This weeks top stories include how Mondays U.S manufacturing report beat the expectations set for it, how interest rates are set to rise, how surveys showed that consumers have a brighter outlook for 2010, how Toronto’s 2009 existing home sales numbers crushed the numbers seen in 2008, how the housing market is expected to remain strong for the beginning of 2010 and level off in the middle of the year and how Canada’s growth is set to move at a snails pace.
Report raises outlook
This Monday’s U.S manufacturing index report surpassed expectations, which has raised hopes that the U.S economy is back on the right path. The positive economic news out of the U.S is a strong sign that Canada’s largest trading partner is improving and that we will soon see the effects here in the Canadian economy. Although there are no direct links to our economy, this is definitely an encouraging sign that there will be added support to our own economic recovery.
If the U.S manufacturing sector is recovering and stabilizing then it will definitely aid our recovery in the process. The one concern is that the recovery in the sector may not be broad enough as fewer industries in the sector reported growth in the month of December than the previous months. Only half the industries in the sector actually reported growth and can be taken as a positive or a negative depending on how you view it.
This does not mean that demand for Canadian products will automatically increase but if domestic spending south of the border strengthens, this usually implies more demand for Canadian exports. Consumer spending is also up which will help with exports as well. Canada currently lacks a broad index to gauge the current health of the manufacturing sector.
Economists have spotted signs of growth for our countries manufacturing sector with the November report showing a small gain in manufacturing jobs. Manufacturers in Canada have been hit hard with the rising dollar taking its toll making exports more expensive to U.S consumers. The dollar will continue to hinder Canada’s growth and continue to be an issue in the up and coming months.
Interest rates to rise
Again and again we are seeing more and more articles stating that interest rates are set to rise. The most recent article says that consumers have roughly six to nine months to get their personal plans together to deal with higher interest rates. It also stated that the prime rate will double from 2.25% today to 4.5% by the end of 2011. Here are some ways to prepare for the rise in interest rates.
Step 1 – Lock down your mortgage
If you are currently looking for a mortgage consider insulating yourself against the rising interest rates by taking a five year fixed rate mortgage. Five year terms start around 3.99% for good product mortgages while the major banks best five year rates start at 4.19%. If you think that you will save more in the long run with a variable rate mortgage, which has been true 82% of the time historically, you are wrong. Today’s five year fixed rates are extremely low in historical standards. The Bank of Canada (BoC) shows that the average five year rate over the past decade was 6.8%. Seven and ten year mortgage rates are currently as low as 5.3%. If you plan on staying in your home for a longer period of time, this may be your best savings option.
Step 2 – Be prepared to face the music
If your mortgage is coming up for renewal in the next few years, be prepared for higher interest rates. In our industry this is called rate shock. If you are nailed with a higher interest rate, be prepared to adjust your budget to make ends meet, as higher mortgage payments will apply. You can also begin to reduce your non mortgage debt now so that you can accommodate the higher rate of mortgage interest in the future. In case of emergency you can also extend your mortgage amortization from 25 years to as much as 35 years if required. For those that have already done this or are on a 35 year term, your options are limited.
Step 3 – No more bonds
Bond funds were the way to go when fearing the worst of the bear market but they are quite vulnerable now due to rising interest rates. In the month of December the largest bond mutual and exchange traded funds in the country were down from 1% to 1.6%. If the interest rates moved up gradually, then gains in bonds will be hard to come by. If rates spiked higher then bond funds would become big money losers.
Consider guaranteed investment certificates as an alternative, especially those from the credit unions and smaller banks. Returns are typically in the range of 1% to 2% for a one year term. Balanced funds are also good as they mix stocks and bonds together to hedge risk.
Step 4 – Get on the saving bandwagon
Rising interest rates provide better returns for those who save money as well as for conservative investors who rely on GIC’s and high interest savings accounts. Accounts that pay 1% to 2% in interest will automatically start paying more once interest rates begin to rise. Beneficiaries will be the people who have used higher interest products for their tax free savings accounts.
If taking the GIC route, you will want to have money maturing later this year and in 2011 to capitalize on the higher interest rates. The best strategy is to invest equal amounts in GIC’s with maturities of one through five years as this approach means you will have money available to reinvest every year.
