August 17th – Canadian 5 yr bond yields -.03bps to 2.58. The spread, based on 5 yr rate of 4.29% is 1.71.

August 13th – Canadian 5 yr bond yields -.05bps to 2.61. The spread, based on 5 yr rate of 4.29% is 1.68.

What does this mean?  Essentially, the yield, or rate of return on a bond, can be read through a yield curve: a pattern of yields on bonds.  The increase in bond yields is what experts watch.  If the bond yield continues to increase, the spread will continue to shrink and this could be a trigger for interest rates to rise.  Typically, lenders are looking for a new spread between 1.80 and 2.00.

]]> http://themortgageblog.ca/2009/08/canadian-bond-yields-may-signify-an-increase-in-interest-rates/feed/ 0 http://themortgageblog.ca/2009/08/real-estate-trends-may-2008-june-2009-are-we-finally-recovering/ http://themortgageblog.ca/2009/08/real-estate-trends-may-2008-june-2009-are-we-finally-recovering/#comments Wed, 05 Aug 2009 00:14:07 +0000 Mike Morisset http://themortgageblog.ca/?p=377 The above numbers show the latest statistics from the Real Estate sales in the Fraser Valley for detached homes.  As is evident in the above numbers, there are a number of markets that have experienced a fair amount of recovery in June of 09 as compared to the previous 12 months.  

The largest recovery was experienced by White Rock/South Surrey (6.5% increase in sales over May of 2009); however, this segment also experienced the smallest decline (5.2%) over the previous year.  The only two market segments that are still experiencing sale declines are Surrey (-0.3% from May 2009 to June 2009) and Mission (-2.6% from May 2009 to June 2009).

This increase in sales is a promising light at the end of a year long downward tunnel that Real Estate Sales have experienced in Greater Vancouver and the Fraser Valley.  Much of the increase in sales can be attributed to low interest rates, a slight rebound in the stock market, and a lack of product on the market.

Activity in the month of June marked the fifth consecutive month of rising sales and the highest level of activity since January 2008, on a seasonally adjusted basis.

“Housing markets around BC continued to post higher sales in June, fuelled by attractive mortgage rates and lower prices,” said Bryan Yu, BCREA Economist.

“The larger urban regions of Greater Vancouver and Victoria exhibited balanced market conditions in June, while others have recorded improved market stability. Stronger demand and a decline in home listings are stabilizing home prices in many BC markets.”

Year-to-date, MLS® residential sales dollar volume was down 20 per cent to $16.3 billion over the same period last year. A total of 36,329 units were sold in the first six months of 2009, down 15 per cent from 2008, while the average MLS® price declined 5 per cent to $448,381.

The average sale price of a home last month in Canada was $306,366. Based on a 25% downpayment and a 25-year amortization, your monthly payment would be $962.61 at 1.35%. Convert that to a five-year fixed-rate term and you’re probably going to have to consider a 4% mortgage rate and a monthly payment of $1,289.04.

Rates are rising fast. Most major banks upped their five-year rate by 40 basis points this week, although discounters were still offering 4% this past week. “It’s not a mass rush yet, but we are starting to see … people locking in. But variable rates are still so good,” says Joan Dal Bianco, vice-president of real estate-secured lending, TD Canada Trust. She stops short of questioning why a consumer would pull out of these “deals” that are no longer available on the market.

Try to get a variable-rate mortgage today and the best you can probably hope to get is 60 basis points above prime, or 2.85%. The landscape changed dramatically in October during the credit crunch. As the Bank of Canada lowered rates, the major banks reluctantly lowered prime because of the massive amount of customers with variable-rate products negotiated under the old, higher terms. “Bonds yields are going up rapidly and people are starting to realize the rates are going to go up,” Ms. Dal Bianco says.

Throw in the fact the Bank of Canada used the weasel word “conditional”(on inflation rates)when it promised not to raise rates until June, and you can understand why some
people think today’s record-low prime rate might not hold. But if you’re someplace between 60 to 90 basis points below prime, the rate is going to have to go up pretty fast to justify locking in today at 4%, even though that is just slightly above the all-time low hit last month for a five-year term. “I don’t understand why you would lock in,” says Jim Murphy, chief executive of CAAMP. “Sure, if they start to rise, but [Bank of Canada governor Mark] Carney says they won’t rise, so you’ve got another year at that prime-minus rate.”

Don Lawby, chief executive of Century 21 Canada, says even when rates do start to increase, they are not going to jump significantly right away. You are not going to get 4% on a fixed rate again, but double-digit rates seem unlikely. “The only logic two locking in would be for someone very sensitive to any rate change and they just want to be secure,” Mr. Lawby says.

