BCREA ECONOMICS NOW

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Bank of Canada Interest Rate Announcement - April 17, 2013

The Bank of Canada kept its target overnight rate at 1 per cent this morning. In the statement  accompanying the decision, the Bank forecast that the Canadian economy will gain momentum through the year following a weak second half in 2012, but slow growth through the first half of this year will limit real GDP growth to just 1.5 per cent in 2013 before rising to 2.8 in 2014. The Bank's revised forecast means that the economy is now projected to return to full capacity in mid-2015, rather than in 2014 as previously predicted. A more persistent output gap will keep downward pressure on inflation, which is now expected to gradually rise to the 2 per cent target rate by mid-2015. The Bank continued to sound a much more dovish note on future rate increases, noting that the considerable policy stimulus currently in place will likely remain appropriate for "a period of time, after which some modest withdrawal will likely be required." 

With an expanding output gap and inflation trending well below its 2 per cent target, it is natural to ask if the next move by the Bank of Canada is a rate cut rather than the rate hike that almost all economists have penciled into their forecasts. However, unless the economy deteriorates much more or inflation trends much lower, the Bank is unlikely to lower interest rates since doing so would run counter to a year of loudly exhorting households to cut back on debt. Instead, the Bank will likely continue to use forward guidance about the need, or lack thereof, for future rate hikes in order to influence long-term rates and the Canadian dollar lower. The combined of effect of which should provide continued stimulus to the Canadian economy.

Katie Keir, with files from news wires / February 04, 2013 

Scotiabank has changed its interest rate forecast, according to a recent economic report.

Previously the bank predicted rates would be on hold until Q1 2014, but now says it has decided to delay this by a full year.

It states, “[We] have long spoken about how the fat tail risks to our print forecast are skewed toward later rather than sooner, this is a pretty sizeable forecast change that merits delving into some of the key reasons.”

It then gives six reasons for the change. These include:

Fed actions will impact the Canadian dollar: The bank doesn’t “believe…the BoC will be able to significantly widen Canada-U.S. spreads…without imposing a more deleterious overshooting of the currency’s rate of exchange against the USD.”

Since it expects the Fed won’t raise rates until 2015, it finds the BoC will also stand pat until around the same time. Scotiabank adds, “There are limits to the independence of a central bank in a modestly sized economy that is heavily dependent upon its bilateral trading and capital markets relationship with the United States.”

Read: How latest Fed move impacts investors

The effects of mortgage-rule tightening: The report says, “[There’s] more evidence that cumulative regulatory tightening of lending conditions since 2008…is sharply cooling credit growth and housing markets… The cumulative, lagged impact of this rule tightening lessens the BoC’s focus upon perhaps…reinforc[ing] its effects by raising interest rates.”

Read: Moderation on tap for Canadian housing

Inflation could keep undershooting: The bank finds Canada is failing to meet the BoC’s inflation target, with headline CPI only hitting 0.8% year-over-year. The report adds, “The BoC might be expected to adopt an easing bias when falling so short of its inflation target.”

Uncertainty after Governor Mark Carney’s departure: The bank predicts policy continuity but says, “A risk is slanted toward a transition that could afford the opportunity for a new Governor to guide markets with his or her own bias in consultation with the Governing Council.”

Read the full report.

Also read:

Long-term interest rates will remain stable

BoC maintains 1% overnight rate

Rise above low interest rates

Originally published on Advisor.ca

There are many different reasons to renovate a home:  to save energy (and save on utility bills) to make room for a growing family, to improve safety or to increase the resale value of your home, or simply to bring a fresh new look to your home.  There are also a number of different ways to finance your renovation.  Read on to obtain information for a number of financing options, along with practical advice to consider before starting your renovation project.

Whether you intend to finance your renovation yourself or borrow money, you should talk to a financial advisor and to your lender before you make firm plans.  They can help you understand your options, and advise you on how much you can borrow and even pre-approve you for a loan. this information will help you plan realistically. 

Explore Your Options 
                    

Your Own Resources:  For smaller renovation projects, you may consider self-funding material costs, especially if you plan to do the work yourself.

Credit card:  Likewise, you can use your credit card to pay for materials for smaller renovations.  But be careful not to carry the balance for too long; credit card interest rates can exceed 18%. 

Personal loan:  With a personal loan, you pay regular payments of principle and interest for a set period, typically one to five years.  You also have the option of a fixed or variable interest rate for the term of the loan.  The interest rate on a personal loan is typically less than that of a credit card.  Unlike a line of credit, once you pay off your loan you will have to reapply to borrow any new funds needed.

Personal line of credit:  This is another popular choice for financing renovations.  It is ideal for ongoing or long-term renovations since it lets you access your funds at any time and provides a monthly statement to help track expenses.  A line of credit offers lower interest rates than credit cards, and charges interest only on funds used each month.  And, as you pay off your balance, you can access remaining funds, up to the line of credits limit, without reapplying.

