Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Our Latest CPI Data Suggests That it’s Back to the Revising Board for the BoC ... Again (Tuesday Interest Rate Update)

2013-05-21T09:19:12-04:00

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.

Anyone keeping an eye on Canadian mortgage rates should pay close attention to the Consumer Price Index (CPI) which is released monthly by Statistics Canada. The CPI tells us whether average prices have increased or decreased over the past twelve months, and over time, changes in the CPI influence Bank of Canada (BoC) monetary policy more than any other economic measurement.

Before looking at the details in the latest CPI (released last Friday), let’s highlight a few phrases from the BoC’s oft repeated inflation-control strategy, which it includes at the front of each Monetary Policy Report (MPR).

At the heart of its inflation-control strategy, the BoC believes that “that the best way to foster confidence in the value of money and to contribute to sustained economic growth, employment gains and improved living standards is by keeping inflation low, stable and predictable”.
Further to that point, the BoC’s inflation-targeting approach is symmetric, meaning “that the Bank is equally concerned about inflation rising above or falling below the 2 per cent target”.

As you will see in a moment, that last phrase is critical in the current context. If the BoC’s monetary policy actions are primarily governed by the goal of steering inflation towards 2% over time, then current CPI trends clearly imply that the BoC’s next move in its overnight rate should be a decrease, rather than the increase it has repeatedly warned us about.

The latest CPI data show that average prices rose by a paltry 0.4% over the most recent twelve months ending in April (down from 1% in March). The largest contributor to this drop was falling gas prices but even with the change in gas prices stripped out, overall CPI would still only have risen by 0.8% - a far cry from the BoC’s 2% target. As the chart by Stats Can on the right shows, our CPI has now been below the BoC’s
target rate of 2% for over a year and much of our supporting economic data, such as GDP growth and unemployment rates, are more consistent with continued disinflation and even deflation, not inflation.

In its most recent MPR the Bank of Canada forecasted that inflation would return to its 2% target in mid-2015 but as with so many of the BoC’s predictions of late, that one is also now ripe for some downward revision. In fact, we seem so far away from returning to that target rate that I think it’s time to suggest that the BoC may need to give us a little help to get back there.

As unlikely as it may sound to Canadians who have grown accustomed to former BoC Governor Carney’s warnings about imminent rate increases, at some point the BoC may have no choice but to lower its overnight rate. Our economy is dangerously close to stall speed and if you want a look at just how far central bankers are willing to go to stave off the threat of deflation and/or recession, look no further than U.S. Fed Chairman Ben Bernanke and his ever-whirring printing presses. A little drop in our overnight rate hardly seems radical by comparison.

The BoC’s main reason for not dropping rates has long been our record household debt levels, which it has called “the biggest threat to our domestic economy”. But the increase in our household borrowing rates has slowed dramatically of late and as strange is it may sound, there may come a day when lowering rates in an attempt to stimulate a little more household borrowing will seem like a price worth paying if it keeps our economy afloat.

To be clear, I don’t believe that a rate cut is imminent and my best guess is that rates aren’t likely to go up or down significantly for the foreseeable future. In fact, even if the data continue to indicate that the BoC should cut its overnight rate, the Bank may still question whether a marginal decrease would have any material impact on consumer spending in our already well-entrenched, ultra-low rate environment. But if we’re going by the BoC’s official inflation-control strategy, I think the recent data continue to lend support to the rate-decrease option.

Government of Canada (GoC) five-year bond yields were two basis points higher for the week, closing at 1.36% on Friday. Not all lenders have raised rates in response to the recent bond-yield run up and as such, five-year fixed rates are still available in the sub-3% range.

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.

The Bottom Line: The latest CPI from Statistics Canada shows that average prices have barely risen over the most recent twelve months. These data bolster my long-held belief that fixed- and variable-mortgage rates aren’t likely to rise for the foreseeable future and lends support to the argument, at least in theory, that the BoC’s next change to its overnight rate is still most likely to be a decrease.

