Credit unions say household debt no big deal

Efforts by chiefs of the big banks to slow the growth of Canada’s booming mortgage market are unjustified and in fact could set off a housing slump, the thing the banks most want to avoid, warns the chief economist of Central 1 Credit Union, the umbrella group for credit unions in British Columbia and Ontario.

“I don’t see a price bubble and I don’t see that we need the mortgage criteria tightened as is suggested in some quarters,” said Helmut Pastrick.

The comments come on the heels of warnings from several top bank executives, including Ed Clark, chief executive of Toronto-Dominion Bank, that consumers are carrying excessive debt, especially around mortgages, and that’s made them vulnerable to economic shocks.

They fear that a rise in interest rates or deterioration in employment could leave many borrowers unable to meet their payments.

The bankers are now in talks with the federal government, which is expected to unveil new measures in the next budget aimed at putting the brakes on home loans, the biggest slice of consumer debt held by the banks.
But according to Mr. Pastrick, any such move would be a mistake.

If Ottawa does what the bankers are asking and tightens up on mortgage lending, that will only slow the economy, potentially triggering a domino effect ending in a slump in the housing market, Mr. Pastrick said in an interview.

“If you slow down the housing market that in turn slows down the economy,” he said. “Housing is an important sector. It generates a considerable number of jobs, particularly in housing construction, and [to a lesser extend] in sales. And certainly as sales go, so go housing starts and housing construction.

“Most forecasters are saying it’s going to be the domestic economy that’s going to carry the day [over the next year], so if we begin to tighten on the housing front that too will begin to diminish the growth rates we see on the domestic side.”

This is the second time the big banks have lobbied the federal government on the matter. In the spring, the government lowered the maximum amortization on mortgages to 35 years from 40 and required borrowers to qualify for a five-year, fixed-rate mortgage even if they were applying for a shorter term.

“I didn’t think [the market] needed it at that time either,” Mr. Pastrick said.

“I may be a contrarian here but the market was already in adjustment phase, housing sales were moving down…. So there was no bubble developing at that time, nor is there one developing now.”

Central 1 Credit Union is the umbrella organization for credit unions in British Columbia and Ontario. Member financial institutions have nearly three million customers and hold about $70-billion in assets, the lion’s share of which are in British Columbia, home to some of Canada’s most expensive housing markets.
Mr. Pastrick said the real estate industry is an important economic driver, generating large numbers of jobs in everything from construction and manufacturing to sales, and if it slows down, the result will show up in declining employment.

Most forecasters are already calling for slower growth in 2011 and it doesn’t make sense to add to the negative pressure by artificially pushing down demand for homes, he said.

The bankers have been warning that after more than a decade of rising prices, real estate is overvalued and approaching bubble territory.

“I’m not of that view,” Mr. Pastrick said. “Obviously, the market over time will have some periods where prices decline, but for the most part history shows that housing prices have risen in Canada … so it’s an appreciating asset.”

Even if consumers are borrowing more than ever before, that shouldn’t be seen as a problem because it’s mainly backed by real estate, which will continue to hold its value — unless of course the government decides to tinker, he said.

Mainstream economists point to the ratio of household debt to disposable income of about 150% as the focus of their concerns. They note that it’s now the highest it’s been in history and about the same level it was in the United States immediately prior to the real estate collapse.

But Mr. Pastrick argues that comparison doesn’t work because the U.S. mortgage industry is fundamentally different from Canada’s. For instance, there is no significant subprime sector in this country, nor did Canadian mortgages get securitized to the degree they did in the United States.

Household debt levels have been growing in Canada as well as most industrialized countries since the 1970s, he said. His economist peers’ fixation on 150% as a danger level is “arbitrary” and illogical, he said.
“It’s just a broader trend in the economy and society that we are more reliant on debt than before,” from The National Post

Inflation, Deflation, and what it means to you

“Inflation” and “deflation” seem to be the most whispered about words in economic circles right now.  Canada’s Finance Minister Jim Flaherty commented today that he is satisfied with the Bank of Canada’s mandate to keep inflation rates at or below 2%; elsewhere all eyes are on China as its central bank issued new regulations today in an attempt to curb their rising inflation.

What’s the deal with inflation? Is it really such a bad thing? And how does the Bank of Canada go about affecting the inflation rate?

Inflation is essentially the gradual increase in the price of goods and services over time. There’s nothing wrong with the inflation that occurs naturally in the economy as wages rise. In fact, this natural inflation is necessary. For example, if the price of something like bread didn’t rise as wages rose then we’d still have $0.25 loaves of bread which would be great but no one would want to bake loaves of bread to sell for $0.25 so we’d have no bread.

So if inflation is bad then the opposite of inflation must be good right? Deflation is the gradual decrease in the cost of goods and services over time. Look at it this way, if deflation is high then it means the price of things like cars is steadily falling. Why then would you buy a car today if you could wait until next week when it’s cheaper? And if everyone behaved this way then no one would be spending any money. Without anyone spending money, who is going to make any money? Wages will go down because your company didn’t make enough money to pay you.

