the BoC Governor imploring them to do it.

But if the BoC removes its interest-rate tightening bias, how can it ensure that households will not ramp up borrowing again? To address this risk, federal finance minister Jim Flaherty has now effectively replaced the BoC’s rate-tightening bias with a mortgage-credit tightening bias.

Last week Mr. Flaherty warned that he was “looking at” other forms of CMHC insurance, which have helped keep residential mortgage rates low, like the bulk portfolio insurance it offers on mortgages where the home owners have more than 20% equity in their property. I can’t help but wonder if this was done as a precursor to the BoC’s removal of its interest-rate tightening bias - a warning of sorts to dissuade us from queuing back up to the borrowing punch bowl as soon as the BoC changes tack.

After four rounds of changes to the CMHC policies for high-ratio mortgage insurance and more recently to OSFI’s lending rules for all mortgages, when Mr. Flaherty warns about tightening credit conditions no one doubts that he’ll pull the trigger.

It’s understandable that Mr. Flaherty would be nervous about a shift in monetary policy threatening the soft landing that he recently claimed has been achieved for our housing markets. But the federal government and the BoC do not have the luxury of time. While Canada has fared remarkably well during the long and drawn out Great Recession, our economic momentum has slowed of late and there is real urgency in getting businesses to spend again.

If the BoC removes its tightening bias, there should be downward pressure on the Loonie and this will give our beleaguered exporters a much needed shot in the arm at what feels like a critical inflection point, one way or the other, for our economy.

We’ll find out on Wednesday.

Government of Canada five-year bond yields were 2 basis points higher for the week, closing at 1.38% on Friday. While some lenders have raised their five-year fixed rates, I still have attractive options available at well below 3%. That said, if bond yields continue to rise this could change in a hurry, so borrowers who are currently in the market for a fixed rate are still well advised to lock in sooner rather than later.

Five-year variable-rate mortgages are offered in the prime minus 0.45% range (which works out to 2.55% using today’s prime rate).

The Bottom Line: For the reasons outlined above, I think the BoC’s rate-tightening bias has outlived its usefulness. As such, I think there is a very good chance that the Bank will soften its interest-rate language as part of this Wednesday’s policy announcement. Stay tuned.

Toronto Real Estate Roundup - May 24 2013

2013-05-24T13:09:11-04:00

Realosophy Team in Media Roundup

Mortgages

Mortgage Rules Help Fuel Rent Hikes (Canadian Mortgage Trends)

Take-back mortgages help young buyers when banks say no (Toronto Star)

Canadians are paying off mortgages quickly — so is Ottawa’s crackdown really necessary? (Financial Post)

Home Buying

In Toronto, the market’s sweet spot is the humble bungalow (Globe and Mail)

Slowdown? Nearly half of Canadian homeowners eager to buy property (Globe and Mail)

Should I buy that condo now, or wait for prices to fall? (Globe and Mail)

Other Real Estate News

Condos becoming part of Toronto’s affordable housing tool box (Toronto Star)

How smoking at home reduces property values (Toronto Star)

The rental-housing shortage is now a national disaster. It needs Ottawa’s help (Globe and Mail)

Top 10 Home Buying Pitfalls Workshop
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