But at what price? If you’re using the “feeling secure” logic, why not go for the 10-year fixed-rate product? Rates on that product can be locked at 5.25%, ridiculously low by historical standards. Yet fewer than 10% of Canadians consider a 10-year product.

There are some compromises you can make. For starters, there is nothing to prevent consumers from having a blended mortgage at most Canadian banks. Some banks will let you take half your outstanding debt and lock it in. Diversity is preached for stock portfolios, but few people seem to adhere to the same philosophy when managing their debt. Consumers might want to take their cue from business. Few companies would want all of their debt coming due at the same time — it presents too much risk. The other option is knocking down principal: Make payments based on a 4% rate and have that extra $300 go straight to your principal every month.

The bottom line is if you’ve got a deal on your mortgage, why would you give it back? Dusty wallet Double check your credit card statements. DW is in a bit of a skirmish with Visa over a taxi cab bill. Of course, DW is too cheap to use cabs, but does succumb to them to get to and from airports on vacation. Last trip, the family took an airport limousine and paid the $56 charge. Guess what? The same amount was billed a month later. So far, the taxi cab company has yet to produce a second receipt. In the interim, DW had to pay the second $56 charge.

Gary Marr, Financial Post Published: Saturday, June 13, 2009

Although we are still falling short from this time last year, April has seen an increase in sales of 31% over March 2009.  “We’re seeing greater balance in the housing market, as evidenced by strong sales to active listings ratio of over 19%” says REBGV President Scott Russell  The trend in the market is now more realistically priced homes that are on the market with the intention to sell, not fish for an overpriced sale.

Coming off an all-time high in real estate prices, too high in fact to sustain, the current conditions are seeing conditions in the market normalize.  

The greater number of buyers together with less housing is creating a better balance between supply and demand which typically brings with it stability in pricing.  Overall buyers and sellers should both be optimistic in light of this stabilizing trend: for buyers prices are normalizing, and for sellers, their properties are now starting to move after a tough fall, winter, and spring!  

Below are the bright spots in Greater Vancouver, where sales are up compared to April of 2008:

Detached:

Vancouver West            up 59.5 per cent (193 units sold from 121)

Attached:

Port Coquitlam               up 69.6 per cent (39 units sold from 23)

Richmond                       up 17.9 per cent (132 units sold from 112)

Vancouver West             up 46.3 per cent (98 units sold from 67)

Apartments:

North Vancouver             up 29.2 per cent (84 units sold from 65)

The printing of money would cause an influx in the economy through the Bank of Canada’s ability to buy a variety of assets such as asset-backed securities, government bonds, corporate bonds, and even stocks.  The purchase of these financial assets works to  decrease the supply of these bonds in the market and increase prices.  This in turn, drives down yields, which fixed-rate mortgages are based on.  This in turn reduces the cost of borrowing and enables more people to qualify for loans to generate economic activity.  

Although quantitative easing sounds like it is a great thing and it works to stimulate the economy, it does not come without negative effects as well.  With the implementation of Quantitative Easing comes a recovery in the economy, which comes with inflation.  When we have higher inflation, it leads to higher interest rates.  The more money there is floating around in the economy, the less value it has, which in time buys us less, which means we need to make more to keep up with the lifestyle that used to cost us less.  In essence, costs rise, which means wages rise, and we have inflation!  Once the inflation rate rises, the Bank of Canada raises the Prime Lending Rate, and interest rates rise.  How long will it take for inflation to catch up if Quantitative Easing is in introduced, it is hard to predict.  Economists around the world have argued and continue to argue this.  

What does all of this mean to someone with a mortgage, or looking to find a mortgage?  In essence, no one knows how long these low interest rates will be around for.  We are all celebrating the low interest rates of today, but we need to be careful as these historically low rates will not be here for forever! 

The Bank of Canada has been lowering the Prime Lending Rate for the past year in an effort to stimulate the economy and ease the slow-down in the economy.  When the BOC announced a .25% decrease in Prime last week, it took Canada’s overnight rate to 0.25%. We have run out of room to boost the economy through the lowering of interest rates.  The lowering of interest rates usually unlocks credit and urges people to take advantage of that unlocked credit; however, this time it has not been as successful in years passed.  The credit has remained fairly tight and people have not responded as well to the interest rates as the Bank of Canada would have hoped.

A Prime Lending Rate of 0.25% is about as low as the Bank of Canada can go, and it now has to turn to other measures to stimulate the economy.  The Quantitative easing we are all hearing about may be the next move by the central bank.  More on Quantitative Easing in the next post.