People feel there’s a brighter 2010
More than 3 out of 4 Canadians still feel that we are currently in a recession with more than half believing that the economy will turn around this year according to a poll conducted by the Economic Club of Canada and Pollara Strategic Research on Wednesday of this week. The survey outlined that 54% of those polled expected to see an improvement in the Canadian economy in 2010 compared to only 20% that thought 2009 would be the year of improvement. 14% of Canadians feel that the economy will see a downturn this year compared to the 57% that the same last year.
While the statistical change seems large, we saw extremely low numbers in consumer confidence last year. Although 78% of Canadians feel that we are currently still in a recession that is still a significant drop from the 91% that felt this way last year this time. Consumer confidence had hit a 27 year low in December of 2008 with the Consumer Confidence Index hitting 66.7 which was the lowest number seen since the 1981 to 1982 recession.
Employment confidence has also increased with 43% of consumers now saying that they believe the employment situation is getting better which is a large increase from the 12% that felt the employment situation would improve the same time last year. 22% of Canadians felt that the employment situation would get worse before it could get better which is down from the 68% that felt it would worsen last year.
The results of this poll were a good reflection of the RBC Canadian Consumer Outlook Index, which stated that 60% of those polled feel that the Canadian economy would improve this year and only 17% saying that it would get worse before it could get better. The results of Pollara’s survey were collected from 4263 respondents from December 6th to December 14th.
Toronto’s 2009 existing sales beat out 2008
Existing home sales in Toronto surpassed the 2008 numbers by 17% according to the Toronto Real Estate Board (TREB). TREB reported sales of 87 308 in 2009 which surpassed the old record set in 2008 of 74 552 sales. Economists had previously forecasted a significant drop in sales for 2009 but were proven wrong as the low interest rate environment did its part to help the housing market bounce back with a strong finish.
The average price of a home was also up to $395 460 in 2009, which was an increase of 4%. Although market conditions became very tight in the latter part of 2009, sales climbed strongly in comparison to the number of homes listed for sale. This resulted in an increase in home prices which have more than offset average price declines during the winter period where sales in the month were up by 115% to reach 5 541 from the same time during previous year.
Active listings in the month of December were down by 47% when compared to the same time last year and this helped to keep the prices above last years prices. This also helped to move homes quickly off the market with the average time to sell a property only being 27 days. In December of 2008 the average time it took to sell a home was 45 days. Sale prices of homes in Toronto averaged $441 607 last year and sale prices of homes in the 905 area averaged $389 205.
Housing to remain strong
Royal LePage’s leading real estate broker stated yesterday that Canada’s housing sector will remain strong in the first half of this year and then go towards a more balanced market for the remainder of the year as improving economic conditions and low interest rates will help demand into 2010. The expectation is that the housing market will begin to cool off later in the year when we begin to see heavy rises in interest rates.
The housing market came to an almost standstill in 2008 at the start of our economic downturn when consumer confidence reached lows not seen since our last recession. Since then we have seen the market recover drastically as improved consumer confidence mixed with improved affordability helped bring the market back on its feet. The only concern now is whether or not we will experience a housing bubble due to the overheated market that we have created.
Royal LePage president Phil Soper commented by saying, “Our forecast is built upon an expectation that interest rates will ease upward before the year’s end, which should have a dampening effect on demand, allowing it to come into balance with the supply of resale homes on the market.” The fourth quarter saw home prices continuing to rise and press forward from momentum built in the third quarter of last year. How do you think we will fare in 2010? Please comment below.
Slow growth expected
The new challenge facing Canadians today is not the country slipping back into a recession but that the country will have a hard time adjusting to slower growth in the future. Craig Wright, a Royal Bank economist said, “We’re going into a slower rate of growth. It’s not as much fun to grow at 2% or 2.5% as to grow at 4% or 5%.
Some of the factors that will determine how quickly we will see our economy expand in the coming years are the aging population, reduced consumer demand and higher debt levels due to rising interest rates. The result will be temperate gains in the stock market, employment and wages. This will be a significant change from the strong gains seen over the past decade and will definitely take some getting used to.
The U.S economic recovery will be well below standards for most people due to higher unemployment rates as the economy currently remains on life support. Canada should begin to look to expanding markets like China, South America and India, as well as other developing world markets, for an added boost from countries where growth is much stronger. Government across the world are left with figuring out how to pull back the massive amounts of stimulus that they have injected into their economies. If they withdraw this too fast, we will damage our recovery. If they withdraw too slowly, inflation could creep up and take its toll. What do you think? Please comment below.
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