Key Points From Benjamin Tal, CIBC Economist

• The U.S. housing collapse won’t rebound anytime soon.
• Tal predicts it will take until 2017 for U.S. home prices to rise enough to bring the average person with negative equity back to even.
• That matters because America’s housing market is driving its economy, which in turn impacts Canada’s economy and interest rates
• M1 velocity of money is the “most important indicator” that Canada’s mortgage market should be watching because it’s the top signal of U.S. inflation. U.S. and Canadian inflation are closely linked. Higher inflation leads to higher interest rates.
• Tal says rising M1 velocity of money will be the “#1 signal” that mortgage rates will rise. When this happens, the U.S. Fed’s Bernanke will need to "remove liquidity from the system very quickly"
• 5-year yields will “have to” increase in the next few years because the market is under-pricing inflation.
• “The Chinese consumer will be the most important force in the global economy for the next 10 years.”
• The Chinese are “starting to demand quality.” That’s positive for North America because the Chinese will increasingly buy our goods.
• China’s demand for commodities (like oil) significantly influences financial markets. Oil has a 93% correlation with the S&P 500, for example.
• If China expands, oil (and other commodities) will rise and 5-year mortgage rates “will go up.”
• China will slow in the next 12 months, predicts Tal. But after that, it will resume growth and put pressure on 5-year rates.
• “I’m almost positive the (U.S. Federal Reserve) will not change rates until mid 2012,” Tal said.
• The BoC won’t “take chances” and raise our rates significantly above the U.S.
• “The next few quarters are safe” from BoC rate hikes.
• Consumers are “exhausted” due, in part, to a 146% debt-to-income ratio. As a result, it won’t take many rate hikes to slow the economy.
• The “forward curve” (i.e. implied interest rates based on derivatives pricing) implies that 5-year fixed mortgages will be slightly cheaper than variable mortgages over the next five years. Tal put up a chart to this effect and 2011 is the first year in 10 years that this is expected to be true. (Take that for what it’s worth.)
• When rates rise we may see mortgage defaults drop. That’s because rising rates imply rising employment, which influences defaults more than anything.
• Only 4.1% of households have less than 20% equity and total debt ratios over 40%.
• The quality of mortgage debt is improving says Tal. Specifically, the ratio of mortgage holders who are 35+ years old and making over $50,000 (adjusted for inflation) has steadily risen in the last 5-10 years.