Good news for homeowners and buyers as the Bank of Canada has just announced that it will hold its key interest rate steady but sounded a touch more dovish in its outlook, saying the risks of undesirably weak inflation appeared greater than they did six weeks ago.

The central bank stunned markets in October by abandoning 18 months of signaling that rate hikes were on the horizon. But it made clear at the time it was just as likely to raise rates as to lower them as it was caught between excessive household debt on one hand and below-target inflation on the other.

The bank’s statement today showed it was now increasingly concerned about possible disinflation after the inflation rate dropped to 0.7 percent in October. It added, however, that the balance of risks remained within the range of possible scenarios it identified in October.

“The risks associated with elevated household imbalances have not materially changed, while the downside risks to inflation appear to be greater,” it said.

“Weighing these considerations, the bank judges that the substantial monetary policy stimulus currently in place remains appropriate …,” it said.

The Canadian dollar briefly weakened after the statement to C$1.0689 to the U.S. dollar, compared with C$1.0663 an hour earlier.

The bank has kept its overnight rate target at 1 percent since September 2010, following three successive hikes that year as Canada pulled out of a relatively mild recession.

None of 32 analysts polled by Reuters last week had expected any rate move on Wednesday, but many market players were nonetheless bracing for the possibility that the bank would somehow introduce more dovish language without signaling actual rate cuts.

The median forecast in that poll was for the bank to start raising rates in the second quarter of 2015.

Source: Reuters

The short answer is ‘not yet’.

Just announced today is that the Bank of Canada is holding its main interest rate at one per cent, where it has been since September 2010.

Economists widely expect the central bank to hold its trendsetting rate steady well into next year, so Wednesday’s announcement came as no surprise.

“The bank did precisely what was expected of them today: nothing,” BMO Capital Markets chief economist Doug Porter said in a note to investors.

“If anything, the tone of the statement was slightly more dovish, noting the more moderate global backdrop, less certainty on the output gap and still relatively relaxed on the household debt front.

“The bottom line is that we are still looking at a very long period of inactivity by the bank, and may well be talking about four years of unchanged rates a year from now.”

That wait-and-see approach would appear to suit Bank of Canada governor Stephen Poloz just fine. He has been on the job since early June and shows no sign of breaking from the monetary policies of his predecessor, Mark Carney, who took up a new post this summer as head of the Bank of England.

“Add it all up and this is a central bank that believes that growth will pick up in 2014 and that will eventually require higher rates, but which is happy to sit on the sidelines and wait for substantial proof such an acceleration is underway before raising rates,” CIBC World Markets economist Avery Shenfeld said in an investors’ note.

“We still look for the first hike in early 2015, with some risk of a move late in 2014 if there are upside surprises to our forecast.”

In the explanatory note to Wednesday’s announcement, the Bank of Canada said it intends no changes as long as considerable slack remains in the economy, inflation remains muted and household finances continue to improve.

Sluggish exports and business investment have slowed the country’s economic growth, the bank said.

“Uncertain global economic conditions appear to be delaying the anticipated rotation of demand in Canada towards exports and investment.”

To underscore that point, new figures Wednesday from Statistics Canada showed the country’s exports fell to $39.2 billion in July, down 0.6 per cent from the month before.

At the same time, imports grew slightly, to push the country’s merchandise trade deficit with the world to $931 million in July from $460 million in June.

Meanwhile, the Bank of Canada noted the housing sector has been slightly stronger than anticipated, while household credit has continued to slow and mortgage interest rates are higher, the bank added, all of which point to “a continued constructive evolution of household imbalances.”

The bank also said the global economy has less momentum than anticipated.

“In Europe, there are early signs of a recovery and Japan’s situation remains promising,” it said.

“In a number of emerging market economies, financial volatility has increased, adding uncertainty to growth prospects, although China continues to grow at a solid pace.”

While commodity prices have been relatively stable, the bank says geopolitical tensions — which presumably include the bloody conflict in Syria and the continued unrest in Egypt — are raising the global price of oil.

