Weekly Mortgage News for July 31, 2009

This weeks top stories include how the Bank of Canada governor Mark Carney stated that the rates will rise, how the Bank of Canada may break their interest rate promise, how Flaherty warns more to come as EI claims peak and how Toronto housing values increased the highest in Beach homes as well as changes in home values for the rest of the GTA.

Rates to rise says Carney

Bank of Canada (BoC) Governor Mark Carney announced that low interest rates will not last forever and that Canadians should be prepared for the day when borrowing costs will rise to normal levels. This advice was given when the BoC’s Monetary Policy Report was released and predicted that the current recession would come to an end this quarter. The economic recovery is just beginning but is still subject to plenty of risks. The stimulus packages are already on their way to helping the economy get back on track but the bank reiterated it’s commitment to keep the key interest rate at 0.25% until June 2010. Carney went on to announce that the return to economic growth would not stop the painful layoffs in the job market. This leaves economists wondering how long the BoC can keep the banks lending rate at the record low that it’s at now. Carney’s promise to keep the rate at the historical low is a conditional commitment and not guaranteed. If growth comes in stronger than predicted, rates could be on the incline before the June 2010 date that was announced. Firmer commodity prices, recovering consumer confidence and improved financial conditions are being factored into the current recovery and improved confidence leads to a better economy, which will lead to further improvements in confidence when it comes to the financial markets. Bond yields soared earlier this year as the market expected a quick global recovery. The jump in yields led to two large hikes in mortgage rates in the month of June. With the central bank forecasting economic growth of 1.3% in the third quarter this leaves economists predicting that the end of the recession is imminent. The economy is expected to contract by 2.3% this year with a growth of 3% in 2010 and a growth of 3.5% in 2011. Inflation is expected to stay where it is for the meantime but there is no telling where it will be next year this time. Keep an eye on the rates if you are in a variable rate mortgage.

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Bank of Canada may break interest rate promise

As the dollar hit a 10 month high this Monday there were rising expectations that inflation might force the Bank of Canada (BoC) to break its promise to keep interest rates where they are until mid 2010. Yanick Desnoyers, assistant chief economist at National Bank Financial states, “The day when the condition for the Banks low rate commitment is no longer met will probably come before June 2010.” The overnight lending rate had initially been lowered to 0.25% to limit the damage of the financial crisis and the recession. Yanick also said that the rate was too low relative to core inflation, which was at 1.9% in June and just one basis point below the BoC’s target rate. An outlook for higher interest rates has helped fuel the Canadian dollar which has increased by roughly 8% since the beginning of July. The dollar has also gained strength against the greenback as many are concerned that the U.S stimulus efforts will leave a problematic debt hangover for the country. With the BoC recently announcing that the recession is likely over, focus has shifted to when interest rates will rise. The Canadian recovery, aided mainly through government stimulus, is set to push up inflation faster than expected. This will cause the BoC to raise the benchmark policy rate before the stated June 2010 commitment. The BoC stated earlier that it would keep interest rates on hold until June 2010 and then recently changed their position stating that it would be conditional on the outlook for inflation. The largest factor weighing in on interest rate increases at the moment was the recent raise in bond yields in the last few weeks that are reflecting a 90% chance of an interest rate hike in the next nine months. Some economists feel that the BoC will keep the overnight lending rate where it currently is until the June 2010 date and then embark on an aggressive tightening thereafter. The BoC’s final decision will depend on the actual speed of our economic recovery but there are numerous mitigating factors to take in to account. The BoC may even be forced to push up the lending rate, and sooner, if the recovery takes on a greater scope moving forward. This is a large possibility as the recovery could easily be on track to outpace expectations as consumer spending picks up, businesses rebuild inventories and fiscal stimulus kicks in.

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Flaherty warns more to come as EI claims peak

The number of Canadians receiving EI benefits rose to its highest point in 12 years in the month of May. Job losses were pushed up by Ontario’s slowing manufacturing sector and weak gas and oil prices in Alberta. The number of EI payments also rose by 65 600 to a whopping total of 778 650 in May. This was an increase of 9.2% from the month of April. It is the highest level ever seen since the inception of the data tracking program by Statistics Canada in 1997. Economists state that it is not unusual for unemployment to keep rising, even after an economy comes out of a recession. With businesses still cutting costs to cope with lower profits and revenues, companies are reluctant to add to their staff until consumers are spending again and existing inventories are sold. Jim Flaherty says, “I think we have to be careful. We have to continue with the stimulus to the economy to avoid the danger of some slowness recurring.” He went on to warn that the number of Canadians receiving regular EI benefits would likely rise in the coming months. Alberta saw an increase of 16.8% in the number of EI benefits being claimed, up 57 000 in May from the month of April. Ontario saw an increase of 16% to 274 100 with southwestern Ontario being the hardest hit due to losses in the manufacturing sector. Claims more than tripled in Guelph, Windsor and Leamington from May of 2008 to May 2009. Toronto even felt the brunt of the recession with EI recipients doubling from last years number of 46 200 to the current number in May of 96 100. There are positive signs for the economy though with house prices rising, along with consumer and business confidence. Last year Alberta had such a tight labour pool that businesses were recruiting from overseas and across Canada in a mode of desperation and panick. An abrupt end came to this once Canada fell into the economic turmoil it is trying to find its way out of now. Erin Weir, economist for the United Steelworkers, recently released a report in which she states, “Despite signs of a nascent recovery of economic output, the figures indicate that Canada’s job market will remain grim for some time to come.” What do you think of our current dilemma and when do you think we will come out of the recession and see growth in our job market? Please comment below.

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Toronto housing value increases the highest in Beach homes

Interest from buyers showed the greatest amount in the Beaches where the highest price appreciation in the Toronto area was placed. A study released this week from ReMax Ontario Atlantic Canada looked at the top performing areas according to price appreciation. Detached homes in the Beach had the best return on investment in the Greater Toronto Area. The average price of Beach homes increased by 3.9% to $715 422 in the first half of 2009 when compared to the same time last year. The Beach is considered a hot, intense market where there is not a lot of turnover. Following the Beach was Pickering where prices climbed 3.72% to $389 536 when compared to the first half of 2008. Willowdale followed with a detached home raising in value to $779 537 up 3.32%. The Downsview and Weston area also showed an increase in the report up 2.25% to $384 485 while the Rouge and Malvern areas in Scarborough showed a 1.99% increase to $345 468. The condominium sector showed that resale’s had the greatest incline in pricing when looking at the affordable segment of condos. Condo’s in Guildwood and Cliffcrest led the way with the average resale price up to $175 855 which was a significant rise of 6.45%. With numbers like this, it’s hard to believe that there were declines on the market but there were and they were substantial. Mississauga’s Lorne Park-Sheridan area saw a decrease in value of 16% over a period of six months to $683 568 when compared to the same period last year. Second on the decline list is the south Scarborough Oakridge and Birch Cliff areas where home prices fell 13.6% to $715 422. When looking at an overall picture, prices of existing detached homes and condos in the Greater Toronto Area increased by 2% in the first six months of 2009 despite the recession. Despite the current gains in the real estate market, some analysts feel that prices could go lower by the end of the year. This is based on the fact that the flow of listings are still down by 17% implying that move up buyers are still reluctant to get into the market. Analysts are suggesting that the major contributing factor to the surge in home buying is that first time home buyers are taking advantage of lower mortgage rates before they expire. What do you think? Please comment below.

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