How low is too low when it comes to mortgage rates?

Apparently the answer to that question is 2.99% on a 5-year fixed.

Finance Minister Jim Flaherty wasn’t too happy that banks broke the 3% barrier on 4- and 5-year rates back in January and March. He implied that those rate promotions were essentially irresponsible with Ottawa trying to temper credit growth.

“I think they’ve moved away from offering sales on mortgage interest rates. That was something we discouraged,” he told the Globe & Mail recently.

Greg Quinn and Andrew Mayeda, ©2012 Bloomberg News
Bloomberg Thursday, April 26, 2012
April 26 (Bloomberg) — Canada will prohibit banks from using insured mortgages to back their covered bonds while increasing oversight of the federal housing agency to cool off the country’s real-estate market.
Under rules in a budget bill that Finance Minister Jim Flaherty introduced in Parliament today, banks will only be able to use uninsured mortgages as collateral on covered bonds, which are notes usually backed by mortgages. The government will also strengthen oversight of Canada Mortgage & Housing Corp. through Canada’s banking regulator.
By barring banks from securing covered bonds with government-insured loans, Flaherty is discouraging mortgage lending by limiting cheap funding for home loans. The moves may raise borrowing costs for banks, leading to higher mortgage rates that would curb a housing market that has seen prices in some cities almost triple over the last decade.
“The government wants to be a little bit more restrictive in terms of slowing down the issues in the housing market and with consumer leverage more generally,” said David Tulk, chief Canada macroeconomic strategist at Toronto-Dominion Bank’s TD Securities unit.
Canadian lenders have been issuing covered bonds, which are backed by pools of residential mortgages, to fund their home- lending business. In most cases, the loans used to secure the bonds are insured by Canada Mortgage & Housing. The government currently guarantees the full value of home loans insured by CMHC and 90 percent of mortgages insured by private companies. The government will also set up a registry for companies that sell covered bonds.
Taxpayer Guarantees
“This is a superb long-term move for the development of the housing finance framework,” said Finn Poschmann, vice president of research at the Toronto-based research group C.D. Howe Institute. “As the market matures, we should find that the housing finance system can function perfectly well, out from under the umbrella of taxpayer guarantees.”
Under the legislation, lenders won’t be permitted to use mortgages insured by CMHC or private insurers such as Genworth MI Canada Inc. as collateral for the covered bonds.
Existing covered bonds will not be affected by the measures, according to the legislation. That means existing securities should benefit from greater investor demand than new ones because of the extra protection, said Francis Kestler, who trades covered bonds at Bank of Montreal in Chicago.

‘Better Bid’
The price of Toronto-Dominion Bank’s 1.5 percent covered bond due 2017 rose, narrowing the spread to government debt four basis points to 68 basis points, according to data compiled by Bloomberg.
“The outstanding issues will be better bid,” Kestler said in a telephone interview. “I don’t think it kills the market” for new bonds, he said, adding “it will be more expensive for Canadian banks to fund themselves going forward using covered bonds.”
Banks that use insured mortgages as collateral “will launch new programs with uninsured mortgage pools,” said Andre- Philippe Hardy, a bank analyst with RBC Capital Markets in Toronto. The rule “would increase the funding cost on future new originations by an estimated 10-15 basis points,” Hardy said in a note to clients.
Of the C$1.2 trillion ($1.2 trillion) of mortgage loans made to Canadians, C$67 billion are insured mortgages that are pledged to covered bond pools, or about 5.6 percent of the total, according to data provided by Kevin Chiang of credit- rating company DBRS Ltd. Of the C$63 billion of outstanding covered bonds, C$54 billion or 85 percent are backed by insured mortgages.
Lisa Azzuolo, a spokeswoman for Genworth, declined to comment on the Canadian government’s plans on covered bonds.

Excessive Risk-Taking
The legislation also proposes that CMHC’s finances be checked at least once a year by the federal banking regulator to guard against excessive risk-taking.
“CMHC fully supports the measures,” spokesman Peter De Barros said by e-mail. “Enhancements to the governance and oversight framework for CMHC support the government’s continuous efforts to strengthen the housing finance system and Canada’s housing market.”
The Office of the Superintendent of Financial Institutions will study if CMHC is acting “with due regard to its exposure to loss,” according to the budget implementation bill. CMHC’s board of directors would also add two government deputy ministers under the legislation.