The bank took a slightly dimmer view than it has previously of short-term economic growth in the United States, said RBC assistant chief economist Dawn Desjardins.

“While today’s statement incorporated a slightly less optimistic view of the near-term outlook for U.S. growth and acknowledged that in turn, a firming in Canadian export and business investment was evolving slower than projected, the main thresholds required for the bank to start to reduce the amount of stimulus remained intact,” she wrote in an investors’ note.

The bank’s next rate announcement is scheduled for Oct. 23.

Source: Steve Rennie, The Canadian Press

Home buyers extended a trend of increasing sales into its fourth consecutive month, according to the Canadian Real Estate Association as mortgage rates also crept up last month.

However, economists suggested Monday the higher rates could help cool the market through the second half of the year.

“Interestingly, the recent move up in five-year fixed rates might have actually stoked sales activity in June, with buyers making their move before their lower rate contracts expired,” said Robert Kavcic, a senior economist at the Bank of Montreal.

“If so, that could set the stage for another cooling off period this summer.”

CREA reported home sales through its Multiple Listings Service were down 0.6 per cent from June 2012, but up 3.3 per cent from May.

Canada’s big banks have been raising rates for fixed mortgages in recent weeks as rates in the bond market have also climbed.

TD Bank economist Diana Petramala said she expects sales to slow down during the summer and fall, but noted they should remain at healthy levels.

“Conditions for housing demand are actually still quite good in most major markets, including good employment markets and decent affordability, with the exception of maybe Toronto and Vancouver,” Petramala said.

“Demographics are still quite supportive of sales roughly around the level that they currently are. So more of a stabilization going forward.”

Despite the drop in sales from June 2012, the national average sale price last month was up 4.8 per cent from a year ago, rising to $386,585.

CREA’s house price index, which adjusts for the difference in different property categories, was up 0.12 per cent from May and up 2.27 from a year ago.

The association said home sales improved in two-thirds of the markets it tracks compared with May with the biggest gains in Victoria, Vancouver, the Fraser Valley, Edmonton, Saskatoon, Winnipeg and Montreal.

When compared with a year ago, Toronto and Montreal were lower, while Vancouver, Calgary, and Edmonton were up compared with last June.

The number of newly-listed homes was down 0.5 per cent on a month-over-month basis in June.

Economists have suggested changes to rules for mortgage lenders and borrowers announced about a year ago have been a major factor behind a slowdown in Canadian residential real estate sales starting last August and continuing into early 2013.

CREA president Laura Leyser said “Whether those sale gains reflect temporary factors or a fundamental improvement after a slow start to the year really depends on where you are.”

The association said some 240,068 homes have sold in Canada through its MLS system so far this year, down 6.9 per cent from the first half of 2012.

Source: Alexandra Posadzki, Canadian Press

The spring housing market is expected to bring on a new battle from mortgage lenders as they compete for what has become a shrinking pie in the form of lower real estate sales.

Bank of Montreal struck first on Friday with a five-year closed mortgage rate of 2.99% — down from 3.09% and now the lowest published rate among the big banks — with sources indicating the financial institution’s mortgage specialists are armed with discretionary power to go as low as 2.89%.

As the banks battle it out for consumers skittish about jumping into what more than one analyst sees as an inflated housing market, lenders know their costs have dropped in the past few weeks. The Bank of Canada’s five-year bond rate is in the 1.3% range after being almost at 1.6% at the end of January.

“Perhaps there is pressure to lower rates,” said Gregory Klump, chief economist with the Canadian Real Estate Association, about banks trying to capture customers in a slowing market. “It remains to be seen how much [the real estate market] is going to slow.”

While some predict a collapse in the housing market, so far prices have remained firm and sales have dipped only in the single-digit range from a year ago.

CREA said last month that January prices were up 2% year-over-year, while sales were down 5.2% during the same period. On a seasonally adjusted basis, sales actually climbed 1.3% from December to January.

