Tag Archive for deputy chief economist

Laurin Jeffrey | February 20, 2011
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Flaherty warns of even higher mortgage rates

The Canadian Press

The Royal Bank of Canada became the third major Canadian bank to hike its five-year mortgage rate, and Finance Minister Jim Flaherty is warning of further increases in the months ahead.

RBC joined TD Bank and CIBC in raising its posted rate for a five-year closed mortgage by one quarter of a percentage point to 5.44%. The bank also raised a number of its other posted and special mortgage rates.

Finance Minister Jim Flaherty said the hikes are “exactly what we expected.”

Speaking outside the House of Commons Tuesday, Flaherty told reporters that with lending rates at historic lows, there is nowhere for the cost of borrowing to go but up.

“We’re likely to see higher interest rates as we go forward because interest rates are still very low,” Flaherty said.

The banks pin the hikes on a rebound in the stock market that has led to rising government bond yields, signs the economy is continuing its slow but sure recovery from the recession.

“It’s gaining some traction and as the economy recovers, interest rates begin that process of returning to more normal levels,” Derek Burleton, TD Bank deputy chief economist told CTV News.

While experts have predicted a cooling in the housing market after tighter mortgage rules come into effect in mid-March, a new report predicts that growing consumer confidence may offset the expected negative effects of higher interest rates.

The Canadian Real Estate Association released a revised forecast Tuesday for Canadian home sales in 2011, which the agency predicts will be higher than it first predicted last year.

Its new forecast estimates that 439,000 existing homes will be sold in 2011, down 1.6% from 2010 but an improvement on the nine-pet-cent decline predicted in December.

And unlike some economists, who predict that home prices will level off, or drop sharply, as rates shoot up, the CREA predicts that the average home price will rise by 1.3% in 2011 to $343,000. In its earlier forecast, the agency predicted that the national average home price would fall by 1.3% compared to 2010, to $326,000.

“Even though mortgage interest rates are expected to rise later this year, they will still be within short reach of current levels and remain supportive for housing market activity,” said Gregory Klump, the CREA’s chief economist. “Strengthening economic fundamentals will keep the housing market in balance, which will keep home prices stable.”

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Laurin Jeffrey | January 24, 2011
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An easy way to lower household debt

By Alison Griffiths – Toronto Star MoneyVille

Finance Minister Jim Flaherty is performing a delicate balancing act trying to rein in Canada burgeoning household debt, much of which is associated with housing, by placing additional restrictions on mortgages and home equity loans.

Among Flaherty’s changes, announced on Monday but not to take effect before 60 days, is that the government (through CMHC) would no longer insure mortgages amortized longer than 30 years.  He also announced that Ottawa will no longer provide insurance on lines of credit secured by home equity.  And when Canadians refinance their homes, the maximum they can now borrow is 85 per cent of the property’s value down from 90 per cent.

However, Flaherty is counting on the housing sector to power Canada’s weak recovery from recession.  And some experts, notably BMO Nesbitt Burns deputy chief economist Douglas Porter, are predicting the reduction in amortization from 35 to 30 years could cut house prices by as much as 7 per cent in the coming year.

Though other experts are less pessimistic, Flaherty is still playing a dangerous game. Any dampening of the housing sector will likely serve to increase consumer debt, at least in the short term.

I’m all for lowering the debt load of Canadians, but I’d like to suggest Mr. Flaherty be a little more daring, and give something back to the little guy and girl, by making mortgage interest tax deductible, as it is in the United States.

Depending on marginal tax rates, the average home owning family would end up with a nice tax refund which could be used to pay down debt, contribute to savings or spur on the economy through increased consumption — all very desirable things.

There are some in the U.S. who believe that tax deductible mortgage interest has contributed to unhealthy indebtedness south of the border, as individuals borrowed more because the deduction made it affordable. Even if true, I’m confident that won’t happen in Canada.  Traditionally, credit practices have been more restrictive here than in the U.S. and, when it comes to money, we’re generally more conservative than our neighbours.

I’m sure the Finance Minister is concerned about the optics of offering big tax breaks to owners of uber abodes.  But he could easily put a cap on the amount of interest deductible in order to benefit low to middle income families — those who need it most. What could be fairer than giving Canadian families a fighting chance to pay off debt with their own money!

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Laurin Jeffrey | March 18, 2010
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The Flaherty effect

Canwest News Service

Many of us have been enjoying supremely attractive interest rates on mortgages. However, with rates having been at historic lows for quite some time and with the economy heating up, the only direction rates will go from here is up. The finance minister wants to ensure borrowers are in good financial shape to withstand rate hikes, which are expected to hit this summer.

Finance Minister Jim Flaherty announced that by April 19 new mortgage criteria will apply. Lenders will now be testing whether buyers can afford a mortgage using a higher interest rate. The new rules apply to mortgages backed by government insurance, a requirement when there is less than a 20% deposit.

“What will tend to happen is that the same practices will cascade through the entire financial system. So when borrowers come in to take out mortgages, they all will be tested against the five-year posted rate,” says Craig Alexander, deputy chief economist at TD Bank Financial Group. “It increases the qualifying interest rate by about one percentage point.”

The higher rate will be used just for the qualifying process -it does not mean your mortgage rate will be higher – at least not right now.

“Any mortgage professional that’s worth their salt is sitting down with their client already and saying, Can you afford a 1% or 2% rate increase?’ ” says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. “We tend to want to have those customers looking forward. If they’re stretched to their maximum at today’s low interest rates, then there could be some financial considerations two years down the road if indeed they have to take a look at higher interest rates.”

So, if there’s an April 19 deadline, won’t that make it more tempting to try to get a mortgage now?

“Folks shouldn’t rush to buy; you don’t want to get caught up in the potentially emotional period that might go on between now and April 19. If you can wait, I would suggest waiting,” says John Turner, director of mortgages, Bank of Montreal. “It’s important for the potential consumer to sit down with their banker and get prequalified. They want to lock in their interest rate so they can take their time and make the right decision. They want to make sure that they can afford the house that they are buying.”

Mr. Alexander says about one-quarter of those looking to purchase a home will likely be affected by the new rules and may have to settle for a smaller home, but he estimates only 4% or 5% will not buy because of the tighter qualification process.

Under the new rules, existing homeowners will only be able to withdraw 90% of the value of their homes when refinancing, down from 95%.

“People who would be looking for [high refinancing] are probably in some sort of financial strife already, so it’s probably something they shouldn’t be doing,” Mr. Rawson says.

The third set of property owners in Mr. Flaherty’s sights are those looking to invest in rather than live in a home.

“People buying a property they are not going to live in now have to put 20% down; before, it was 5% down. That’s a really big change,” Mr. Alexander says. “That measure is really aimed at speculators. The government said specifically the objective was to diminish speculation in the marketplace.”

The new requirement may affect the Toronto condo market, Mr. Alexander says.

“Demand growth will probably be tempered by some of these new rules. … If there were people looking to buy a couple of extra condo properties as an investment … it doesn’t mean people can’t do it but if you’re going from 5% to 20%, instead of buying four properties with the same amount of money, maybe you end up buying one.”

The new rules plus more new condos coming on stream may cool the market, Mr. Alexander says, but adds that the Toronto real estate market remains fundamentally strong with demand boosted by immigration.

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