‘Important Financial Institution’

“I have been concerned about CMHC for some time in this sense: that it’s become an important financial institution in Canada and it wasn’t subject to the same supervision,” Flaherty told reporters in Ottawa. “This is an important step forward.”
The tightening of oversight over CMHC and changes to covered-bond rules will probably make it more difficult for borrowers “at the margins” of the market to qualify for mortgages, said Louis Gagnon, a professor of finance at Queen’s University in Kingston, Ontario.
“It will have the beneficial effect of preventing the most vulnerable borrowers from getting access to mortgages,” said Gagnon, a former senior risk-management official at Royal Bank of Canada. “So these people will have to wait longer to get into the game.”
–With assistance from Cecile Gutscher in London and Chris Fournier and Doug Alexander in Halifax, Nova Scotia. Editors: Paul Badertscher, Dave Liedtka

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2012/04/26/bloomberg_articlesM33C2R6K510F01-M33SG.DTL#ixzz1tF8gWd8R

New restaurants popping up, an art gallery opening, university campuses expanding — the changes have appeared over time, but to Shanti Fernando they’re all signs of an actively growing city doing everything it can to attract new residents.

Fernando lives in Oshawa, Ont., a community perched on the eastern edge of the Greater Toronto Area which has typically been identified as a blue-collar automotive manufacturing hub in years past.

But that image is changing.

With the latest census figures highlighting the city as a metropolitan area with population growth exceeding the national average — one of just four such areas in recession-weary Ontario — Oshawa is a bright spot in a province being somewhat eclipsed by the success of the West.

“The character has changed from being a one-focus city to having a number of different things that they are getting known for,” said Fernando, who teaches community development at the city’s University of Ontario Institute of Technology.

“It is really diversifying.”

With a population growth rate of 7.7 per cent, Oshawa ranks above the national average of 5.9 per cent. Ontario’s growth rate, on the other hand, was just 5.8 per cent for the latest census period, down from the 6.6 per cent reported in 2007.

To Fernando, there are three main reasons for Oshawa’s good news on the population front.

“It’s the bedroom community (for Toronto), it’s economic growth in a number of areas with business and education, and then immigration,” she said.

As other manufacturing cities in Ontario struggle with plant closures and residents migrating to the resource-rich western provinces, Oshawa has been working hard to break its dependence on General Motors for jobs, particularly after the auto sector’s meltdown in 2008.

“Oshawa doesn’t just mean GM to people,” Fernando said. “It can mean something else.”

The city is working on revitalizing its downtown, expanding its health-care services and is also developing a suite of support services to attract immigrants to the area. The big driver of growth, however, seems to be Oshawa’s proximity to Canada’s most populous city.

With frequent express trains into Toronto’s downtown core, observers say Oshawa allows residents to commute to work in the country’s financial capital while still being able to afford larger houses to raise a family in.

“It’s not so much what’s going on locally… increasingly people are just living there and working elsewhere in the GTA,” said John Andrews, director of the Queen’s University real-estate roundtable.

“Oshawa is an affordable alternative.”

The rate at which people are buying comparatively cheaper homes in Oshawa may slow in the future, however, as Toronto’s condo market soars and Canadians choose downsizing over commuting to work, Andrews warned.

“It’s not like people are going to be fleeing the suburbs, but if the government doesn’t get the public transit system under control, you’re going to see tremendous intensification in the inner city.”

Oshawa’s story is significant because it shows just how much of an effect a large urban centre can have on neighbouring cities. And the impact runs both ways.

The Ontario border city of Windsor, which sits across the river from Detroit, was once very similar to Oshawa — a gritty, blue-collar city with an economy utterly dependent on a bustling auto manufacturing industry.

The most recent census data shows Windsor is one of just two metropolitan areas in the country to experience a drop in population. The other was the Ontario forestry hub of Thunder Bay.

Alan Phipps, a professor with the University of Windsor and a member of the Canadian Institute of Planners, has seen that decline first-hand. Just as Oshawa has benefited from growth in Toronto, Windsor has been shrinking in the shadow of Detroit.

“Oshawa is just insulated from any impact from loss of manufacturing by being in the suburban commute zone of the GTA,” Phipps said.

“Windsor is in the international commute zone of an incredibly declining city.”

To turn things around, Windsor is trying to change its identity and brand itself as more than an auto city, but that evolution could be a long time coming, he added.

“They keep talking about it being a retirement sort of place … but I wouldn’t come here thinking I could retire, because it’s a de-industrializing kind of place.”

That being said, Phipps noted that housing in Windsor is among the cheapest in the country and is drawing some buyers looking for affordable vacation homes.

Despite Ontario’s apparent decline in light of the rising West, analysts are quick to point out that Canada’s most populous province is, in fact, still growing.