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 - May 17 2013

2013-05-17T08:00:00-04:00

Realosophy Team in Media Roundup

Real Estate News

OSFI probes longer-term uninsured mortgages, could act (Globe and Mail)

Hookers to High Rises: The Evolution of the Etobicoke Waterfront (Toronto Standard)

Signs of spring – and a soft landing – in Canadian real estate (Globe and Mail)

Toronto real estate: Condo rents hit record high as would-be homebuyers stay on sidelines (Toronto Star)

Canadian housing market not that bad for banks (Financial Post)

Home Buyers: What should a real estate lawyer do for you? (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 Review of Our Latest Employment Report with Implications for Canadian Mortgage Rates (Monday Interest Rate Update)

2013-05-13T10:48:59-04:00

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.

Anyone keeping an eye on Canadian mortgage rates should pay special attention to our Labour Force Survey (commonly referred to as our ‘employment report’), which is released by Statistics Canada each month.

The Survey gives us a bevy of useful information about whether and where our economy is adding jobs, whether average incomes are rising or falling, and whether the average worker is putting in more or less hours of work each month. Together, these factors combine to give us valuable insight into where our overall economic momentum is headed.

Here are the data from the latest report, which was released last Friday, with some thoughts on its implications for Canadian mortgage rates:

Our economy added 12,500 new jobs overall last month, almost bang on the 12,400 new jobs that we have averaged over the last six months. The federal government has hinted that over the near term the Bank of Canada (BoC) will lean its monetary policy more towards job creation than tight inflation control and the April employment data shouldn’t give them any cause to alter that approach.
The public sector added 34,200 new jobs in April. In other words, full-time government hiring was the only reason we added jobs over the past month. That’s an unsustainable trend that can’t be relied upon in this age of austerity-themed government budgets.
The private sector lost 20,000 jobs in April and has now shed 105,400 jobs over the past two months. In fact, this sector has grown by only 0.1% over the past year so our current private-sector hiring slump is actually very well entrenched. This is a big concern because private-sector job growth and GDP growth go hand-in-hand, making it unlikely that we will see any real change in our overall economic momentum until private-sector hiring looks very different than it does today.

The manufacturing sector added 21,000 new jobs in April. That would be a more encouraging development if the same sector hadn’t shed 54,000 jobs in March, meaning that we’re still down 33,000 manufacturing jobs over the last two months. In fact, we have seen the total number of manufacturing jobs shrink by 52,000 over the past twelve months, so this slump is also well entrenched. Manufacturing is a key sector of our economy because its jobs produce a powerful multiplier effect that ripples through the broader economy. This impact was highlighted in a report by the Department of Finance last year which estimated that each manufacturing job in the automotive industry, for example, produces 3.6 other jobs, 2.4 of which are in non-manufacturing sectors. Here’s hoping that the recent hiring pick up in manufacturing continues.
Average hourly wages rose by 2.9% for the month, which was well above the rate of inflation. At first glance this is not intuitive. Why would labour costs be significantly outpacing our overall rate of inflation when we still have surplus labour available? David Rosenberg is now highlighting the risk that a shortage of skilled labour could trigger cost-push inflation. (While he is primarily focusing on the U.S. labour market, the risk exists here in Canada as well.) This type of inflation is caused when there is a skills mismatch between unemployed workers and the jobs available to them, forcing employers to bid up the cost of qualified skilled labour. There is an 80%+ correlation between rising labour costs and rising inflation, so if skilled labour remains in short supply over an extended period, higher prices will inevitably follow. This raises the medium-term risk of stagflation, a scenario we last faced in the 1970’s when high inflation coincided slowing economic growth and high levels of unemployment.

Government of Canada (GoC) five-year bond yields were 11 basis points higher for the week, closing at 1.34% on Friday. Most of that spike happened on Friday so I’ll be watching to see if that momentum carries through into this week. Only a few smaller lenders have raised their fixed-mortgage rates in response thus far but if the five-year GoC yield continues to move higher, more are sure to follow. As such, anyone currently in the market for a five-year fixed-rate mortgage will be wise to lock in today’s sub-3% rates while they still can.

Five-year variable rate mortgages are still offered in the prime minus .45% range (which works out to 2.55% using today’s prime rate).

