Mortgage Rate wars may be coming our way

Mr. Oliver told reporters Thursday in Ottawa. “I listened to [BMO’s] explanation, his reasons. I reiterated what I’ve just stated — the government is gradually reducing its involvement in the mortgage market.”

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Reblogged from The Financial Post

TORONTO • Why did Bank of Montreal risk a (verbal) slap from Finance Minister Joe Oliver for daring to chop its five-year mortgage rate below 3%?

Because they knew the mortgage war is going to be different this time.

On previous occasions when the banks publicized rates below the government’s favoured minimum, they found themselves on the receiving end of angry calls from Mr. Oliver’s predecessor, Jim Flaherty, who resigned on March 18.

Mr. Oliver seems in no mood to quarrel with Bay Street and ready to largely leave the mortgage market to its own devices.

“There’s a market and the bank made its decision, and the chief executive officer of the Bank of Montreal informed me about it,” Mr. Oliver told reporters Thursday in Ottawa. “I listened to his explanation, his reasons. I reiterated what I’ve just stated — the government is gradually reducing its involvement in the mortgage market.”

Asked if the government would take further steps if a housing bubble formed, Mr. Oliver said: “I don’t have to get into a hypothetical negative.”

It’s a big change from Mr. Flaherty who didn’t jump on the banks every time they cut rates to new lows but certainly always let them know he was a coiled spring. He also didn’t mind opining on the “hypothetical negative” of what he viewed as overpriced housing in Toronto and Vancouver.

And, without Finance calling out the banks, there is a dearth of negative voices around this high-profile plunge below 3%.
Home loans are simply products that people buy, and when demand is strong the companies that produce those products — the banks — can charge higher prices, said Peter Routledge, an analyst at National Bank Financial. When demand falls off, prices move in the opposite direction.

“What [the rate cut] tells me is that household credit growth is slowing and BMO has reacted to slowing demand in the way one would expect,” Mr. Routledge said. “It’s textbook economics.”

In fact, other lenders are already providing even lower offers for five-year mortgages, though they’re mostly going about it more quietly.

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Joe Oliver, expected to be named Canada’s next finance minister

We’ve been following Jim Flaherty quite a bit here on theresashaw.ca as his monetary policy has had such a drastic effect on housing, affordability, real estate market, financing, mortgages and more in Canada. News yesterday of his resignation quite sudden for some, but somewhat expected by others. His replacement is expected to be Joe Oliver, read more about him below:

joe-oliver

Reblogged from National Post

Joe Oliver, the relatively new Toronto-area MP who has spent the past three years as Natural Resources Minister, is expected to be named Wednesday as the successor to Finance Minister Jim Flaherty

News broke of the appointment Tuesday night.

Mr. Oliver, 73, is a relative newcomer to the ranks of the Conservative caucus, having first been elected to his Eglinton-Lawrence riding in 2011.

Nevertheless, whereas Mr. Flaherty brought more than a decade of political skills to the post, Mr. Oliver boasts more than 40 years’ experience in the financial sector.

Originally from Montreal, Mr. Oliver obtained an MBA from the Harvard Graduate School of Business in 1970, and just before his 30th birthday had entered the investment sector with Merrill Lynch Canada.

The 1980s and 1990s saw him take up portfolios at Nesbitt Burns and First Marathon Securities Ltd., as well as serving as the executive director of the Ontario Securities Commission from 1991 to 1993.
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Forget house prices and debt, deflation is Canada’s new bogeyman

“After spending two years watching house prices and household debt measures, investors may spend 2014 focused on inflation reports when making bets on the Bank of Canada’s interest rate outlook.”

cashregister

Reblogged from Bloomberg News

The slow pace of consumer price inflation surprised policy makers in 2013, reviving rate-cut bets and prompting the central bank to abandon its bias to raise borrowing costs. Bank of Canada Governor Stephen Poloz said in an interview last month he can’t explain the weak inflation, which is now almost a percentage point below where the bank forecast it would be at the start of last year.

“A lot of people are starting to position for CPI releases,” Mazen Issa, senior macro strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, said in a telephone interview. “Inflation is going to be one of the major stories for Canada” this year.