“It’s flirting with the national average,” said Mario Lefebvre, Director of the Centre for Municipal Studies at the Conference Board of Canada.

With nearly 12.9 million residents, Ontario accounts for 38.4 per cent of Canada’s residents. While February’s census figures indicated more people were migrating west, analysts say it’s unlikely population levels in the western provinces will surpass Ontario in the next decade.

Once the U.S. economy strengthens further and housing prices in the west rise as those in Atlantic Canada drop, the population will eventually spread out more evenly across the country over the long term, Lefebvre said.

“These things come and go,” he added, noting British Columbia was once a big benefactor of inter-provincial migration in the 90s, followed by Alberta.

These days, it’s Saskatchewan that’s attracting the bulk of the migration. For now.

“As things turn around, these trends will change.”

Posted by Frank Uithoven

Jason Heath Mar 31, 2012 – 7:00 AM ET | Last Updated: Mar 30, 2012 9:09 AM ET

For three years, the word on the street has been that interest rates have nowhere to go but up. But few Canadian commentators – other than David Rosenberg – got the call on rates right. Although the prime rate has risen since dropping to an all-time low of 2.25% in April 2009, the increase to the current 3% rate that has remained stable since September 2010 has been modest to say the least. Long-term rates, like fixed mortgage rates, have gone up and come back down during that time, such that one can currently lock in fixed rates under 3%.
York University’s Moshe Milevsky did a study in 2001, which he revised in 2007, and determined that borrowers are better off going with a variable rate mortgage instead of a fixed rate mortgage approximately 9 times out of 10. That said, we have to be close to if not already in that 10% sweet spot where fixed beats variable.
Despite the opportunity to lock in low rates today, it could actually be beneficial for the average Canadian for rates to rise. Conditions need to warrant rate increases and the Bank of Canada (which directly governs the prime rate) and the bond market (which indirectly governs fixed mortgage rates) won’t raise rates until the time is right. How soon that time comes depends partially on domestic influences, but also on our neighbours to the south and the current eurozone debt debacle.

Greece is a perfect example of why rates should rise. Greek participation in the European Union gave them access to cheap credit and helped facilitate some of the excess spending that has them where they are today. Despite bond markets demanding higher interest rates on Greek and some other European government bonds, market intervention by the EU has helped keep rates artificially low.
The U.S. Federal Reserve has been doing the same thing, buying up U.S. government treasury bills to keep U.S. rates artificially low as well.
It’s hard to justify how artificially low interest rates for an extended period are good for anything other than delaying the inevitable for some market participants.
Higher rates would have a negative impact on those of us with outstanding debt, as higher interest charges would follow. But Canadian debt levels have moved ever higher in recent years, likely a response to the low rates that have been in place in part to stimulate spending. Higher mortgage rates could protect us from ourselves by making higher debt levels more punitive and less tempting.
Furthermore, fixed income investors could benefit. The emphasis on “could” is key. Rising rates typically hurt those holding bonds because today’s bonds are that much more appealing than yesterday’s as rates go up. How much the hurt hurts is a matter of fact. But those renewing GICs or sitting on cash these days are desperately awaiting higher interest rates to help their savings grow. So higher rates could at least lead to higher returns for fixed income investors in some cases.
Higher rates could benefit stock investors. Once again, the emphasis on “could” is key. Higher rates usually mean the economy is improving and inflation is rising. This could be a good sign that corporate profits and corresponding stock prices are moving higher. That said, one has to wonder if low bond and GIC interest rates and cheap credit have pushed more money into the stock market than should otherwise be there. Rising rates could bring income investors back to the more traditional income investments like bonds and GICs from the blue chip stocks they’ve potentially flocked to in order to obtain yield.
Despite the purported uncertainty above on stocks and bonds, higher rates should at least contribute somewhat to restoring equilibrium to credit, debt and equity markets. Something seems wrong with near zero or negative real interest rates. That is, something seems wrong with a GIC investor earning 2%, paying 1% of that away in tax and 2% inflation resulting in an effective return of -1%. On that basis, something seems right about higher interest rates, whether we like it or not. What happens to mortgage debt, stocks and bonds remains to be seen.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto.

TORONTO – Canada’s largest banks are raising their posted mortgage rates in a sign the era of ultra-low borrowing could be drawing to a close.

Royal Bank (TSX:RY) and TD Bank (TSX:TD) both announced Monday their posted five-year closed mortgage rates will move up 20 basis points to 5.44 per cent effective Mar. 29, while both raised their special fixed rate offer on a four-year fixed rate by 50 basis points to 3.49 per cent.