It’s unclear whether a new round of mortgage rate cuts will have an impact on consumers already used to a prime rate of 3% and long-term mortgage rates even below that.

“I don’t think low rates change their mind on whether they are going to buy or not,” Mr. Klump said. “What it does change is how much property they can afford. The most important thing at this point in the cycle is how confident consumers are of economic prospects going forward.”

Source: Garry Marr, Financial Post

The Bank of Canada is keeping its trendsetting interest rate anchored at one per cent for the remainder of the year and sending a message that it still believes the cost of borrowing in Canada will go up at some point in the future.

The decision by the central bank’s policy setting panel was in line with the expectations of markets and economists, who had given only low odds to governor Mark Carney removing a mild bias towards raising rates sometime.

Canada’s dollar gained strength after the announcement. It was up 0.19 of a cent to 100.7 cents US — slightly higher than just prior to the central bank’s announcement.

The bank’s statement Tuesday suggests it is looking through the disappointing third quarter result as a temporary aberration.

Last week, Statistics Canada reported the country’s gross domestic product output had slowed to 0.6 per cent — about half what the bank had predicted in October, and the weakest result in more than a year.

The bank’s statement Tuesday said that “economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector” — referring to some maintenance shutdowns.

“Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013. The expansion is expected to be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.”

Tying improved conditions to 2013 suggests governor Carney, who has announced his intention to step down in June to take charge of the Bank of England, now realizes the economy is unlikely to live up to his 2.5 per cent hopes in the current fourth quarter as well.

In a bit of a surprise, Carney says he is not as yet convinced the recent cooling in housing activity in Canada, and slowdown in credit accumulation, represents a fundamental shift.

On Monday, Finance Minister Jim Flaherty said he was pleased housing was moderating and that Canadians were starting to pay off debt, a shift in the credit and mortgage market he attributed in part to his decision to tighten borrowing rules in July.

Carney says, however: “It is too early … to determine whether the moderation in housing activity and credit will be sustained.”

That is likely because the bank expects to keep interest rates, and as a result borrowing costs, at historic lows for likely another year.

Part of what has Carney in a holding pattern, both in terms of rates and his language, is that he does not know the outcome of the so-called fiscal cliff negotiations in Washington. Canadian policy-makers say if no deal is reached in the next month to extend tax cuts and program spending, the U.S. economy could take a battering amounting to about four percentage GDP points next year, sufficient to send it and likely Canada back into recession.

As it is, Carney said the uncertainty over whether Washington will be able to avoid figuratively going over the cliff is already impacting the economy.

Otherwise, not much has changed in the past month or so, the bank says. Europe is still in recession, the U.S. is recovering but at a gradual pace and Chinese growth appears to be stabilizing. If there is good news for Canada in all this, it’s that commodity prices have remained elevated, which helps the country’s terms of trade.

For many economists, those conditions might warrant the central bank jettisoning its pretence that it will raise rates “over time,” and acknowledge a rate cut may equally be in the offing in the next year or so.

But Bank of Montreal economist Doug Porter said in a note Tuesday morning that Carney will want to await the results of the fiscal cliff talks in Washington, and is holding his fire — if he has any to shoot — until the announcement date on Jan. 23 when he knows better the situation.

Tuesday’s decision was the 18th consecutive time Carney has kept the policy rate at one per cent, comprising over two years, the longest stretch of stability since the 1950s.

Source: Julian Beltrame, The Canadian Press

Bank of Canada governor Mark Carney is suggesting interest rates will likely rise before the end of 2014.

It’s one of the clearest indications Carney has given as to when he might raise the bank’s key benchmark, which has been held at one per cent for more than two years.

Responding to a question in the Commons finance committee Tuesday afternoon, the bank governor said the bank’s current thinking was that monetary policy will need to be tightened before 2015.

Last week, Carney inserted the phrase “over time” to give markets guidance on when the bank’s trendsetting rate might be increased. Tuesday’s response was somewhat more detailed, but still pointed to no immediate plans.