Statistics Canada reported Dec. 20 that annual inflation in November was 0.9%, unexpectedly staying below the central bank’s 1% to 3% target band. The difference between Canadian and U.S. two-year yields narrowed by 4.22 basis points, the largest one-day reaction to Canadian CPI data since September 2011, when inflation was above the target band.

Inflation below 1% gives the Bank of Canada “plenty of reason to be dovish,” said Camilla Sutton, chief currency strategist at Bank of Nova Scotia in Toronto. The Dec. 20 report was “a disappointment because the market thought we would go back into to that 1 to 3%” target band.

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Three reasons why the Bank of Canada is not trying to drive down the loonie

“The Bank of Canada’s most recent policy meeting this month revealed a growing dovish streak, raising questions about whether the bank is actively trying to drive down the loonie.”

Stephen Poloz

Reblogged from John Shmuel

It’s a policy approach that would make sense, considering the strength of the loonie has hurt Canadian exports in the past few years. The strategy of “talking down” a currency has been used to relatively successful effect in countries such as Australia and Norway.

But Charles St-Arnaud, Canada economist for investment bank Nomura, doubts the Bank of Canada is currently attempting something similar.

“While a weaker CAD would be welcomed by the Bank of Canada… we find that using the properties from the BoC’s projection model the size of the depreciation needed to compensate the loss in competitiveness and to bring back inflation to target would require a depreciation of CAD of between 25% and 30%,” he said. “A depreciation of the currency of this magnitude would be almost impossible to attain only through monetary policy and requires significantly lower commodity prices.”

Essentially, the loonie would need to become much weaker than it currently is for Canada to see any economic benefit. Driving it down by such a large margin would be extremely difficult and, even if it could be done, would create a whole host of other problems.

Mr. St-Arnaud points out others have argued the bank could create smaller benefits for the Canadian economy without going to such great lengths, but he counters those, too. Below, he lists three main arguments he’s heard for why the Bank of Canada is actively working to lower the loonie, and why he thinks they’re wrong.

1. Because he joined from EDC, Gov Poloz wants a weaker CAD: Interestingly, since Gov. Poloz took over the helm of the Bank of Canada, none of the policy decision communiqués have made reference to the currency and the reference to the strong Canadian has disappeared from Monetary Policy Reports. Furthermore, all is comment have pointed to the need for a flexible exchange rate that is determined by the market. Ultimately, we believe that the most important comments made by Governor Poloz since taking the helm of the BoC has been during his first public appearance when he said that ’the inflation target is sacrosanct’.

2. A strong CAD is the reason for the weakness in exports: Recent publications by the BoC suggests that the weakness in exports comes mainly from ongoing competitiveness challenges over the past decade that have been exacerbated by the appreciation of CAD over the period. While it is tempting to conclude that a weaker currency would solve the problem, the BoC also showed that the appreciation was driven by fundamentals and CAD is currently around fairvalue and, hence, hard to reverse. Moreover, while a weaker CAD would push exports higher, simulations from the BoC’s projection model suggests the magnitude of the FX move needed to push growth significantly above potential and close the output gap more rapidly is also big.

3. A weaker CAD would help bring inflation to target: Recent Bank of Canada research papers have shown that the pass-through from a weaker exchange rate to inflation has diminished over the past few decades. Moreover, simulation from the BoC projection model suggest that the impact of a CAD depreciation on inflation is also weak and would require a large depreciation to bring back inflation to target.

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Flaherty regrets massive growth of CMHC, vows mortgage action if needed

“Finance Minister Jim Flaherty said Friday he regrets that Canada’s housing agency has grown as large as it has and promised to take additional measures if a reduction in the amount of government insurance on mortgages is needed.

The value of home loans insured by Canada Mortgage & Housing Corp., which is backed by the federal government, has almost doubled since the end of 2006, saddling taxpayers with a growing liability as policy makers warn that gains in house prices may be unsustainable.”

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Reblogged from Bloomberg News

“Regrettably, CMHC became something rather more grand I think than it was intended to be,” Flaherty told reporters today in Markham, Ontario, near Toronto. “We’ll see over time what that role should be.”

CMHC, set up in 1946 to address a post-war housing shortage, had assets of $289 billion as of Sept. 30, which would make it the nation’s sixth-largest bank.

