Weekly Mortgage News for June 5, 2009

June 5, 2009

This weeks top stories includes a look at if the recession is easing, how Muskoka’s cottage elite are handling the downturn, how long economists predict it will take to come out of the recession, a reflection of the recession, how first time homebuyers helped boost the economy last month and how the Bank of Canada is keeping the overnight lending rate right where it is.

Is the recession easing?

Looking back at the first quarter of 2009 is gloomy at best. The Canadian economy contracted at a whopping 5.4%. Things are looking better for this quarter but the actual economic recovery and normalization is still a long way off. Although the contraction was less than the expected 6.7% contraction, this news cannot be taken as good news. BMO deputy chief economist, Douglas porter, projects that the economy will contract 2.4% in the second quarter. These statistics are proof that this recession is just as bad as the recession of the early 1990s. With business investments falling at it’s fastest rate since 1982 and corporate profits falling 24% compared to the previous quarter, it’s no surprise that Canada has not posted a single month of growth since last July. The real question in everyone’s minds is…. where/when is the end?

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Muskoka’s Cottage elite hit by recession

The Muskoka lakes area is the place to be in the summer if you are a well off individual in Toronto. With prices of cottages surpassing the $5 Million mark, you can see why I said well off. It looks like even the rich cannot escape this recession. This year there were four power-of-sales in the area for homes well over a million dollars. An example of this is a six-bedroom cottage, listed at $4.9 Million that sold for only $3.8 Million. The unusual amount of high-end listings is something not seen in this part of Ontario but with discretionary income being limited by everyone, cottages are typically the first thing to be discarded during a time of recession. Sales of all properties are down 30% in the area but Real Estate professionals are attributing this to the lack of nice weather on top of the recession. One thing is for sure, if you have the money and have been thinking of buying a cottage, now is the ideal time.

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TD says budget won’t be balanced in 4 years

Canada’s federal government projected that the budget will be balanced by 2014 but economists at TD state that it’s impossible without raising taxes or spending cuts. They went on to predict that the budget will likely remain in a deficit over the next five years. Finance Minister Jim Flaherty stated that the budget shortfall would be in excess of $50 Billion this year due to slowing revenue and costs associated to the auto industry bailout but hasn’t provided us with a more accurate number as of yet. With such a vague estimate Canada should prepare for the worst. How high do you think the deficit will get? Comment your thoughts below.

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A look at the recession

With the economy contracting at 5.4% in the first quarter, tied into the 3.7% drop in the fourth quarter of last year, we have fulfilled the term of recession. A recession is defined as two consecutive quarters of declining real Gross Domestic Product (GDP). Some economists are saying that the worst is over and others suggest that the turning point will be in the fourth quarter of this year. Signs are already pointing in that direction with easing in the credit market, a possible bottom in sight in the U.S meltdown and good rallies in the stock market since this March. Some go as far to state that we may even come out of the recession in the third quarter but this will be left up to a wild card labeled as the global backdrop. If other countries pull out of the recession and begin import and exports it could help the Canadian economy recover. The only thing that would hold us down at that point will be the surge in the Loonie. This will definitely hurt Canada’s demand for exports. Even if there is a recovery, Canada should still be prepared for the up and coming years of high unemployment.

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First Time Home Buyers help May sales

Sales of existing homes rose by 2% in Toronto for the month of May with the average home price being $395 609. It seems that resale home prices in the area are moving in line with last years levels due to tighter market conditions in the market this spring. First time home buyers are getting into the market due to greater affordability and low interest rates. Listings in May were down 27% compared to listing the same time last year but prices are still high compared to the seven consecutive years of decreases we watched during the last recession. CMHC forecasts that the average housing prices will fall 5% by the end of 2009 to $360 000. The decision most of my clients are making right now is do I buy and take the 5% loss on the property or do I wait until housing prices go down and pay the interest rate hike between now and then. What will you do? Comment below.

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Overnight lending rate staying right where it is

As expected the overnight lending rate is staying right where it is until mid 2010. The bank rate of 0.5% will also be staying where it is. This does not come as new news to anyone in the industry this week as there has been a significant gap in output that is expected to continue to grow through the third quarter of this year. This will, in turn, put downward pressure on inflation. Although there were many positives effects during this quarter, the quick rise in the Canadian dollar is on it’s way to offset all of them. The Bank of Canada feels that, “as a consequence of operating at the effective lower bound, the overall risks to its inflation projection remain tilted slightly to the downside”. The BoC also reiterated that we can expect the overnight lending rate to remain right where it is until the end of the second quarter of next year. This is all in a move to attempt to achieve the inflation target. What does this mean for you? Rates will likely stay in the vicinity of where they are. Although the 5, 7 and 10 year rates have shifted slightly upward, prime will be staying where it is for some time.

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