“We have in this projection … some modest withdrawal of monetary policy stimulus over the course of the projection, which runs until the end of 2014,” he said. “In other words in advance of 2015.”

Carney added that whenever he does move, it will be when global and domestic factors dictate. And he reiterated his recent guidance that he will also take into account household debt in his decision.

At the moment, he said the country still needs super-low interest rates to stimulate the economy and create jobs.

Canada may have recovered all the jobs it lost in the recession, and added an additional 380,000, he said, but the economy still has a way to go before returning to what would be considered full employment.

“We are in still in position where there are more Canadians who want to work than are working, and the level of involuntary part-time (workers) is still elevated,” he explained.

“They illustrate a degree of slack that still exist in the labour market, which is one reason our monetary policy continues to be and should be accommodative.”

Most private sector economists have pencilled in late 2013 or early 2014 for the first bank action.

The bank governor was appearing before the committee to explain his latest economic outlook released last week that projected growth of 2.2 per cent for this year, followed by a 2.3 per cent advance in 2013 and 2.4 in 2014.

That is slightly more optimistic than the economists’ consensus estimate handed to Finance Minister Jim Flaherty on Monday for the government’s fall update projections, which will be released in a few weeks.

Carney continued to blame global factors for most of the drag on the economy. But he said government restraint is also contributing to slower growth, although not as much as some have suggested.

He estimated the public sector will contribute about 0.3 percentage points to growth in 2013 and 2014. That’s about half the historic level and well down from when Ottawa and provincial governments were pumping billions into the economy during the 2008-09 recession and early stages of the recovery.

“So it’s positive but not as much as previously,” he said. Government restraint was a modest 0.2 percentage point constraint in 2012, however, the bank report shows.

Carney even ventured to assess the economic impact of the destruction caused by superstorm Sandy, which early estimates put at $20 billion.

While the economy will take a hit immediately, over the long term needed reconstruction in the eastern U.S. states will largely recoup the losses.

“There are activities that can never be redone, for instance a visit to a restaurant. Then there is restructuring (which creates economic activity). In general, it tends to be a relatively negligible impact over time,” he said.

Source: Julian Beltrame, Canadian Press

The Toronto and Vancouver housing markets have cooled rapidly in the wake of Ottawa’s latest bid to stop a bubble, with many first-time buyers knocked out of the running.

Finance Minister Jim Flaherty put the July 9th changes into effect to curb growing mortgage debt levels and take some steam out of house prices. Among other things, the new rules cut the maximum length of insured mortgages to 25 years from 30.

The changes have sparked a debate in Canada. Some industry players and economists worry that the impact will be so widespread and long-lasting that they want Mr. Flaherty to consider rolling some of them back. But with prices that some still deem overvalued and new fears over consumer debt, others say the changes aren’t enough and must be followed by a hike in rates.

Among the latter is Toronto-Dominion Bank chief economist Craig Alexander, who estimates that national home prices are 10 to 15 per cent too high.

He released a report last Thursday predicting the July changes will shave three percentage points off prices and five points off sales by next year.

“Our models suggest that had the government not tightened lending mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160 per cent this year – the level that households in the U.S. and U.K reached before sending their economies and housing markets into a tailspin,” Mr. Alexander wrote.

While debt burdens are lower than they would have been, they’re still at troubling levels. Moody’s Analytics said in a separate report that economic headwinds will increasingly cause consumers to struggle with their debt loads over the next few years.

And although the mortgage insurance rule changes have curbed house sales and debt levels somewhat, the impact on prices has been relatively fleeting, Mr. Alexander said. Without rate increases, consumers still have a strong incentive to take out large mortgages, fuelling overvalued prices, he argues.

The impact of the changes is predominantly being felt by first-time home buyers because they are typically the ones who require mortgage insurance. Insurance is mandatory in Canada for borrowers who have a down payment of less than 20 per cent, which has traditionally been about 35 to 40 per cent of the market.

Brian Hurley, the CEO of Genworth Canada, the second-largest mortgage insurer, said business slowed in August as a result of the rule changes. He would like Ottawa to revisit the rules later this year, and consider reversing some of the changes.