Secured lines of credit and home equity loans:  These options offer all the advantages of regular lines of credit or loans, but are secured by your home's equity.  They can be very economical, since they offer preferred interest rates, however initial set-up costs including legal and appraisal fees usually apply.  Lines of credit and home equity loans are usually limited to 65% of your homes value; however, some regional lenders still allow up to 80% financing for HELOCS.

Mortgage refinancing:  When funding major renovations refinancing your mortgage lets you spread repayment over a long period at mortgage interest rates, which are usually much lower than credit card or personal loan rates.  This type of financing can allow you to borrow up to 80% of your home's appraised value (less any outstanding mortgage balance).  Initial set-up costs including legal and appraisal fees may apply.

Financing improvements upon-purchase:  If you're planning major improvements for a home you're about to purchase, it may be advantageous to finance the renovations at the time of purchase by adding their estimated costs to your mortgage.  CMHC Mortgage Loan Insurance can help you obtain financing for both the purchase of your home and the renovations -  up to 95% of the value after renovations - with a minimum down payment of 5%.

Other Considerations and Options

Planning for the Unforeseen

It's a good idea to set aside a percentage of your renovation funds to cover items not included in your renovation contract.  For things you discover you'd like to add once work us under way, like extra or upgraded features, furniture, appliances and window coverings or for contingency.  A separate fund lets you make decisions easily, without having to renegotiate your financial arrangements or reapply for new funds.

Grants and Rebates for Energy-Saving Renovations

Across Canada, renovation grants and rebates are available from the federal and provincial governments and local utilities, especially for energy saving renovations.  If you qualify, they may help pay for some of your projects costs.

Source: CMHC

The BCREA's Chief Economist Cameron Muir speaks up about the myth of the housing bubble:

I am now convinced that we will never hear the end of housing bubble speak. The

premise is now as firmly entrenched in popular consciousness as carbon emissions and TMZ. It has taken the form of idolatry in the blogosphere, where any countervailing narrative is demonized. It has catapulted university dropouts into media darlings because of a hackneyed webpage and an opinion. It has been tarted up by so-called experts who predict impending doom year after year, despite being completely wrong every time.

Now, I’m not wearing tinted glasses. Housing markets go up and they go down.  However, my point is that sharp and significant declines in home prices are usually created by massive economic shocks, like the 21 per cent mortgage rates and recession of 1982. Yes, there can be shortterm speculative bubbles that float back to earth after the circus leaves town, but home prices in Vancouver, for example, have been incongruous with other Canadian markets for decades.

The big test was 2008. That was the year of the doomsayers, when the largest financial crisis since the Great Depression besieged us and the collateral damage hurled us into a global recession, one from which we still haven’t fully recovered. The airwaves were all a buzz with end of the world prophets and those predicting home prices would be chopped in half, at least. It was going to be the big one! The housing market had gone through a significant infl ationary period leading up to 2008. Unlike today, speculation was clearly evident. Accusations abounded that Vancouver was overvalued, unsustainable and frothy. One financial institution even had a publication called Housing Bubble Watch, now defunct, in which Vancouver was always the straw man.

So what happened? Home prices fell 15 per cent from peak to trough, but that was short-lived. Indeed, once the clouds of uncertainty dissipated only a few months later, buyers came back in droves. 

The most dramatic turnaround ever recorded occurred in Vancouver during 2009, when the year began with 1980s level consumer demand and ended with sales tracking near record levels. Prices came right back to where they were before the crisis, and have stayed there, for the most part, for the past three years. If such a severe financial crisis and global recession couldn’t trigger a meltdown of the housing market or pop
any asset balloon, what could?

The main misconception about housing markets is that they behave like the stock market. They don’t. Bad news can drive stocks lower in a matter of seconds,whereas homes are relatively illiquid; they take a long time to sell and have higher closing costs. In addition, owner-occupiers typically don’t speculate with the family home. In times of hardship, the home is typically the last thing to go. Instead, they hold off on other expenditures like lattes, movie tickets, new TVs and vacations.

In a market that has a well-diversified economy and expanding population, fire sales are extremely uncommon. Unless there is household financial catastrophe on a large scale, potential home sellers simply wait until market conditions improve.

I write this piece as home sales in Vancouver and many other markets stagnate and homes prices tread water (see the Canadian Real Estate Association’s Multiple Listing Service® Home Price Index for an accurate reading). I have no doubt that the voices of impending doom will soon renew their bellicose refrain. Perhaps their tea leaves will be right this time and the market will indeed collapse, leaving homes selling for 50 cents on the dollar. I’d put my money on that refrain continuing for a long time to come.

By Cameron Muir, BCREA Chief Economist