A basis point is one-hundredth of a percentage point.

Meanwhile, their posted five-year variable rate — which rises or falls along with the banks’ prime lending rate — will rise 10 basis points to prime plus 0.20 percentage points.

The prime rate, which usually moves with the Bank of Canada’s key interest rate, is currently three per cent.

The moves come after a recent race to the bottom that saw several banks offer special fixed rates as low as 2.99 per cent.

Although variable rates usually follow the lead of the Bank of Canada, longer-term rates are more influenced by bonds. Higher bond yields increase the cost of funds for lenders, who in turn pass them on to customers.

Government of Canada five-year bond yields have jumped more than 50 basis points in the past three months alone.

In a BMO report Friday, its economists argued that with the U.S. recovering gathering steam, central bankers on both sides of the border are becoming more comfortable with the economy and less so with historically low interest rates that in Canada are fanning the flames of the hot housing market.

Both Finance Minister Jim Flaherty and Bank of Governor Mark Carney have recently flagged household debt at a danger to the economy.

Household debt to disposable annual income is above 150 per cent.

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OTTAWA — Finance Minister Jim Flaherty saw irony Thursday in major banks seeking changes to mortgage rules from government, given the control the banks themselves have over the industry.

Flaherty said, however, the possibility of tightening the insured mortgage market — which has been done three times under the current Conservative government — is there. Those decisions, however, result from constant evaluation of the markets.

“I find it a bit odd that some of the bank executives are taking the position that the minister of finance or the government somehow should tell them how to run their business,” Flaherty said during an appearance in Stittsville, Ont., just west of Ottawa.

“We have bank executives in Canada going and saying ‘really, the rules on insured mortgages should be tightened up.’ They must forget that they are actually the ones that issue the mortgages. It’s their market. It’s not my market. They decide what they want to charge in interest rates.

“They’re the ones that make the profits out of this business, so I do find it a bit much when some of the bank executives turn to the government … and say ‘you ought to change the rules and make it tighter.’ It’s very interesting commentary from them.”

Ideally, the finance minister said, the mortgage market will be able to work out its own issues, for which he said he’s already seen positive signs.

“There’s a balance there. The new-housing market produces a lot of jobs in Canada, so there’s a balance that needs to be addressed,” he said. “I’d like the market to correct itself if it can. We’re seeing some evidence of that in the condo market, particularly in Toronto, where there is some softening of the market and that’s a good thing.”

Canada’s household debt-to-income ratio hit a record high of 151.9% last year, largely the result of mortgage borrowing. The ratio dipped slightly in the fourth quarter but at 150.6% was not far off the record.

Since 2008, Mr. Flaherty has lowered the maximum amortization period for new mortgages to 30 years from 40 years, raised minimum down payments required to qualify for government insurance, and required all borrowers to qualify for a five-year fixed-rate mortgage to get insurance.

“We will have modest savings-reductions in order to stay on track to a balanced budget in the medium term,” Flaherty said. “More importantly — and this really is the focus of the budget — if you concentrate on the savings, you’re going to miss most of what the budget is about. (It’s) about long-term sustainability for jobs, growth and prosperity, looking at retirement income, making sure our social programs are sustainable in the long-term for Canada.

“We’re coming back down in our deficits — you’ll see the numbers next Thursday. We’ve done very well this year, we’ll do better next year. We keep reducing the deficit and we’ll get to balance in the medium term.”

Flaherty also defended the government’s Economic Action Plan by referring to a number of infrastructure projects across the country, as well as numerous tax credits, including child fitness credits and those linked to volunteer firefighters.

He said that initiative has help keep unemployment down across the country as well, saying that despite the economic downturn, Canada’s unemployment “never went into double digits.”

Flaherty was particularly critical about provincial spending in Ontario and said change is needed in that province to put it in a better fiscal situation.

“What we’ve basically seen in Ontario is eight, almost nine years of spending mismanagement,” he said. “They need to focus in Ontario, and for the good of the country … on the spending side of the ledger and get things under control. What we’ve seen so far from Ontario — and this is disappointing, but not surprising — is this ‘we’re in a lot of trouble … so we’re going to blame Alberta and other Canadian provinces.’

“Next week I suspect they’ll blame … the federal government, despite the fact our transfers to Ontario are up 77 per cent since we took government in 2006. This year, we’ll transfer $19.2 billion to the government of Ontario, so I forewarn you about that, that we’ll see this ‘blame everyone else, and don’t look in the mirror’ (attitude).”

