Pending changes to Canadian mortgage rules may bite hard
On February 16, Finance Minister Jim Flaherty announced new rules that affect mortgage lenders and borrowers starting on April 19 of this year.
One of the changes requires that buyers qualify for their high-ratio mortgage based on the “five-year fixed rate” even if their mortgage payments are actually calculated on an available lower rate. In other words, the lender must calculate and evaluate your debt service ratios as if you were taking a five-year fixed.
For the most part, the changes were met with a “no big deal” kind of attitude but not long after the announcement questions began to surface about which five-year fixed rate would prevail for the purpose of “qualification.” After all, RBC’s posted five-year fixed rate is 5.39% today, while some brokers have offers for the same term available as low as 3.59%.
CanadianMortgageTrends.com is reporting today that the “chartered bank 5-year posted rate” which is currently at 5.39% will be the benchmark lenders use to determine how much house a buyer can afford.
So how might that impact the Saskatoon real estate market?
Let’s assume that you have a household income of $75,000. Let’s also assume that property taxes and/or condo fees will set you back $2,400, and that you’d like to pay this puppy off within 25 years. Mortgage calculators, enthusiastic lenders and motivated real estate agents would suggest that you could afford to service debt of $356,109. Now, bump that rate up to 5.39% and suddenly you can only afford $296,279. Any buyer who is pushing the limits of their debt service ratio at brokerage level rates must seriously adjust their expectations, if they don’t just happen to be borderline enough to fall out the bottom end of the market.
Oh, by the way. If you’ve been thinking about taking a 35-year mortgage, the same assumptions outlined above result in a $90,000 trim to the housing budget.
This suddenly sounds like a tough pill to swallow if you ask me.
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Royal LePage Saskatoon Real Estate
There's 46 Comments So Far
March 7th, 2010 at 9:46 am
Wow! I just thought it was the discounted rate. If true, how it affects the market will depend on how many people are just squeezing into the market with 5% down.
There needs to be a steady flow of first time buyers for the market to be sustainable.
Have not seen this reported in the MSM.
March 7th, 2010 at 4:46 pm
If this turns out to be true, good. The Canadian housing market is in serious bubble territory as it is, and anything the feds can do to let a little steam out of it is a good thing, as this makes housing more affordable for everyone. Interest rates are likely headed up in the near term, if people are streteching to buy now and the new rules are going to ‘hurt’ them, they need protection from themselves anyways. Personally, I’d love to see strict front/back end debt to income ratios mandated and enforced (28/36 or similar) on any CMHC backed loans and at least 10% down required on all home loans, but the dti ratios in particular are unlikely in the extreme. If you can’t buy the house you want on a 5.35%/25 yr loan with 10% down, can you really afford the house?
March 7th, 2010 at 7:41 pm
Doug,
The author of the post I noted said that it came from a source in the know and that an announcement would be forthcoming soon. We’ll see, but I’m inclined to believe it.
kinjikii,
Thanks for the comment. Excellent points.
The silver lining is a more inclusive housing market and we need homes people can afford if we want them to come here, or stay.
Of course, it was no big secret that these low rates wouldn’t be around forever and this new “announcement” only brings us where we were ultimately headed sooner than expected. Hopefully we won’t see eight and nine percent five-year rates anytime soon.
I’ll respectfully disagree on the 5% down thing. That particular program has opened the door to tens of thousands of young Canadians, myself included, and helped them get a head start in a home. It would be a shame to see it go. Young families can use the help most while they’re still young, and typically lower household incomes would make it nearly impossible to come up with ten percent. Now that we understand the full extent of the changes coming April 19, I’m feeling pretty confident that a “cooling” is in the works and will likely be quite effective. CIBC economist Benjamin Tal recently estimated that the new rules would hit unit sales in the range of 14-17%. I believe that was before we learned of the change we’re talking about here.
March 8th, 2010 at 10:31 am
I think there is a bit of miscommunication in this article and the example doesnt make sense. The 5 year posted rate of 5.39% only applies for qualifying if the term is less than 5 years or a vrm. All this will do is force people taking our cmhc insured mortgages to take out 5 yr fixed rate mortgages and qualify at the discounted rate(about 3.75%). This will have a very negligible impact.
March 8th, 2010 at 10:35 am
The other silver lining is a housing market that won’t fall out from under us, taking the rest of the economy along for the ride.
If I remember correctly (and I might not, so feel free to correct me on this), the Conservatives briefly introduced zero-down 40 year mortgages, before backpedaling once they saw how well that played out south of the border.
As a homeowner, tighter rules might take away from my net-worth, but you know what? It doesn’t matter in the long-run as long as we have a sound sustainable market, free from popping bubbles.
We need to think about the long run more often.
March 8th, 2010 at 11:38 am
Brian,
You may be right. It seems strange to make people qualify for the 5-year posted rate if 5-year fixed discounted rates are available, and they commit to the full term. If you’re right, this should only affect people qualifying using low variable rates and I don’t think there are many lenders allowing that right now.
Jeff,
Good points.
“Declining net worth” probably isn’t a “so what” for seniors who have placed the majority of their eggs in the housing basket, but I accept the point that some intervention might be a good thing right now.
The Conservatives did introduce 40-year mortgages in November of 2006 when housing markets in this region were just starting to heat up and that change made a significant contribution to blasting prices ridiculously higher. They later pulled them off of the shelf in July 2008 just as the market peaked and we were gearing up for a correction. A good example of how you can almost always count on government to do the wrong thing at the wrong time.