The Bottom Line: The April employment report confirmed that private-sector employment continued to shrink last month. While our ongoing private-sector slump was temporarily offset by an increase in full-time public-sector jobs, the experts I read expect government hiring to slow in the near future. Normally excess labour capacity would coincide with continued low inflation and mortgage rates, but the threat of stagflation, which would trigger higher inflation and mortgage rates, is slowly rising. While this is still a distant threat, we should stay tuned on that front.

Toronto Real Estate Roundup - May 10 2013

2013-05-10T11:23:04-04:00

Realosophy Team in Media Roundup

Condo News

Peter Munk’s contrarian bet on Toronto’s condo market (Globe and Mail)

Toronto New Condo Sales Drop 55% in First Quarter (Wall Street Journal)

Next Year Could Be a Key One for Toronto Condo Market (Wall Street Journal)

Real Estate News

Homebuyers clueless about mortgages (CNN Money)

Toronto real estate: First-time homebuyers heavily influenced by commute (Toronto Star)

Should everyone consider renting over buying right now? (Globe and Mail)

Early exit from closed mortgage can cost you dearly (Toronto Star)

Drop in housing starts latest signal that housing market is cooling (Toronto Star)

Beware Sending a Real Estate Deal Off the Rails

2013-05-10T10:06:46-04:00

Bob Aaron in Legal, Home Selling, Home Buying

An interesting decision from Toronto’s small claims court last December provides a useful lesson on the obligations of buyers, sellers and lawyers when a real estate transaction starts to go off the rails.

In his decision, Justice M. Donald Godfrey wrote that the case came to court because the parties and their lawyers were unable to work out a “reasonable compromise” on the closing of a transaction on Mould Ave., in Toronto.

Nuno Barbosa and Paula Boas agreed to buy the house for $516,000 from Helder and Maria Rodriguez, with a scheduled closing of October 30, 2009. Two days before closing, the buyers discovered that the property taxes were not $2,300 as indicated on the MLS listing but were in fact almost $4,600. The increase was the result of a re-assessment of taxes due to an addition to the property which was completed in early 2008.

The buyers requested a $10,000 price reduction. When the sellers declined the offer, the buyers refused to close even though their lawyer was holding enough trust funds to complete the transaction.

After receiving advice from another lawyer, the buyers changed their minds and told their lawyer that they were willing to close and sue later. But the request was not made until after the 6 p.m. closing deadline.

The sellers did not agree since they did not know what damages they were exposed to as a result of two “chain reaction” closings, which depended on the sale of their Mould Avenue house.

The buyers then sued the sellers for return of their $10,000 deposit, and the sellers sued the buyers for damages resulting from their refusal to close.

After an unusually long three-day trial, Justice Godfrey ruled that the buyers should have closed the transaction on time since the breach of contract was “not material.” However, the judge also decided that the sellers were entitled to refuse to close 15 minutes after the 6 p.m. deadline because the contract stated that time was “of the essence.”

The sellers could keep the $10,000 deposit, but were awarded no additional damages since they did not take reasonable steps to limit their losses. Although their legal position in refusing a price reduction was technically correct, they were exposing all parties to the risk of subsequent litigation.

“The vendors knew or ought to have known,” the judge wrote, “that they were obliged to compensate the purchasers for the misrepresentation on the taxes if the purchasers were forced to close.” The judge felt that the $10,000 reduction offer “certainly appears to be a reasonable attempt to estimate (the purchasers’) potential loss,” and the sellers were “negligent in absolutely refusing the $10,000 abatement.”

They “could and should have at least made a counter offer” to hold back the money and establish the proper damages after closing.

Three days after the scheduled closing, a further attempt to close failed. The sellers offered to close if the buyers agreed not to sue them afterward, and the buyers insisted on retaining their right to sue for damages as a result of misrepresentation of the taxes.

On this point, “the vendors were not acting reasonably,” the judge wrote, since “there was no question that the purchasers would be entitled to some compensation for the misrepresentation of the taxes.”

In the end, “both sides acted unreasonably” in not enabling the transaction to close.