Like most things, inflation and deflation are perfectly fine and even beneficial if they occur in moderation. Moderate inflation helps you out by raising your wages over time. Moderate deflation also helps you out by encouraging people to develop more efficient ways to produce goods and services.

Basically it’s like this: deflation is typically worse than inflation because deflation stops people from spending money. Inflation at low levels is alright but inflation at higher levels makes people spend more money and save less.

This is where the central bank steps in. It directly controls interest rates so it can make it more attractive for people to save money by increasing the interest rate you would receive if you invested your money instead of spending it.

It also directs commercial banks about how much of their clients’ money they have to keep on hand and how much of it they can lend out. If they order commercial banks to hold more money then less will be lent out and spent and more will be saved.

So the next time you see a headline that says “Inflation rate on the rise” you’ll know that it’s an indication that interest rates might also be close to rising. And if you’re on the lookout for buying a home or refinancing your mortgage then you’d be wise to look into your options now.

Is your hard earned money working for YOU or your financial institution?

Is your hard earned money working for you or your Financial Institution?

With the onset of technology and immediate news feeds, Canadians, now more than ever are provided with a vast amount of information regarding mortgage rates. While running a simple GOOGLE news search this morning, there were no less than 823 news articles on the Bank of Canada’s decision to keep the overnight lending rate at 1.00%. What this means for most Canadians is simple, record low interest rates. Now more than ever Canadians need to take advantage of low mortgage rates, reduce their overall mortgage debt, and increase their net worth.

Major financial institutions want you to lock into to their 5 year fixed rates. We have demonstrated on previous blogs the primary reason; PURE PROFIT. Consider this, in April and May of 2010, most Financial Institutions were advertising heavily across Canada that Canadians needed lock into 5 year fixed mortgage rates. The 5 year fixed rates hovered in the 4.25% range. All the advertising emphasized that you should lock in now and that rates will be rising. Currently, in a time when mortgage rates where supposed to be much higher, the average 5 year fixed rate is hovering around 3.69%. Similar to gas prices, there no real rhyme or reason for this. Therefore if you are in the market for a mortgage or have a current interest rate that is higher than 4.00% you MUST speak to a Mortgage Professional. The advisory service provided by a mortgage professional is absolutely free and the benefits can be enormous. Saving thousands of dollars, shortening your amortization and dramatically reducing your debt load are all possible in this current rate environment. Having a mortgage professional negotiate on your behalf provides Canadians with numerous advantages.

Most economists are predicting that the overnight lending rate, which dictates the banks prime rate, will remain unchanged until at least mid 2011. Given the current economic conditions in most of the European nations, there is now some predication that rates might not go up until the fourth quarter of 2011. There is now some speculation from economists that a rate drop might be in the cards if the Canadian Dollar continues to gain momentum against the US dollar.

A variable or adjustable rate mortgage can provide Canadians a great recipe to aggressively pay down their mortgage with the appropriately designed home ownership strategy. With mortgage rates as low as 2.20%, Canadians should consider taking advantage of these historically low rates and shave years of their mortgage. When you are looking at your next mortgage statement, ask yourself these very simple questions; How hard is my hard earned money working for me? How hard is my hard earned money working for my Financial Institution? Reducing your mortgage debt and increasing your overall net worth is the best possible combination.

Don’t miss this amazing opportunity.

TORONTO - Bank of Canada governor Mark Carney takes centre stage this week with his last interest rate announcement, but given the persistent economic uncertainty it's widely expected he'll leave the bank's influential policy rate untouched at one per cent

"The bank will be in absolutely no rush to raise rates," Douglas Porter, deputy chief economist at the Bank of Montreal, said Friday.
"We certainly don't expect them to move on rates next week. We also think they're unlikely to raise rates any time soon in early 2011," Porter added.
The vast majority of economists say an interest rate hike is off the table when Carney addresses the issue Tuesday — an assumption that had been built into economic models for months but was solidified by lukewarm economic reports released last week.
The Bank has already raised the rate three times this year in increments of 0.25 percentage points in three sequential announcements in June, July and September.
Since it's last announcement in October — when rates were left unchanged — there have been some significant changes in Canada's economic outlook.
Inflation has heated up — largely on the back of the new harmonized sales tax regimes in B.C. and Ontario introduced this summer — a key factor in any interest rate decision as hikes are usually introduced to cool an overinflating currency.
Last week three key economic reports suggested the pace of the economic recovery is much weaker than had been forecast.
Canada’s current account deficit widened to $17.5 billion in the third quarter, the largest on record since 1946, while third-quarter real gross domestic product growth came in at a disappointing one per cent annualized, below expectations for 1.4 per cent.
And on Friday, Statistics Canada issue a mixed report on the jobs market that also suggested the economy hasn't been as strong as previously forecast.
The national unemployment rate fell three-tenths of a point to 7.6 per cent, the lowest since January 2009, despite only a modest pickup of 15,200 net jobs
Many observers don't believe the economy will be strong enough to give Carney a reason to raise interest rates until the second half of next year, leaving consumers in an extended period of low interest rates.
With little possibility of a rate hike, economists will instead focus on the tone of Carney's speech for signs about where monetary policy might be headed further down the road.
In past announcements, Carney has voiced concern about consumer debt and the ability of borrowers to meet their payments once interest rates begin rising again.
Despite the mixed economic data streaming out of the U.S. and Canada last week, the Toronto Stock Exchange hit a post-recession high on three consecutive days, closing Friday at 13,178.95 — up 2.2 per cent from the previous week's close.
Bank of Montreal (TSX:BMO) will report its fourth-quarter results Tuesday, wrapping up earnings season at Canada's big six banks.
Earnings for the Canadian banking sector have been wildly divergent so far, with the Royal Bank (TSX:RY), TD Bank (TSX:TD) and CIBC (TSX:CM) all turning in weaker fourth-quarter earnings results, while Scotiabank (TSX:BNS) and National Bank (TSX:NA) both showed improvement.
Meanwhile, commodity prices have been on a tear as the U.S. dollar weakens against other currencies and that's expected to continue, said Bob Tebbutt, vice-president of risk management at Peregrine Financial Group Canada.
"There was a depression in commodity prices because worries over Ireland ... and Portugal but I think that has been eliminated," Tebbutt said.
"I see the American dollar starting to sell off and, since all commodities are priced in U.S. dollars, that too is going to add to the strength on commodity prices," he added.