The Finance Department and financial regulators have taken steps over the past four years to curb mortgage lending. Most recently, CMHC announced Nov. 29 that the agency would be paying a “risk fee” of 3.25% to the federal government on the insurance it writes, starting Jan. 1.

While measures introduced last year by regulators and Flaherty slowed the market temporarily, home sales and values rebounded as the year progressed. The average sales price of a home sold in the country this year is up 4.6%, according to Nov. 15 Canadian Real Estate Association data.

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IMF urges Ottawa to cut back on mortgage insurance through CMHC

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Reblogged from Canadian press

Ottawa should consider phasing out insuring home mortgage through Canada Mortgage and Housing Corp., the International Monetary Fund said Wednesday.

The advice is contained in the IMF’s latest economic report card on Canada, which projects modest economic growth of 2.25% for the country next year.

Such a recommendation, surprising from an international financial organization, appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages at all.

Some analysts have credited the system for providing much needed confidence in Canada’s housing sector during the 2008-09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.

The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.

“We think banks lend too much to mortgages and too little to small and medium enterprises,” Roberto Cardarelli, the IMF mission chief for Canada, told reporters in a briefing in Toronto.

“We suspect the fact that banks may benefit from government-backed insurance on mortgages (…) it sort of makes it easier for banks to do mortgages than other kinds of lending which presumably, we think, is going to be more useful for the real economy.”

The Washington-based financial institutions said further measures should be considered to “encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.”

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Bank of Canada may not hike rates back to ‘normal’ even when economy recovers

Deputy Governor John Murray reminds markets in an article published Thursday that there is no precise check list when it comes to monetary policy.

Deputy Governor John Murray reminds markets in an article published Thursday that there is no precise check list when it comes to monetary policy.

Monetary Policy according to the BoC is much different than predictions made by the OECD which estimates Bank of Canada may need to start hiking its trendsetting interest rate within the next year and steadily push it to 2.25 per cent by the end of 2015, according to an international think-tank representing the world’s leading economies.

Reblogged from The Financial Post, Reuters

OTTAWA — The Bank of Canada does not necessarily need to raise interest rates to “normal” levels even if the economy is running at full speed and inflation is close to the target level, Deputy Governor John Murray said in an article published on Thursday.

Murray addressed what he called five common misconceptions about Canadian monetary policy in the institution’s quarterly Bank of Canada review.

One such idea is the view that when inflation is nearing the central bank’s 2% inflation target and the economy is at full capacity, that benchmark rates should be “neutral,” a level much higher than the current 1%.

“Headwinds and tailwinds are often present, threatening to push economic activity and inflation higher or lower,” Murray wrote. “Monetary policy needs to lean against these forces with opposing pressure from higher or lower interest rates to stabilize the economy and keep inflation on target.”

The comment is a reminder to markets that there is no precise check list of factors the Bank of Canada needs to see before raising or cutting rates.

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Don’t look now Mr. Flaherty — here’s another shot in the arm for real estate

Gavin Young - Postmedia News files

Gavin Young – Postmedia News files

Reblogged from The Financial Post, Garry Marr

The Canadian real estate industry will get more good news today — not that it needs any more positive spin or Finance Minister Jim Flaherty even wants to hear it.

Canada won’t interfere in housing market — for now: Flaherty

The Canadian government has no plans for now to clamp down on the housing market even though prices are rising again, Finance Minister Jim Flaherty said on Monday, but he pledged to investigate whether the price uptick looks to be more than temporary.

Continue reading.
But a London-based group is now predicting construction output, led by housing, is set to grow by about 4% over the next year, despite the fact the industry faces labour shortages and financing concerns.

“It’s not stunning growth but it’s solid growth. Over the year, based on this survey, the construction industry will underpin the economy in Canada,” said Simon Rubinsohn, chief economist with the Royal Institute of Chartered Surveyors which interviewed dozens of senior managers in the largest construction firms in the country.

The news comes as Mr. Flaherty continues to keep a close watch on the Canadian housing industry which is showing signs of a recovery. The finance minister said he will be talking to developers about whether the housing sector needs more regulation as prices continue to rise in most markets and sales recover after a dismal 2012.

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