With files from Reuters

Thanks for all the hard work Frank, you truly went above to help out a hysterical couple, and when I say couple I mostly mean me.  Thanks again.

Take Care,

Cat.

MISSISSAUGA, Ont. — Major Canadian housing markets have continued to show “exceptional resiliency” so far this year, setting the stage for a busy spring, according to a major Canadian real estate organization.

In its market trends reports, Re/Max said its survey has found that 12 of 15 Canadian centres, or 80 per cent, reported sales activity in January and February that was ahead of last year’s levels.

More than half of the cities reported double-digit increases, “with the strong demand and diminished supply setting the stage for a heated spring 2012.”

Re/Max said low interest rates, coupled with strong consumer confidence levels and a mild winter played a significant role in the upswing, ushering in an early start to the spring market.

The Re/Max finding of strong early-year sales was in line with those released a week ago by the Canadian Real Estate Association, which also reported an unexpectedly strong market in February.

CREA said actual home sales over its Multiple Listing Service increased 8.6 per cent overall to 36,937 in February compared with February 2010, defying even its own earlier predictions of a cooling market.

Industry watchers who are closely monitoring home prices have suggested Canada’s real estate market, which has been fueled by low mortgage rates since the recession, will soon cool off, but many predict a so-called “soft landing.”

Garry Marr Mar 15, 2012 – 7:05 PM ET

Melting snow across Canada may have helped heat up the housing market but the new worry is whether there will be any demand left for homes this spring.

Home sales across the country rose 1.4% from January to February on a seasonally adjusted basis while actual sales climbed 8.6% from a year ago, the Canadian Real Estate Association says. In the first two months of the year, 61,772 homes changed hands, a 6.7% increase from a year earlier.

CREA said in particular there has been a jump in demand for low-rise homes, which has put pressure on prices.

“There has been a preference in recent months, in Toronto and other markets, for single-family homes which are typically more expensive. This trend held in February, putting upward pressure on the national average sale price,” the real estate group said.

That demand has helped to keep home values from falling, with the average sale price of a home in February $372,763, a 2% increase from a year earlier.

The strength of the winter market has Don Lawby, chief of Century 21 Canada Ltd., wondering whether we have stolen some of the traditional spring market frenzy.

“Many parts of Canada had no winter. The question is has the market we have been experiencing taken business from the spring market,” Mr. Lawby said as he toured Montreal. “I can look at property and I don’t have to wait for the snow to melt to see what that property looks like. I’ve seen it.”

It doesn’t hurt that interest rates remain at record lows, with the major banks engaging in another round of cuts that have taken the five-year fixed-rate mortgage down to 2.99%, the lowest rate in history, which was already breached once before this year in January.

Ottawa-based CREA, which represents about 100 boards across the country, said about half of local markets recorded an increase in activity, led by major markets in Calgary, Toronto and Montreal.

Toronto and Montreal.

Consumers have jumped on the change in market conditions with new listings climbing. CREA said that on a seasonally adjusted basis, ne listings were up 1.9% in February from a month ago.

Gerald Soloway, chief executive of Home Capital Group Inc., said the weather was already boosting the housing numbers.

“Canadians historically don’t like to buy houses in three feet of snow. This year with a little less snow, some of the numbers are up,” he said. “That’s been my experience. People get out and look. They might buy a month later, but they get out now and get around looking at new houses and subdivisions because their car doesn’t get stuck. In southern Ontario and the urban areas, there has been very little snow.”

For its part, CREA said the latest numbers are proof the market is on solid footing. “The national rise in both sales activity and the number of newly listed homes beyond the normal seasonal increase provides clear evidence that Canadians are confident in housing market prospects,” said Gary Morse, president of CREA.

Benjamin Tal, deputy chief economist at CIBC World Markets, says you can seasonally adjust statistics but you can’t necessarily take into account the extreme conditions we’ve had this year.

“It’s only adjusted for normal weather, it accounts for winter, but you cannot capture what has happened [this year],” Mr. Tal said. “Some of the activity we are seeing is weather-related.”

As for the idea that we have stolen some of the spring market activity, Mr. Tal contends there is truth to the theory. “I would say yes, absolutely. It’s an early spring, it started already,” he says.

So what will be left over when the spring begins for real? “I don’t think it will be strongest spring ever. I think we will see some [buyer] fatigue,” Mr. Tal said.

http://business.financialpost.com/2012/03/15/with-winter-housing-sales-up-fears-of-meltdown-in-spring-demand/