Even though the purchasers lost their deposit, the sellers were unsuccessful in recovering their almost $27,000 in losses on their own purchase when they failed to limit their damages. The sellers also had to pay their realtors $3,750 in costs when the case against them was dismissed.

The lesson to be learned from this sad case is that any real estate transaction carries the risk of going off the rails.

If that happens, it is critical that all parties act reasonably and get solid legal advice on the risks involved, so that damages can be minimized and the possibility of an ugly court case is avoided.

Often, in litigation, nobody wins.

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

Toronto Real Estate Roundup - May 3 2013

2013-05-03T12:35:11-04:00

Realosophy Team in Media Roundup

Real Estate Market

What’s happening in the housing market? (Toronto Star)

You want that dream home? Why you'll have to join the line in this thin housing market (Globe and Mail)

Even in a real estate slump, Canadians lured into bidding wars (Financial Post)

Canadian housing: Bursting bubble or gentle landing? (Financial Post)

Condo News

Tarion new home protections may be extended to condo conversions (Toronto Star)

Toronto real estate: Downtown condos lead broad rise in prices (Toronto Star)

Other Real Estate News

Feeling Pug-ish About Toronto Architecture (Torontoist)

What are the 5 best new buildings in Toronto from 2012? (Blog TO)

Canadian Mortgage Rates Will Inevitably Rise … But When? (Monday Interest Rate Update)

2013-04-29T11:58:07-04:00

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.

Today’s consensus on mortgage rates goes something like this: Central banks around the world are printing money like crazy in an attempt to stimulate (and reflate) their economies and to keep their governments (and in many cases their banks) from going broke. All of this ‘new money’ will eventually lead to higher inflation and when it does, higher mortgage rates will inevitably follow.

I agree with this general premise but it omits the most important detail – when.

While the Bank of Canada (BoC) and many prominent Big Five Bank economists have until recently been warning Canadians that higher mortgage rates could be just around the corner, I have consistently subscribed to the view that this day of reckoning will actually arrive later than most believe.

Today, let’s look at the impact (or lack thereof) that the U.S. Federal Reserve’s actions have had on the U.S. economy over the last several years – it’s a key element in my ‘lower-for longer’ view. I am focusing on the U.S. example because the U.S. and Canadian economies (and monetary policies) are tightly linked and if the U.S. economy experiences significantly higher inflation, we will import it.

For starters, it may be splitting hairs but technically the U.S. Fed isn’t actually ‘printing’ new money. Instead, it is expanding its balance sheet by increasing its purchases of U.S. treasuries which it typically buys from U.S. banks. That action increases each bank’s reserves but has no impact on the amount of money that is actually circulating in the economy. If the Fed wants to increase the supply of money circulating in the real economy it needs U.S. banks to act as the transmission mechanism, and it is here that the first breakdown in its master plan is occurring.

Despite its best efforts, the Fed has not increased either the banks’ appetites for lending, or consumer appetites for borrowing. When once asked about how to deal with this specific problem U.S. Federal Reserve Chairman Ben Bernanke famously said that if the banks wouldn’t start lending more he would drop money from helicopters directly into consumer’s wallets, earning him the nickname ‘Helicopter Ben’.

The Fed has been successful in engineering a massive increase in U.S. bank reserves over the last five years, causing the U.S. monetary base to increase by 250% from $840 billion to nearly $3 trillion over that period. But the rate at which banks convert reserves into money that is deployed into the economy, called the money multiplier, has fallen sharply over that same period. The net result is that the amount of money that is actually circulating in the real economy, referred to as the money supply, has increased by only 35% since 2008.

Now 35% is a lot less than 250% but a 35% increase in the money supply is still significant. If all else had remained equal, this might well have been enough to get things moving again. But other elements have been changing as well. Most importantly, the U.S. economy has seen a corresponding decrease in the velocity of money.

The velocity of money is a measure of the rate at which money circulates, or changes hands, in an economy. In simple terms, when money is circulating quickly it corresponds with increasing demand and in this environment, inflation rises. When the rate at which money changes hands slows, this corresponds with falling demand and creates a headwind that can cause disinflation, or even outright deflation.