By: Sunny Freeman, The Canadian Press

Housing Affordability in Canada Improves

In RBC’s November 2010 “Housing Trends and Affordability” report, owning a home in Canada got a little easier and all provinces saw improvements in affordability in the latest quarter owing to a reduction in home prices and historical low mortgage rates. 

"The improvement in affordability during the third quarter has relieved some of the stress that had been mounting in Canada's housing market over the past year," said Robert Hogue, senior economist for RBC. “After appreciating rapidly during the strong rebound in resale activity last year and early this year, national home prices recently came off the burner and retreated modestly as market conditions cooled considerably through the spring and summer.”

The report also points out that the proportion of pre-tax household income needed to own a home dropped in the third quarter of 2010. This means that homeowner’s are spending their income on their housing costs.  It took 40.4% of household income, on average across the country, to own a bungalow between July and September which was 2.4% lower than for the second quarter.

Overall owning a house nationally became more affordable, however Vancouver's affordability measure remains the highest in Canada, RBC said.  Vancouver was 68.8%, down 5.4% from the last quarter. For a standard condo, it fell 2.2% to 40.1%.   

With low mortgage rates currently sustained, the rates are not expected to rise beyond the closing months of this year.  The prediction is that Bank of Canada will start raising rates in the second quarter of 2011.  “In our view, higher mortgage rates will be the dominant factor raising homeownership cost over the medium term, although increasing household income – as the job situation continues to strengthen in Canada – will provide some positive offset.  We expect housing demand and supply to remain mostly in balance, overall, setting the course for very modest home price increase” said Robert Hogue.    

Here’s what Mr.Hogue is trying to say: interest rates are expected to rise in the middle of next year which will decrease affordability but household income is expected to increase and house prices are still drifting downward which will increase affordability.

Therefore these two opposing forces are going to essentially cancel each other out and we’ll see little change in affordability in the next half year or so.  So for people who are looking into buying a house in the near future, this is the time to buy.  With rates predicted to increase in the 2^nd quarter of 2011, why wait and sit on the fence.  Get pre-approved today and talk to your mortgage broker.  

If you like to take a look at the full RBC Economic Report, the link is  

http://www.rbc.com/economics/market/pdf/house.pdf

Did your Bank offer a 5 year fixed rate mortgage?

It is very interesting that most mortgage shoppers are immediately offered a 5 year fixed mortgage rate from their favorite Bank. When asked why this was the rate recommended by the Bank most shoppers have no answer.
When offering a mortgage solution and strategy to a client it is very important to understand the clients’ needs, future expectations and ability to handle risk.
Is the 5 year fixed mortgage better for you or your bank?

• On average Canadians move or refinance their mortgage every 3 years, this requires them to either break or restructure their current mortgage.
• Fixed rate mortgages require a 3 month interest or IRD (interest rate deferential) penalty to break, whichever is greater with no maximum. The past 2 years we have seen IRD penalties from $10k-$35k depending on the existing mortgage rate, term remaining and outstanding balance.
• Discounted closed variable rate mortgages only require a 3 months interest penalty to break or restructure. Open variables are available with little or no penalty, but are only offered with a rate premium added. 
• An oft-cited 2001 study by York University finance professor Moshe Milevsky reveals that from 1950 to 2000, a variable-rate mortgage would have beaten out a fixed-rate mortgage almost 90 per cent of the time. Recent numbers haven’t changed any of the main 2001 study conclusions, according to Prof. Milevsky.
• Approximately 66% of Canadians have a 5 year fixed rate mortgage.
• Approximately 30% of Canadians used the advice and expertise of an independent mortgage broker and not their banks to secure a mortgage last year.

You have probably already guessed which mortgage is the most profitable for your Bank, so next time make sure your needs and not the Banks are addressed when choosing your mortgage.