“These are pretty dramatic changes, and I think they’re getting close to the tipping point,” he said in a recent interview. “We see really qualified first-time home buyers with very high credit scores now not meeting the bar because they can’t afford a 25-year amortization. These people should be getting a home.”

Eric Lascelles, chief economist at RBC Global Asset Management, approves of most of the rule changes, but said there is a risk that they are being overdone to compensate for ultra-low mortgage rates.

“I wonder if the drop from 30 to 25 years amortization might be regretted in a decade when interest rates have normalized and 25-year-olds are being told they cannot make mortgage payments past the age of 50, even though they expect to work until 65,” he said in an e-mail.

Traditionally, the banks have applied mortgage insurance rule changes to all mortgages – even those with large down payments that don’t require insurance. But that hasn’t been the case this time, Mr. Alexander said.

“The banks are basically not applying the 25-year limit to the non-high-ratio mortgages,” he said in an interview. “That’s one of the reasons why the mortgage insurance rule changes had a more muted impact on the market, because really the segment that’s being significantly hit is the first-time buyers.”

Jim Murphy, the CEO of the Canadian Association of Accredited Mortgage Professionals, said that while Mr. Alexander’s prediction that the changes will dent sales by five percentage points could be correct, the impact on the insured portion of the market appears to be more like 15 per cent. “It’s having a bigger impact on first-time buyers,” he said.

On Thursday, the Toronto Real Estate Board said sales of existing homes in the country’s most populous city fell almost 12.5 per cent in August from a year ago. But the average price rose by almost 6.5 per cent, to $479,095.

One day earlier, Vancouver’s real estate board said August sales were the second-lowest level for that month since 1998, while the average price of a home in the Greater Vancouver Area was down 0.5 per cent from a year ago.

Source: Tara Perkins, Globe and Mail

TD Bank says tighter mortgage rules should do the job of cooling Canada’s hot housing market in the short term, but higher interest rates will be needed to return the market to saner levels.

The bank’s chief economist Craig Alexander estimates the new rules, which went into effect July 9, will shave five percentage points off sales activity and cut prices by 3% on average during the second half of this year and early 2013.

In the next three years, he expects the combination of the tighter rules and anticipated modest increases in interest rates will result in a 10% price correction on homes.

While it is early, there are already tentative signs that the new rules have tempered sales, if not prices, especially in the country’s hottest markets — Toronto and Vancouver.

The Toronto Real Estate Board reported Thursday that sales of existing homes in the greater municipal area fell 12.5% from last year, although the average price of $479,095 was 6.5% higher.

Meanwhile, the Vancouver board said sales dropped 30.7% in August, while the average price was only 0.5% lower at $609,500.

In July, Finance Minister Jim Flaherty reduced the amortization rate on new insured mortgages to 25 years from 30, bringing the maximum period for paying off a home back to the historic level. It was the fourth time Flaherty had tightened mortgage rules in as many years, incrementally dropping to amortization period from the high-water mark of 40 years.

Alexander says the latest moves, which hike mortgage costs by $140 a month on the average priced home, may be even more effective than the previous efforts in slowing the market.

But if the experience of the previous three moves are any guide, the slowdown will be temporary, lasting a few quarters, after which Canadians will dive back into the market.

For a longer lasting solution to the overheated market, Alexander said Bank of Canada governor Mark Carney will need to hike interest rates to make borrowing more difficult and expensive.

“Interest rates simply cannot stay at current levels indefinitely,” he says in the paper.

On Wednesday, Carney kept the trendsetting policy rate at one%, marking two years that it has remained at the super-low level, and few economists expect him to act before mid-2013.

Canadians have taken advantage of the cheap borrowing costs to buy homes, cottages, cars and other consumer items, but the result is that household debt has hit record levels at 152% of disposable income.

Alexander says debt would even be higher if Ottawa hadn’t begun tightening mortgage rules in 2008.

“Our models suggest that had the government not tightened mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160% this year,” he said.