The way that money is spent is arguably the primary determinant of its velocity (and of whether it leads to further growth). When a business borrows money to expand production or to increase productivity, this money is invested in order to produce income that can then be used to repay its debt. This stimulates growth and creates positive knock-on effects for the broader economy (by increasing ongoing demand for raw materials and labour, for example.)

Conversely, when consumers or governments borrow to finance immediate consumption this money provides no lasting benefit and produces no ongoing income that can be used to service outstanding debt. Worse still, as this type of debt accumulates it crowds out other more productive demand-generating uses of borrowed capital, acting as a drag on economic growth.

To put the current U.S. economic backdrop in context, consider that the velocity with which money now circulates in the economy has reached a six-decade low. And this has happened at the same time that U.S. growth rates have averaged 1.8% over the last thirteen years (the lowest average growth rate over a decade or more since the Great Depression).

The powerful forces described above have so far counteracted the U.S. Fed’s quantitative easing (QE) programs and as private and government debt levels continue to rise, both the money multiplier and velocity of money should slow further. For these reasons, while I agree that we will see higher inflation (and mortgage rates) at some future point, I don’t think the Fed’s QE programs are necessarily a threat to near- or even medium-term future inflation.

Government of Canada (GoC) five-year bond yields were unchanged for the week, closing at 1.18% on Friday. Five-year fixed-rate mortgages are widely available in the sub-3% range and the most aggressive rate promotions are being offered to high-ratio borrowers. While this may sound counter-intuitive, borrowers who have less than 20% equity in their property are required to pay for high-ratio mortgage insurance and this makes their loans cheaper to securitize. Lenders pass some of that savings back to high-ratio borrowers with additional rate discounting (usually five basis points). Notwithstanding this, borrowers with more than 20% equity in their homes still enjoy a lower overall borrowing cost because they do not have to pay to have their mortgages insured.

Five-year variable rates are currently available in the prime minus .40% to .45% range (which works out to 2.55% to 2.60% using today’s prime rate).

The bottom line: The U.S. Fed’s unprecedented balance sheet expansion has not yet triggered the higher economic growth the Fed hoped for - or the inflation that most pundits have rightly warned us will inevitably arrive at some future date.

Growth has been stifled in part because so much of today’s borrowed money is being used to finance immediate consumption, instead of productive investment. This is an unsustainable trend. And the Fed can only indirectly influence the supply and velocity of money that is actually circulating in the U.S. economy. If U.S. banks don’t want to lend and U.S. consumers don’t want to borrow, the Fed can only watch and wait.

The combination of these factors underpin my view that inflation in both the U.S. and Canada, and by association our mortgage rates, should remain at or near current levels for longer than the BoC and most economists are predicting. Unless Helicopter Ben wants to try firing up his rotors – then all bets are off.

Toronto Real Estate Roundup - April 26 2013

2013-04-26T13:05:09-04:00

Realosophy Team in Media Roundup

Condo News

Get ready condo flippers, Canada Revenue Agency is hunting you (Financial Post)

Condo renters pay hefty price for downtown living (Toronto Star)

Toronto condo parking spaces can fetch $60K (Toronto Star)

The rise of the mid-rise (Toronto Star)

Other Real Estate News

What’s happening in the housing market? (Toronto Star)

Potential first-time home buyers: Bide your time (Globe and Mail)

Most Canadians say they won’t get sucked into a bidding war (Globe and Mail)

Problems With Land Titles Just Got Clearer

2013-04-26T10:15:20-04:00

Bob Aaron in Legal

A decision of the Ontario Court of Appeal in February may have settled the thorny question of whether or not courts have the authority to correct erroneous descriptions of properties in the land registration system.

The origin of the dispute dates back to 1985, when Veikko Kivikangas subdivided a parcel of waterfront land he owned in the Sudbury area into three lots.

Kivikangas instructed his surveyor to prepare a reference plan of survey showing the registered right of way to be in the same location as an existing gravel road which ran from the main highway across the first parcel, then the second, and into the third.

