This week’s top stories include how the Royal Bank of Canada and TD Canada Trust led the way this week for interest rate raises, how the housing and jobs market are leading the rebound out of the recession, how the change in the global economy will create change for all countries, how one out of every five Canadians is struggling to meet their mortgage obligations, how the recent interest rate increases are expected to help cool off the hot real estate market, how the added pressure on bond yields finally caused interest rates to rise, how the economy expanded again in the month of January and how some Canadians are expecting the economy to worsen before it gets better.
RBC & TD raise rates
This week started off with news that Canada’s largest bank had raised interest rates on some of their fixed rate mortgage products. Canadians had been anxiously awaiting news from the Bank of Canada (BoC) of when we could see a shift in the variable rates so that we could find the best time to lock in. This time is on the verge of passing now as 5 year fixed rates saw an increase of 0.6% or 60 Basis Points (Bps). The three year fixed rates also saw a rise of roughly 0.2% or 20 Bps with the four year fixed seeing an increase of 40 Bps. RBC’s 3 year fixed mortgage rate is now 4.35%, the 4 year fixed mortgage rate is now 5.34% and the 5 year fixed mortgage rate is now 5.85%. TD bank also followed suit just hours behind RBC.
Jobs & housing lead rebound
The Canadian economy is gaining traction faster than expected with hiring, home building and auto sales surpassing most analysts’ forecasts. The past few weeks have shown better than expected numbers on almost each economic front.
Housing starts, job creation and automotive sales have beat all expectations over the past month and Canada’s trade surplus saw it’s best level in the past year during the month of January. The government also stated that it had recorded its smallest monthly deficit in more than a year during the month of January.
An example of this strength can be shown through General Motors. This company was on the verge of bankruptcy last year and now they have just announced plans to hire more workers and boost production across Canada to try and keep up with the demand for some of its models.
With the U.S economy slowly recovering, Canada keeps moving ahead without a look back. Douglas Porter, deputy chief economist at BMO stated, “Indicators here have been on the fast track almost since the first day of March. The domestic side of the economy has come flaring back almost to where it was before the recession began. Canada’s economy is still closely tied to the U.S. but the difference between each country’s domestic recoveries has been unexpected. It has been a surprise at how much Canada has been able to diverge from the U.S.”
The road ahead for 2010 is now looking clearer than before and Canada is on the verge of moving from a recovery into an expansion period with two sectors leading the turnaround. The labour market and the housing market are really Canada’s strengths at this point. What do you think? Please comment below.
Global economy to create change
The Bank of Canada urged Canadian business owners to prepare for an increasingly competitive global economy. At a recent seminar that had senior deputy governor Paul Jenkins as a speaker, business owners were told that Canadian businesses must adapt to an environment where the emerging economies will be expanding at a rate that is two to three times faster than the rest of the developed world.
Over the next 10 years, emerging economies will make up 55% of the worlds economic output. This is up 10% from the 45% of the worlds economic output that is currently being made up from the same emerging economies. This is a good sign for Canada as Canadian products will be in more demand for those emerging economies. For the last decade, Canada’s productivity has been lagging when compared to other economies.
When compared to other countries, Canadian businesses are coming out of the recession with fairly healthy balance sheets. It is now up to the financial institutions to make more credit available to smaller firms that are looking to step up production and investments. What do you think? Please comment below.
Homes unaffordable for some
A new study that was released earlier this week shows that roughly 1 out of 5 Canadians are struggling to afford their mortgages and that national productivity is suffering as a result of this problem. The report released by the Conference Board of Canada this week also outlines that 75% of Canadians are living in homes that they can afford but 5% are living in government subsidized homes.
The board stated that this leaves roughly 20% of Canadians in homes that they are struggling to make ends meet with. They also stated that this causes these Canadians to sacrifice key expenses such as nutritious foods, which adversely effects the health of these Canadians and lowers productivity. Housing is deemed unaffordable if it eats up more than 30% of a family’s pre-tax income. Do you know anyone that is in this position? Please comment below.
Rate increases will cool market
The housing market, that has been on a red hot streak this year, is expected to cool over the next few months as job numbers keep moving upwards. Interest rates are known to stay low if unemployment remains high. Once jobless numbers start to drop, mortgage rates typically make a move upwards. This will cause the real estate market to face some resistance moving forward.
