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Posts Tagged ‘mortgage’

Rising Interest Rates – thanks to QE?

December 16, 2010 Leave a comment

If you haven’t already heard so…interest rates have reversed their downward trend to dramatically move up since the November Federal Reserve meeting, Quantitative Easing (QE2) announcement… QE2 is supposed keep US interest rates low… would you have thought that it would affect rates elsewhere?

Year-to-Date chart of Canadian interest rates…

As marked on the chart, interest rates in Canada have risen significantly over the last 6 weeks… especially the medium to long term rates in the 2-10 year terms. The 5-year rate is at 2.56%, same as in mid-July.

Here is the term chart or the Canadian yield curve… see the parallel shift in yield across all terms!

This means, borrowing costs will increase in proportion… yes, including mortgage rates, particularly fixed rates.

The 5-year fixed rates are as low as they have ever been… but they will be rising shortly; see this

The Bank of Canada hasn’t indicated any shift in monetary policy since the last rate hike in Sep-2010… so why are rates in Canada rising? Possible reasons:

· Higher inflation expectation

· Better than expected economic growth

· Bond markets are overbought

· Rising risk of default (!)

Stay tuned… I will explore each of these possibilities in the coming days…

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Canada – New House vs Resale Housing Divergence

August 10, 2010 1 comment

Global Housing report from Scotia Capital (Source):

The slowdown has been most dramatic in Canada. Average home prices in Q2 were up just 6.8% y/y, compared with 16.6% y/y in Q1. Sales, while still at a high level, have trended steadily lower alongside reduced affordability and exhausted pent-up demand. Meanwhile, increased listings are tilting overall market conditions back in favour of buyers. We expect demand to remain at a lower ebb into next year, and prices on average to be roughly flat. 

It doesn’t look like Scotia Capital has seen the recent house price data… which as I pointed here & here is towards declining prices not flat

I find this chart very interesting…resale house prices increase ~130% where as new house prices rise only 50% in the last 2 decades… I wonder if this divergence was driven by speculative investment of buying a new house (planned but not built) and flipping it when it is actually built?

Source: Scotia Capital

…Traditionally, the demand and pricing for new homes mirror, but with a lag, trends in the resale market…

The report points there might be several factors for this divergence in new house prices… here are some factors sighted in the report:

  • Tight Supply of resale homes
  • Value added from Renovations to resale home (I agree with this one – the quality of new homes in general is not the same even with top of the line upgrades)
  • Increased land values in urban centers (new construction tends to be in large suburban lands) because of:
    • lifestyle choice
    • traffic congestion
    • established neighbourhoods

Some more subjective factors I think should be included:

  • Resale homes are generally built on bigger lots
  • Resale homes older than 10 years are built on wider & less congested streets
  • Fewer chances of voyeurism – more space between neighbouring homes

Some other facts:

  • Land value accounts for 50% of residential properties.
  • Land value has increase by two and a half fold (150%) in the last decade
  • The Chart below shows the construction cost of residential building materials 

Source: Statistics Canada, Reed Construction Data

Flatenning Yield Curve – Canadian Bond Yields go down

July 26, 2010 3 comments

Government of Canada Yield Curve flatenned since April 2010… flatenning means the long term bond yields decrease more than short-term yields… in fact short term yields on treasuries rose in direct response to increase in Bank of Canada rate in June & July 2010. 

Flatenning of yield curve is a sign of weak economic outlook and tame inflation. The economic outlook in Canada has deteriorated since April 2010… Last week’s release of Canadian economic indicators – wholesale sales, retail sales & consumer price index – were less than forecast

Graph showing Yield Curve of Government of Canada Debt

Source: Bank of Canada

Flatenning yield curve has the effect of reducing medium to long-term borrowing costs for business and households… E.g. – The 5-year fixed mortgage rate is priced relative to the 5-year Government of Canada bond yields which are currently at 2.4%… Usually the spread is about 120-150bps… which would mean the 5-year fixed mortgage rate should be about 2.4+1.5 = 3.9%… the best posted rate is about 4.25% … so if you are negotiating a mortgage be sure to use this and other research from here & here

reflections on yesterday’s resale housing numbers

July 16, 2010 Leave a comment

David Rosenberg:

The deteriorating inventory situation could suggest that prices may decline instead of remaining stable over the coming months. In June, months’ supply ticked up to 6.9 months, the highest since March 2009. Rising inventories are not limited to the existing home market — we estimate that builders have been building inventories of new homes for about eight months or so.

BMO Capital Markets

…Sales were also front end loaded in 2010 ahead of the HST and are now in rapid reverse. While the headlines may look soggy for the next few months, there are reasons to believe the market could soon regain its balance—long term mortgage rates have dropped, employment remains on a roll, and prices have stabilized

TD Economics

…it comes as no surprise that the housing market continued to cooling from the record levels of activity established last year. After improving markedly in 2008, home affordability eroded significantly in 2009… Nonetheless, the housing market slowdown should be cushioned by an improving employment and income picture. The level of interest rates remains quite supportive of sales activity, and rising interest rates would only occur against a stronger overall economic backdrop.

Mortgage Rates – Fixed or Variable? Redux…

July 14, 2010 2 comments

There are plenty of debates on which mortgage rate is better/cheaper to the customer… fixed or variable? Historically variable rates have been lower than fixed rates… agree but just by looking at the two rates at a point in time doesn’t prove that Variable Rate is cheaper than Fixed…

I have seen just one chart comparing the 5-year discounted Fixed Rate to the then Prime Rate (which is a proxy for Variable Rate)… This only shows that variable rate is generally lower than fixed rate at a given point in time… Most brokers forget that variable rates change throughout the term as Bank of Canada changes the bank rate…

To really prove that Variable rate is better than fixed…mostly… i took data from 1973 and calculated the Realized mortgage rate (average rate) on a Variable Rate mortgage over the 5-year term and compared it to the 5-year Fixed rate at the beginning of the mortgage term… The realized variable rate can be thought of as the average or equivalent fixed rate over the 5-year period…

And here are the results… there have been 4 instances in the past 38 years when the variable rate is cheaper than fixed rate at mortgage initation but ends up costing more than fixed rate over the full 5-year term!!

Chart showing fixed 5-year mortgage rate and the realized 5-year variable rate

Source: Bank of Canada

what are your thoughts?

Are Canadian banks gouging consumers & businesses?

June 8, 2010 3 comments

For the last decade, the spread between Bank Rate (top end of the Bank of Canada operating band) and the Prime Rate (the rate banks charge their best customers and the rate used as benchmark for almost all loans except fixed rate mortgage) has been about 150 basis points (bp) or 1.5% but since Dec 2008, the spread has increased to 175 bp or 1.75% – see chart below. Prime Rate affects almost all business loans, line of credit (personal, secured, HELOC, etc) and variable rate mortgages.

10 yr Spread_between_prime_rate_&_bank_rate

Source: Bank of Canada

What determines this spread and why is it still at decade highs when the Big Five Canadian banks have hit record profits in Q1/Q2 2010?