On the ground, the path takes a detour around a large rock outcrop. Unfortunately, the surveyor prepared and registered the reference plan showing the gravel drive going directly through the outcrop rather than around it.

Effectively, it was impossible to access the two inner lots using the registered right of way.

For many years, the owners of the three lots peacefully used the actual roadway on the assumption that it was located as described on the reference plan.

In 2005, Kimberly MacIsaac, one of the current owners, became aware that the registered road went through the rock rather than around it. The other neighbours discovered the discrepancy two years later.

Peggy and Gordon Salo had spent considerable funds improving the roadway with ditches, culverts and concrete. After their neighbours allegedly began to use the roadway with commercial trucks and construction equipment, the Salos barricaded the road and a series of altercations took place.

With the road blocked, the owners of the two inner lots, MacIsaac and Kristina and Karsten Johansen, had no way to access their properties except over (or through) the rock outcrop.

Eventually, MacIsaac and the Johansens sued the Salos claiming rectification of the land registry because of the surveyor’s error.

In January last year, Justice Dan Cornell decided that the court did not have the power to rectify the reference plan and title abstract, and that MacIsaac and the Johansens were stuck with a roadway they couldn’t use.

The real estate bar was, to say the least, unhappy with the decision. Toronto real estate lawyer Craig Carter said at the time that the court decision is “a fundamental attack on the system of title recording in Ontario” since erroneous land descriptions could not be rectified.

The case came before the Ontario Court of Appeal last September, and the court’s decision was released in February.

In a highly unusual decision, Chief Justice Warren Winkler, writing for a three-judge panel, rejected the arguments of the plaintiff, the defendant and the Canadian Bar Association, acting as intervener.

The court based its opinion on the Land Titles Act, which says that the title system only guarantees the quality of title and not the quantity. As a result, the court said that it had the authority to rectify the location of the easement by relocating it around the rock outcropping.

The Court of Appeal decision highlights the risks of relying on the descriptions of property parcels in Land Titles since there is no guarantee of boundaries. Registered owners clearly own something, but what they own is not guaranteed unless the size or extent of title is determined by established and accepted legal descriptions, by survey of the property, by court order or by other means. Only then will the land titles system effectively guarantee the size and extent of the land as well.

The appeal court’s decision affects a purchaser’s ability to rely on the land titles system since boundaries are subject to rectification whenever a court believes justice requires it. This exposes land owners to unpredictable loss of the extent and quality of their ownership unless an actual boundary has been settled.

The courts can settle the actual boundary by determining the parties’ intention and, once the actual boundary is determined, the courts can rectify the boundary but require a legal basis to do so.

The case may yet wind up in the Supreme Court of Canada.

Has the Bank of Canada Discovered Life on Mars? (Monday Interest Rate Update)

2013-04-22T16:07:01-04:00

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.

The Bank of Canada (BoC) left its overnight rate unchanged last week, as expected.

The Bank also released its latest Monetary Policy Report (MPR), which I read with great interest because it gives us the BoC’s views on the state of the world’s economies and includes projections for where the Bank sees foreign and domestic economic momentum headed over the next several years.

In a perfect world, the MPR would offer an unbiased assessment but bluntly put, that has not been the case for some time now. The BoC remains primarily concerned about our elevated household debt levels and continues to warn Canadian consumers about higher future interest rates. The Bank’s hope is that this form of ‘moral suasion’ will help counteract the natural effect that its ultra-low interest-rate policy is having on household borrowing. If successful, the BoC would be able to continue stimulating the rest of our small, open economy, which is needed in light of current global economic conditions, without fueling a household credit bubble as a by-product.

The challenge that the BoC has today when drafting its MPRs is that it must support its higher interest-rate warning with forecasts to match. This is where the tangled web that tries to connect the Bank’s warning to the hard economic data can be most plainly seen.

A pattern has emerged in the last several MPRs where the Bank downgrades its current data and near-term forecasts, unable to deny that our near-term economic momentum is slowing, but then offers more optimistic medium-term projections as an offset. This is a clever way of massaging the data because it allows the Bank to use a distant pickup in economic momentum as a way of continuing to justify its threat of higher interest rates, even while we are clearly still in the midst of an economic slump. Then, later, as the future unfolds and that momentum doesn’t materialize, the BoC simply adjusts its projections downward as they move nearer to the present day and makes new medium-term projections to fit as needed. Wash, rinse, repeat (and hope no one notices).