Home prices will also be effected as strong increases in prices have been continuing for an extended period of time without just cause. Home prices are expected to level off this year and hold current values for at least the next two years. Monday was the day of reckoning for consumers as the Royal Bank of Canada and Toronto Dominion Bank both raised interest rates on their fixed rate mortgages.
The strength in our economic recovery is at the bottom of this. Strong numbers have removed the need for the Bank of Canada to keep the bank rate at the current historical low levels that we are taking advantage of. The outlook for the next year is that the variable rate will shift upward from 2.25% to 4% by next summer. Five year fixed rate mortgages are expected to be in the 7% range by next summer.
Average prices for resale homes across Canada have doubled over the last 10 years with little or no reason to justify the increases. If there was a shortage of available listings, rents should have increased across the board as well, which they didn’t. Does this mean that we will suffer a melt down like the one seen in the U.S.? That is highly unlikely as borrowers in Canada can’t just walk away from their debts.
The majority of high risk mortgages in Canada are insured against default through a government owned corporation called the Canada Mortgage and Housing Corporation. This should help prevent any meltdown from taking place on this side of the border but what do you think? Please comment below.
Pressure on bond yields raises rates
Late this week, the Bank of Nova Scotia joined the rest of the major pillar banks in announcing an increase in their fixed mortgage rates. Scotia raised its 5 year fixed rate mortgage by 60 Basis Points (Bps) to 5.85%. This was in line with CIBC and National Bank, which raised their rates on Tuesday and was also in line with TD Bank and Royal Bank, which raised their rates on Monday.
The new rates took effect on Wednesday of this week. Senior economist Benjamin Tal, with CIBC world markets, commented on Monday by saying, “This is actually a fairly large increase reflecting what’s happening in the bond market lately.” He also stated that there is anticipation for the Bank of Canada (BoC) to raise the overnight lending rate before the scheduled date that the BoC had previously given. This in turn, is pushing up bond yields and rising yields are putting pressure on fixed mortgage rates.
Economy expands again
Canada’s economic recovery is shocking analysts as January was another month where the recovery expanded more than previously anticipated. January’s gains were led by the construction, wholesale and manufacturing sectors as reported by Statistics Canada. Gross domestic product (GDP) grew 0.6% in the month of January, which was the fifth consecutive monthly increase on record.
The agency did revise its December GDP reading from 0.6% down to 0.5%. Economists had previously predicted GDP to increase 0.5% in the month of January. Chief economist at BMO Capital Markets, Doug Porter, commented by saying the the January numbers are unambiguously strong results with GDP now increased to a 6.9% annual pace between the November and January period.
The manufacturing sector expanded by 1.9% in the month of January after posting a 1.2% increase the month before. The construction sector also saw growth in the month of January rising by 1.7%. Wholesale activity also expanded by 2.9% with increases in almost all of its trade groups. February’s GDP numbers are already looking like winning numbers as GDP continues to expand. Do you think we will break January’s growth numbers? Please comment below.
Some expect economy to worsen
According to a new survey by RBC, 20% of those surveyed feel that the economy will take a downturn over the next 12 months. One out of five people surveyed in the month of March expect the economy to worsen, which is 7% higher than those that felt the same in February. The survey of over 1000 people showed that Canadians remain mixed about the state of the economy.
54% of Canadians feel that our economy is in good health and 46% believe that we are still in a downturn. The RBC Canadian Consumer Outlook Index remained almost the same at 108 points, down 1 point from February. The survey also showed that plenty of Canadians are anxious about job losses with 22% of those surveyed stating concern over layoffs or losses. That number is down 3% from the previous month.
33% of Canadians feel that their financial position will become brighter over the next three months, which is up 3% from the previous month. 44% of Canadians feel that their personal economic situations will change for the better over the course of the next year.
RBC chief economist Craig Wright commented by saying, “With solid consumer spending, historically low interest rates and improved credit markets, an economic recovery is under way. However, Canadians may be worried about impending interest rate hikes and the strength of the Canadian dollar, which may be responsible for the slight drop in the Index and their weakening expectations of economic performance in both the short and long term.”
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