Bond Rates Rise! Fixed Rates to Jump

Bond Yields Jump Again The 5-year government bond rocketed to 2.71% today. Various lenders have already issued fresh new fixed rate increases. More may follow tomorrow if yields don’t retrace.

Two-year bond yields also broke to the upside. That may lead to upcoming rate increases on shorter-term mortgages, which have been insulated from rate hikes for several months.

 

If you’re shopping for a fixed mortgage, be safe and get your application in soon.

Interest Rates to Fall? Will the Bank Of Canada cut again? Will the major banks follow?

In todays Vancuover Sun Eric Beauchesne puts forth the idea that even with the plunge in energy prices and a rapidly destabilizing economy the Bank Of Canada will not wait to see the September inflation report issued by Stats Canada and cut rates a further quarter of a percent.

The outlook remains bleak for the economy, which has been hammered by the US Credit Crunch effectively cutting off Banks supply of funds. Later this week we are going to see the release of the key retail and wholesale data for the Canadian markets from August, and the effects of Auto Sales and large ticket items are going to felt.

 

It will be interesting to see if the major Canadian banks lower there key lending rates to match the pending Bank of Canada Rate change. As we saw earlier this month the banks were extremely hesitant to pass along all of the rate reduction to consumers and only did so after the Federal Government committed to purchasing 25 Billion in Mortgage related securities from CMHC and other institutions.

Here is the article from the Vancouver Sun,

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http://www.canada.com/vancouversun/news/business/story.html?id=7d420fda-c86b-4c0a-8a84-d4bc0d4abe24 

“The bottom line? Interest rates are coming down

Inflation not expected to pose an obstacle to cuts

Eric Beauchesne

Canwest News Service

Monday, October 20, 2008

 

With the plunge in energy prices and a rapidly weakening economy, inflation shouldn’t pose any obstacle to further interest-rate cuts this coming week, and for some time to come.

But the Bank of Canada won’t even wait to see the September inflation report, being issued by Statistics Canada, before cutting interest rates further Tuesday, according to analysts who expect another cut of at least a quarter point.

Despite a surprise half-point reduction earlier this month, in coordination with reductions by central banks around the world, markets are pricing in at least another quarter-point reduction Tuesday.

“The global financial crisis has taken its toll on the Canadian economy, justifying the need for more monetary stimulus,” Scotia Capital said Friday, noting that among other things “retail sales are now barely growing.”

The Bank of Canada will issue a brief statement on Tuesday explaining its interest-rate decision, which will be followed by a more detailed explanation and update of its economic forecasts in its Monetary Policy Report on Thursday and at a news conference by bank governor Mark Carney.

“Look for the Monetary Policy to noticeably downgrade the outlook for Canadian economic growth, and clip the inflation projection,” said BMO Capital Markets economist Douglas Porter.

Support for further rate cuts will likely also come from other domestic economic reports, including August wholesale sales today, and retail sales on Wednesday, both of which are expected to have been driven down by both weaker sales, especially for autos, as well as lower energy prices.

The bottom line is interest rates are coming down.

“Inflation concerns have been trumped by the credit crisis and enhanced risks of a global recession,” said CIBC economist Kirshen Rangasamy. “Declining energy prices should keep a lid on headline inflation over the rest of the year, and give the Bank of Canada ample room to provide further stimulus if necessary.”

Don’t bank on a quick retreat in inflation, however.

CIBC projects that prices edged up last month, leaving the inflation rate at 3.4 per cent, down only a notch from 3.5 per cent in August and still well above the Bank of Canada’s two-per-cent target.

“Gasoline prices continued to trend lower in September, albeit at a slower pace,” Rangasamy said, adding that downward pressure on inflation likely came from autos as well. “Those price declines should, however, be balanced out by higher prices for education, food and imported goods.”

Despite a dearth of U.S. economic reports in the coming week, the eyes of most analysts, here and elsewhere, will still be focused on the U.S. looking, hopefully, for signs of at least some stability in volatile and deeply depressed stock markets.

The only major U.S. economic report doesn’t come out until Friday, but it may contain a glimmer of hope, and from a surprising quarter: that country’s devastated housing market, the source of the whole financial and economic mess that the world now finds itself in.

Indications are that there may have been a moderate two-per-cent upturn in sales last month, noted BMO Capital Markets economist Sal Guatieri.

