Posts Tagged ‘variable rate’

Detailed Analysis of GTA Housing Market – up to August 2010

September 20, 2010 2 comments

I have been posting housing stats for a couple months now but I never thought about seasonality… housing moves in cycles – like a lot of other markets – due to two major factors: weather and school.

The seasonal trend is very clear from this sales chart – sales increase from January to May, then slowly decrease from June to August, pick-up marginally in September and then decline gradually with a sharp drop-off in December

The next logical question is how does seasonality affect prices?

To look at the seasonal trend, I have charted the month-over-month change in resale home prices since 2005.

Even though most market pundits and MSM claim 2009 to be an anomaly, I think the 2009 monthly price trend sticks well to the seasonality.

Here is a line chart with the same data as above (take your pick 😉

(Note: Legend is same in all charts)

This table summarizes the above chart and shows the direction of price movement in a given month:

Period Price Direction
November-January, Jun-Aug Decreasing
Feb-May, Sep-Oct Increasing

So how does this fit into the current numbers ?

Well, GTA prices declined about 8% from Jun-Aug… believe it or not GTA prices declined between 5-8% from 2006-2008, only in 2009 they declined by 2%… so the current trend should not be alarming. Similarly, the decline in Sales is almost in line with previous sales decline of 25-30%.

Is this good news?

To answer this, lets look at the year-over-year changes

Again, line chart with the same data as above year-over-year column chart

(Note: Legend is same in all charts)

The yearly downtrend is against the seasonal uptrend… so the next couple months/quarters should be key.

Low mortgage rates might again drive demand!

Even though prime rate has risen by 75bp or 0.75%, variable mortgage rates have not increased proportionally due to heavier discounting by mortgage brokers/banks.

Before Bank of Canada increased rates, the lowest Variable Rate was around 1.75%. Today, even after a 0.75% increase in rates, the variable mortgage rate is 2.10% – a mere 0.35% increase… so rates haven’t increased as dramatically as the media makes it sound!

Fixed Rates have been dropping in absolute in term due to the recent rally in bond markets… today you can get a 5-year fixed rate mortgage for 3.59%… which is very close to the lowest mortgage rates in 2009!


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?