Weekly News (as of July 19, 2012)

1. BoC interest rate remains unchanged

Governor Mark Carney left its key interest rate unchanged at 1%; the last time it rose was September 8^th, 2010 from 0.75% to 1.0%. 

“The economic weakness that is unfolding in Europe, emerging economies, as well as in the U.S., is impacting Canada’s economic growth projections,” Arlene Kish, economist at IHS Global Insight, wrote in a report.

Due to European crisis and emerging economies (i.e., China) is affecting the price and demand for commodities such as oil and timber. Economists believe that Carney will keep interest rates the same until late 2013.

Source: http://www.thestar.com/business/article/1227840–interest-rate-why-mark-carney-s-canada-is-still-the-one-per-cent

2. Equifax Report suggests Canadian taking on less debt

The pace of consumer debt growth is about 30% lower YoY, which is the biggest slowdown since before the recession; this shows Canadians are handling their financial situations better with a decrease in serious consumer delinquency and bankruptcy numbers.

 3. Canadian housing Market – boom or doom?

 Prices are deflating at a rate of 0.8% YoY, and are gradually becoming a buyer’s market as unsold homes supply’s are rising. Existing home sales dropped 1.3% MoM, and 4.4% YoY in June 2012. Lastly, Canada’s housing correction could see prices to fall another 10% to 15%.

 Source: http://business.financialpost.com/2012/07/17/will-canadas-housing-boom-end-with-a-whimper-or-a-bang/

 4. New Mortgage rules

– Amortization period is now 25 years, down from 30 years for government insured mortgages.
– Borrowers can borrow up to 80% of their property value as collateral, instead of 85%
– Government backed mortgages insurance will be limited to homes with a purchase price of less than $1 million.

Finally Flaherty takes charge and tightens Mortgages rules

 New rules announced in Ottawa Thursday mean first-time house hunters who have been approved for mortgages will require higher down payments and will get a lower mortgage-approval rating. This is the fourth time the federal government has tightened mortgage rules since 2008.  (Source 1)

 Finance Minister Jim Flaherty cuts the mortgage amortization period to 25 years from 30 and limited refinancing loans to 80 per cent of a home’s value from the current 85 per cent. (Source 1)

 Those are not the only changes the government is making. It will no longer be in the business of insuring homes that are worth more than $1 million — meaning buyers will need to put up at least a 20 per cent down payment or seek private insurance. (Source 2)

 The changes go into effect July 9.

 CIBC deputy chief economist Benjamin Tal said he wondered about the timing of the announcement, given house prices are already receding. He estimated it could reduce new sales on homes by between three and five per cent. That’s not an insignificant hit to a fragile economy that’s been riding the coattails of a strong housing and building boom, which supports construction activity and jobs. (Source 2)

 My Opinion

 Toronto real estate is still hot, and the prices are still inclining. I am glad Flaherty is taking charge and tightening the rules (we knew it was coming). This will soften the housing market and hopefully not crash especially the condo market (i am worried about). As mentioned in an earlier post, the debt-to-income ratio is an all-time high of 152% in Q4/11 and about 72% Canadians are in some form of debt however, making extra payments to bring down the balances. Now, does this mean Bank of Canada will not change the interest rates for a while? Let me know what you think!

 (Source 1)

Title: Young buyers worry they’ll be stuck at parents’ place; Written by: Katherine Dow
Source: http://www.winnipegfreepress.com/business/young-buyers-worry-theyll-be-stuck-at-parents-place-159983265.html

(Source 2)

Title: Getting Canada’s house in order; Written by: Julian Beltrame
Source: http://www.winnipegfreepress.com/breakingnews/getting-canadas-house-in-order-159983615.html

Canadian Markets Part 2 – Mortgage rates

Let me provide some facts from Source 4:

– Average Mortgage debt
o Yr 1990 – $56,800
o Yr 2010 – $171,500

– Average savings:
o Yr 1990 – 8%
o Yr 2010 – 4%

This shows that mortgage has increased and savings have decreased which proves we are hitting our limit and has been recently flagged as a danger to the economy by both Finance Ministers Jim Flaherty and Back of Governor Mark Carney.

This brings me to another hot topic of households which is debt-to-income ratio (Total debt / Total monthly gross income), which calculates how much debt every household carries compared to their income.

To improve your household ratio, there are two options: increase your income and/or lower your expenses. Debt rose 78% in 20 years, to an average of $100,000. The debt-to-income ratio was 154.2% in Q3 and 152.9 in Q4, 2011. Even though the debt increased from $1.58 trillion to $1.60 trillion in Q3/11 and Q4/11 respectively, the income grew at a faster rate therefore the improvement of 2%.

My Opinion (purely based on my thinking)

Canadians have more debt compared to income; the debt-to-income ratio is 152.9% which means, for every $100 they earn, they owe $153 – disappointing.