Let’s look at what the latest MPR is forecasting for export growth in various economies around the world as an example:

US - “Firming foreign demand is projected to support a steady rise in U.S. exports through 2015 ….”
Euro area - “Economic activity in the euro area is expected to decline further during the first half of 2013, although at a slower pace. A gradual recovery, initially supported by external demand, should then take hold”.
Japan – “The recent sharp depreciation of the yen, coupled with an increase in external demand, is also expected to spur a significant rebound in exports.”
China: “A rebound in exports is also anticipated ….”

The BoC’s rosier medium-term view seems to be largely underpinned by the view that world’s economies will soon enjoy across-the-board increases in export demand, despite the fact that the world is in the midst of a massive and growing currency war and despite a rise in other protectionist policies that typically occur in times of economic slowdown. The BoC’s key assumption on exports flies in the face of all evidence to the contrary and begs the question – where will all of this increased demand for exports come from? Have our central bankers discovered a secret source of hidden demand that only they (and probably Goldman Sachs) are aware of? Has our search for life on Mars discovered a new species of well-healed consumers who can’t wait to live beyond their means?

** Spoiler alert ** Here is a sneak preview of the BoC’s MPR in 2014 (my construction): “The rise in export demand that was forecast in previous MPRs has not materialized due to the slower-than-expected pace of economic recovery in many of the world’s largest economies. This reduced economic momentum has also coincided with a rise in protectionist, beggar-thy-neighbour policies that have led to lower export demand than originally projected.”

Here are some other examples of assumptions that seemed like ‘reaches’ in the latest MPR:

The BoC believes that both the U.S. and Canadian economies will benefit from an improving U.S. housing market, largely because increased residential investment has historically created spillover demand in other housing-related sectors. I question whether this well-established precedent is applicable today, however, because first-time buyers are not driving the U.S. housing recovery. The marginal buyers of U.S. houses today are investors, who are far less likely to buy related goods, like furniture and electronics, for their newly purchased rental properties.
The Bank is projecting a rise in both U.S. and Canadian business investment but it also acknowledges that it has not materialized to date. Instead of investing in longer-term projects, businesses have focused on small capital outlays with more immediate, but smaller, returns. Today, the most well-known business-sentiment indices such as the U.S. Fed’s Beige Book and the BoC’s Business Outlook Survey show falling, not rising, business confidence and project only modest business-spending increases. As such, assumptions about medium-term increases in business-investment appetite that return our economy to full capacity by mid-2015 seem more like wishful thinking than anything that is based on facts on the ground.
The BoC sees the main upside risks to be “stronger-than-expected-growth in the U.S. and global economies, a sharper-than-expected rebound in Canadian exports, and renewed momentum in Canadian residential investment”. Conversely, the Bank sees the main downside risks to be: “the European crisis, more protracted weakness in business investment and exports in Canada, and the possibility that growth in Canadian household spending could be weaker”. While the Bank sees these offsetting risks as “roughly balanced over the projected horizon”, the latter risks seem much more probable to me than the former, especially when you consider that both the BoC and our Federal Finance Minister have been openly cheering our recent housing- market slowdown.

Government of Canada (GOC) five-year bond yields were two basis points lower last weekend, closing at 1.18% on Friday. Five-year fixed-rate mortgages are widely available at sub-3% rates as lenders continue to engage in aggressive spring-market rate competition.

Five-year variable rates are offered in the prime minus .40% to .45% range (which works out to 2.60% to 2.55% using today’s prime rate).

The Bottom Line: The BoC has painted itself into a corner by consistently warning Canadians about higher interest rates while global economic conditions continue to deteriorate. Higher interest rates are always a possibility, but they still seem like a distant threat to me and I don’t think the BoC’s latest MPR medium-term projections make a compelling case otherwise … unless NASA announces a Martian press conference in the near future.