“The good news is that home sales appear to have stabilized this year after sliding deeply the previous two,” Guatieri said.

© The Vancouver Sun 2008

Canadian Mortgage Changes

“Mortgage changes followed concerns about housing crunch in Canada

by Julian Beltrame, The Canadian Press”

“OTTAWA – Concerns that cracks were beginning to appear in the foundations of Canada’s housing market were behind the government’s surprise decision to crack down on loose mortgage conditions ushered in less than two years earlier, officials and experts say.

Starting Oct. 15, Canadians will no longer be able to purchase a home with a government-backed mortgage with a 40-year amortization and no down payment.  

Instead, mortgages will be limited to 35 years and the government will only insure 95 per cent of the value of the home, meaning buyers will need to come up with at least a five per cent down payment. As well, borrowers must demonstrate that debt servicing costs are no more than 45 per cent of gross income and have a good credit rating.

But while most in the housing sector welcomed the announcement, they also questioned the timing. The Canadian housing sector is cooling after six torrid years of growth.

Bank of Montreal deputy chief economist Douglas Porter said the decision should have been made a year ago, when Canada’s housing market was likely exhibiting signs of a bubble as both prices and starts increased by double-digits over the previous year.

“It’s better a little late than never and better than ridiculously late,” Porter said.

“I think in hindsight, we can attributed a lot of the very strong conditions we saw right across the country in 2007 to the loosening up of rules in the prior year,” he explained. “At the time, I was a little concerned that the Canadian housing market just continued to thunder along last year when the fundamentals were starting to move against it.”

Liberal MP Garth Turner, who recently authored a book warning about a Canadian housing bust, suggested Canadians could expect to see the value of their homes fall about 15 per cent nationally, and 30 per cent in some hot markets such as Vancouver.

While praising Finance Minister Jim Flaherty for acting, Turner said the minister has also set up the conditions under which some Canadians will try to beat the Oct. 15 deadline.

“This pulls the plug right out of the bubble, but it does it in a way that inflates the bubble another few months,” he said.

“If you’ve been shopping around for a home and you don’t have any money for a down payment, you will want to buy now with zero down and a 40-year mortgage. If you’re a lender, you’ve got three months to load up people with debt regardless of what the debt-service ratio is.”

Ottawa said the changes were a precautionary measure designed to head off a U.S.-style subprime mortgage crisis, not an indication of underlying problems in the Canadian system.

But officials said concerns had been mounting for months as the government tracked the explosion in the issuing of mortgages longer than 25 years, for years the standard in Canada.

The government had been consulting with lenders, insurers and brokers for the past few months over generous mortgage products, said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals (CAAMP).

“I think they were worried about what was coming out of the U.S. in increases in defaults and foreclosures, and I think they were concerned over their 100 per cent guarantee, wondering, ‘What is our risk here in a calamity?’ ” Murphy said.”

Julian Beltrame, The Canadian Press

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b0710133A&page=2

I think that many folk’s are reading the headlines and forgetting to do a little more research, one of the biggest differences that can be plainly seen from the American counterparts is that the US was using 100 year Amortizations, yes you read that correctly 100 years. In the Vancouver market it is almost impossible for anyone to break into unless they have a substantial source of income, I don’t know of that many young people who have the kind of income to even consider home ownership in the Greater Vancouver Area.

I don’t foresee many being able to buy out there baby boomer parents either, and the parents need to pull the equity out of there homes in order to retire. “Nearly 3 out of 5 middle-class retirees will probably run out of money if they maintain their pre-retirement lifestyles, a new study from Ernst & Young www.ey.com has concluded.

The study, set to be released Monday, finds that Americans will have to drastically reduce their standard of living before retirement to live comfortably, or even avoid destitution, later in life. Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more – 37 percent.” http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/07/13/MN9511OD8S.DTL

More Canadians will continue to be increasingly dependent upon their nest egg that has been built by the equity of homeownership, how will the new generation afford to take over the burden of what have become million dollar mortgages?

Just as an example the amount of income required for a 850,000 home with 5% down over a 35 year term would be 185,535 per year, I don’t know of many people under 40 that are legitimately earning that kind of income—even combined income—a great deal of the Vancouver bubble has been created from offshore money and as of right now the amount of offshore influx is still over 50k people from oversees moving here every year!

What do you think, is the younger generation going to be able to sustain these prices??