As the mortgage debt continues to increase, there will be a slowdown in housing prices but it will at a slower rate. I believe the overly priced housing will be more affected than less costly housing. I know there are some condos in Toronto and Vancouver which are highly priced and will significantly drop; this will cause a spiral effect causing housing prices to decrease at a slower rate.

Sources
(Source 4): Family debt-to-income ratio hits record by CBC News, February 17th, 2012.

Canadian Markets Part 1 – Interest rates

This blog was merely based on personal life and my thoughts that are always running through my mind, and it definitely makes me lighter when I share lol, plays a role of a personal diary. Today I decided to share what I know and what my predictions would be regarding the markets, hence a new section on my blog.

Keep in mind, this is all based on my opinions and nothing to do with what I do and where I work; all the facts mentioned are sourced if you want to research further. The real reason why I want to write about the markets is, I want to see how accurate my prediction will be, don’t worry I am not an economist but starting to love this subject.

Let me first define few things before I talk about it.

1. Overnight rate: The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves; the Bank sets a target level for that rate. This target for the overnight rate is often referred to as the Bank’s key interest rate or key policy rate. (Source 1) The chart below shows that the target rate has not changed for a while:

Target for the overnight rate, recent data

Date	Target (%)	Change (%)
8 March 2012	1.00	—
17 January 2012	1.00	—
6 December 2011	1.00	—
25 October 2011	1.00	—
7 September 2011	1.00	—
19 July 2011	1.00	—
31 May 2011	1.00	—
12 April 2011	1.00	—
1 March 2011	1.00	—
18 January 2011	1.00	—

(Source 1)

 2. Prime business rates usually moves with Bank of Canada’s key interest rate, and is currently at 3.0%, when a bank gives out a mortgage, its usually Prime plus certain percentage (depending on the borrower).

Recent News on Mortgage Interest rates

March 9^th, 2012
BMO/TD/CIBC – announced a promotional offer of 2.99% for a fixed four year mortgage, I believe one of the institutions is providing a five year mortgage, effective til end of March 2012. Similar offer was provided by BMO last January (2012) but critics complained due to the restrictions it had, such as a 25 years amortization and limited prepayment privileges.

March 26^th, 2012
RBC and TD – announced their fixed rate offer on a four-year fixed rate will be increased by 50 basis points to 3.49% by March 29^th. The five year closed mortgage will move up 20 basis points to 5.44% as well. Also mentioned, the five year variable rate will raise 10 basis points to prime plus 20 basis points. (Source 2)

 My Opinion

Due to low interest rates that big financial institutions provided in the last few weeks caused people to take advantages to lock their mortgages or interested them to buy a house, therefore housing sales and starts have increased in the past month. According to Moody’s economists, Canadian house prices will fall 5.6% in 2012 and 1.03% in 2013 (Source 3) – to which I totally agree with. When the interest rates will rise, the prices of the housing will decrease. In my next post, I will mentioned more reasons to support my predictions of the near future.

Sources
(Source 1): Bank of Canada Website.
(Source 2): ‘Royal, TD raising mortgage rates in reversal of recent trend at Canadian banks’ by The Canadian Press, March 26th, 2012.
(Source 3): ‘Moody’s puts odds on soft landing for Canadian housing market’ by FP Street, March 23, 2012.

My opinions on the future housing market…

Housing Market is dependent on the following factors:

1. Interest Rate – Bank of Montreal raised its variable mortgage rate last Tuesday, followed by RBC, which did the same earlier in the day citing higher borrowing costs.
2. Housing affordability in Canada is doing great due to low interest rate. I believe end of 2012, either of two things will happen: the housing market will slow down significantly or will depreciate slowly. There is a chance that BOC will raise its interest rates, and then the housing prices will decrease. If it doesn’t, the housing market will depreciate slowly. I am glad I am in Toronto, because I believeVancouver’s housing market is the most stressed city in Canada and will face the highest risk if the housing market starts depreciating.
3. Household Income growth is dependent on Unemployment rate – As per Stats Can, Unemployment rate was declining, then stable two months ago, and is better this month primarily due to summer students working from May to August which eventually go back to school in September.
4. Market condition – Worsening since U.S.and European growth prospects are the primary issue, not only because of their direct impact on global GDP, but also because of the implications for other advanced and emerging economies.
5. Other factors: Gold plunged in New York, heading for the biggest drop in 18 months, on speculation that financial markets may be stabilizing.
6. Other factors: First-time buyers are decreasing due to tightening policy (i.e. borrowing rules) in 2011 and therefore trying to purchase now before it gets even tighter. This is probably one of the reasons; housing market is still doing great.
7. Just as things go up, it also goes down. The future prices will always remain uncertain, but according to my research, my assumption is, housing market will depreciate slowly by end of next year.

Keep in mind, this is just my opinion.