That’s about the level the U.S. and the United Kingdom reached before the collapse, although not all factors are similar.

Alexander says he believes the latest rule changes would trim about one percentage point off credit growth.

Source: Julian Beltrame, Canadian Press

While owning a single-family detached bungalow in Vancouver would take up 91 per cent of a typical household’s pre-tax income according to an RBC report, a Vancouver mortgage broker doesn’t expect a huge drop in prices anytime soon.

Mortgage broker Dave Foran said he expects the market to pick up in September, once the normal summer lull is over.

While prices have come down a bit during the lull, those decreases are not reflected in the latest RBC Economics Housing Trends and Affordability Report, released Monday and which covers the second quarter of 2012, said Robert Hogue, senior economist at RBC.

It found that “extreme unaffordability conditions” in the Vancouver housing market are dragging down the provincial and national measures as well.

“Housing affordability in British Columbia remained poor and worsening in the most recent quarter,” said Robert Hogue, senior economist at RBC. “The situation is far less severe in other parts of the province. In Victoria, for instance, the share of income needed to carry the costs of a mortgage at market prices for some housing types is almost half that of Vancouver.”

Hogue said he expects the next quarterly report will show improved affordability due to falling prices, but that an interest rate hike early next year would send the cost of owning a home in Vancouver upward again. RBC expects the Bank of Canada will raise interest rates in the first quarter of 2013, Hogue said.
Foran’s clients seem to be on the same page as RBC.

Foran said he has a higher-than-average number of clients with pre-approved mortgages waiting to see if prices will come down, while many don’t want to wait because they’re concerned about interest rates going up.

“Some are being quite cautious, while others are jumping in to get a good interest rate,” Foran said. “I don’t see a huge drop in prices coming or a huge increase in interest rates.”

While Foran agreed that single family homes in Vancouver are not very affordable, he said there are many other options, such as townhouses or condos, that are still within reach.

“A lot of the builders are getting away from single-family homes,” Foran said. “I think people are going where they can afford.”

Vancouver has the least affordable houses in the country, by far, although resales are falling and the market has cooled. Year-to-date resales have fallen 18 per cent in Vancouver, compared to a year ago, while the Real Estate Board of Greater Vancouver reported that July sales were the lowest total in the region since 2000, with sales 31.2 per cent below the 10-year July sales average.

The new housing price index slipped 0.9 per cent in Vancouver in June 2012, compared with June 2011, Statistics Canada reported earlier this month, while the MLS Home Price Index composite benchmark price for all residential properties in Greater Vancouver over the last 12 months has increased 0.6 per cent to $616,000 and declined 0.7 per cent in July 2012 compared to June 2012.

New mortgage rules were brought in last month that shorten the maximum amortization to 25 years from 30, which is also expected to dampen the market.

Despite these factors, affordability declined for all housing categories, with the RBC measures for Vancouver going up between 0.4 percentage points and 2.2 percentage points in the second quarter.
The report says that in Vancouver, home ownership costs, including mortgage payments, utilities and property taxes, take up 91 per cent of a typical household’s monthly pre-tax income. As a comparison, Edmonton’s affordability measure is 32.4 per cent and Toronto’s is 54.5 per cent.

Source: Tracy Sherlock, Vancouver Sun

Good news for homeowners and buyers as the CIBC says Canadians may enjoy historically low interest rates into 2014.

The bank released its new outlook for the global and Canadian economies, and all indicators point to weakening conditions and rising risks.

It says Canada’s economy will barely keep its head above water with growth rates of 2.1 per cent this year and next year, after growing 2.4 in 2011 and over three per cent in 2010.

The main reason, the bank says, is that the global economy will continue to slow, down to three per cent this year, the slowest pace of expansion since the recession.

As well, Canadian consumers are tapped out and governments are spending less.

With this backdrop the Bank of Canada will find it difficult to raise interest rates, says the CIBC, predicting it may wait until U.S. growth picks up sometime in 2014.

Source: The Canadian Press