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Key Points From Benjamin Tal, CIBC Economist

  • Benjamin-TalThe 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.

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Global troubles bring some good news for Canada: low interest rates

Julian Beltrame

OTTAWA — Canadians could be enjoying historically low interest rates on loans for cars and homes for quite a long time, economists believe.

Since June, the Bank of Canada has been attempting to “normalize” interest rates, hiking its policy rate by one point.

But recent developments in the global economy — and to a lesser extent in Canada — have not to been positive, nor supportive of monetary tightening, regardless of what central bankers want.

The slowing global recovery and the re-emergence of the European debt crisis has caused the TD Bank to revise its outlook on when Bank of Canada governor Mark Carney can safely resume pushing the policy rate, now at one per cent, back to the three to 3.5 per cent range analysts believe is ideal for a balanced economy.

In a note released Friday, TD says Carney is unlikely to start hiking rates until at least next July, when U.S. Federal Reserve chair Ben Bernanke is scheduled to stop pumping billions of dollars into the economy under his controversial quantitative easing initiative.

That is good news for Canadians, both consumers and corporations, looking to borrow cheaply.

But, overall, super-low interest rates are reminders the economy is on life-support and that central bankers are more concerned about sending the economy crashing in the near term than worrying about setting up conditions for a reckoning later on.

Carl Weinberg of U.S.-based High Frequency Economics notes that Bernanke’s much criticized $600 billion US injection and zero interest policy has done nothing to stoke inflation, which this week came in at 0.6 per cent in the United States.

Nor are price pressures building despite stimulative policies in Canada, where core inflation remains a tame 1.5 per cent, or in other advanced economies such as Japan and Germany.

“With employment slack everywhere, and with abundant excess capacity everywhere, the G7 economies are all experiencing historic or near-historic lows in core price increases,” Weinberg notes. “This tells us that the G7 economies all remain depressed, and there is plenty of scope for monetary stimulus.”

The Organization for Economic Co-operation and Development also this week urged Carney to hold tight until at least the spring.

Being the first in the G7 to tighten, it’s unlikely Carney will go so far as reverse course on rates, failing signs of a second downturn.

But TD chief economist Craig Alexander thinks Carney’s fear that Canadians may be induced to take on debt beyond their means is not as great as the fear that raising rates could slow consumption, raise the dollar and crash the economy.

“I think the Bank of Canada would like to have higher rates from a domestic point of view,” he said. “But there is so much slack out there. It does not suggest double-dip recession, but people have to come to terms with the fact that growth of 1.5 to two per cent is now normal and the labour market is not going to recover quickly.”

The often missed fact about two per cent growth, adds Alexander, is not that it is modest, but that it barely keeps up with the trend rate of the economy. That means it will likely take another two years just to return to full capacity.

Evidence of just how profoundly Canada’s economy has slowed since the quick reboot that began a year ago is mounting.

This week, Canadians learned factory shipments shrank 1.4 per cent in volume terms in September — an important indicator because with consumer spending receding, the economy needs a boost from exports to make up the difference.

The most visible sign of braking is in Canada’s much-ballyhooed employment record. While still better than the U.S., job growth has virtually ground to a halt since June, gaining about 5,000 a month when about 15,000 is needed just to keep up with Canada’s population growth.

As little as the Bank of Canada is counting on exports to bolster growth, it may be overbanking on its expectations, says Sal Guatieri of BMO Capital Markets. Europe’s woes, along with those in the U.S., and China’s tighter monetary policy, all point to global markets drying up further.

Not everything argues against a rate hike, says Guatieri, but most things do.

The Canadian Press


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BC Home Sales Trend Higher


Vancouver, BC – November 15, 2010. The British Columbia Real Estate Association (BCREA) reports that Multiple Listing Service® (MLS®) residential sales in the province declined 36 percent to 5,507 units in October compared to the same month last year. On a seasonally adjusted basis, MLS® residential unit sales in the province increased 2 per cent in October from September 2010. The average MLS® residential price climbed 6 per cent to $521,859 in October compared to the same month last year.

 “BC home sales have posted moderate gains since the summer months,” said Cameron Muir, BCREA Chief Economist. “Consumer demand was bolstered by double-dip in mortgage interest rates and the associated increase in purchasing power.” “Total active residential listings in the province have declined 18 per cent since June,” added Muir. “However, the housing market remains tilted in favour of homebuyers.”

 Year-to-date, BC residential sales dollar volume declined 2 per cent $32.5 billion, compared to the same period last year. Residential unit sales declined 10 per cent to 64,735 year-to-date, while the average MLS® residential price climbed 9 per cent to $502,353 over the same period.


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