March 8th, 2010 at 11:47 am
Brian,
As I currently understand it, for terms 5-years or longer, the qualifying rate would/could still remain as the contract rate. Norm’s example does make sense, but if one were going to take out a 5-year fixed rate anyway, you could still conceivably qualify at the discounted rate (which will vary according to the lender, but using the RBC example is currently 4.09).
I’m not sure the impact will be negligible, however: It will funnel “marginal” buyers attempting to use terms less than 5 years or VRM’s into qualifying for the posted rate. I suppose the effect it has on the market will equal the amount of buyers that are using these rates to qualify for “maximum house” today- and I’m not sure what that is.
March 8th, 2010 at 12:23 pm
Brian, I agree with you on one thing — that 5 year fixed rate owners won’t be hurt. From the article Norm linked to:
Going forward, mortgages with terms of five years or more will use the contract interest rate. This is key because it suggests lenders will still be able to qualify insured 5-year fixed borrowers using heavily discounted contract rates (e.g., 3.75% instead of 5.39%, as of today).
As to whether or not that’s going to make a difference… I’m not so sure that I agree with you that the effect will be negligible.
People look at things like ‘carrying costs’ … and often that’s all they look at. They see that juicy 2% interest rate (or less) on a 5-year variable rate, and they base their purchasing decisions on how much house they can carry on their current salary. Sadly, many people do not look at the future… or if they do, they look at it thinking that it will be much better than the present and not account for potential downsides. How do you think things like Option-ARM mortgages got sold (in the USA) in the first place?
I used the numbers from above (made up a downpayment that seemed fair) and then plugged everything into the ING Direct mortgage calculator (which uses their posted rates).
Monthly income: $75k
Downpayment: $25k
Monthly CC/Debt payments: none
Amortization: 25 years
Property Taxes: $2400
Plug that all in and use ING’s posted 1.95% rate for 5 year VRMs, and you will see that this couple will ‘qualify’ to make an offer on a $429k house, which will give them a monthly payment of $1700.
HOWEVER… under the new rules they will have to be able to service that debt based on the posted 5 year rate. Using Norm’s 5.39%, that means they would only be able to afford a house worth $306k — quite a haircut! Now the upside is that if they do ‘only’ buy a $300k house, their monthly mortgage payment drops to just under $1200, giving them an extra $500 of ‘disposable’ income every month.
But these two DINKs decide that they can’t bear to live in the squalor of a three hundred thousand dollar house, so to get around these new ‘qualifying’ rules they lock in to the 5-year fixed-rate (3.89% at ING), which will allow them to make bids of up to $352k. This will maintain their monthly debt service level at $1700 (just like in the VRM example) … but at least it’ll be fixed there for five years, and won’t start heading up when the VRM gets adjusted.
So this hypothetical couple goes from being able to ‘afford’ (for some definition of the word) to bid almost $430k down to bidding just over $350k, because using the new rules they would actually have to bid even less (~$305k) if they went for the low, low VRM rates. That’s quite a difference.
Will this apply to everyone? No, of course not. Anyone who can slap down 20% of the purchase price doesn’t need to worry about qualifying rates… but anyone who can do that has already shown adequately that they understand how to save and budget appropriately. This is going to target the very people who can’t seem to make those choices, who can’t seem to see past the end of their nose, and who think that ‘Buy Now, Pay Later’ is a wonderful device. These (IMHO) are the people who cause the bidding wars, because they’re the ones who don’t seem to have mastered the skill of delayed gratification and who (again, IMHO) drive up prices past sustainable levels.
A house-to-income ratio of 4.7 (352k/75k) still isn’t healthy, by any stretch of the imagination… but it’s a whole lot more sustainable than 5.7 (429k/75k). I don’t know that this will fix anything in and of itself, but it might — just might — prevent things from getting any worse than they already are in some of the crazy-up-spiralling urban centers.
March 8th, 2010 at 1:01 pm
Hi Jen and Bookrat,
Agreed that the barebones numbers do show that there is a haircut in the total amount someone can spend on a home; however, the fact that anyone with an ounce of sense will know and budget for increased interest rates in the near term and want a longer term fixed rate.
Even if they don’t have the sense, I don’t think that any lender will even look at an application for a VRM in our current marketplace unless the borrower has shown creditworthiness (ie. very high dp, very low TDS). This is the reason I say the impact will be negligible, because this type of irresponsible lending hasn’t really taken place for the (very)recent past – at least by the big 5. Perhaps there are some brokers out there selling this type of product, but I think(hope) most mortgage underwriters now are digging deep into these types of applications. I would guess that the market keeps chugging along as it has until July when the inevitable interest rate increases occur.
March 8th, 2010 at 1:15 pm
“Anyone who can slap down 20% of the purchase price doesn’t need to worry about qualifying rates”
Not necessarily. Banks are free to make their own rules on conventional mortgages. One would think that they would take more care when the mortgage dollars aren’t insured.
Brian,
You make some good points and I think that these intended effects of these changes is to knock people out of the market who are right on the fringe, and perhaps acting a bit recklessly.
March 8th, 2010 at 1:17 pm
Bookrat,
I agree with and understand your example. Lower interest rates gives people a false sense of security for their financial future as they only calucate the monthly cost and don’t seem to blink an eye at the interest they’re paying over the life of their mortgage.
I think these new rules are well overdue and even a little lax. Tougher qualifications and higher interest rates mean lower housing prices. And for those of us who have been saving since the craze in 2008 may have a chance at snagging a good deal in the next year or so.
I also agree with kinjikii on having 10% down. If you can’t have the discipline to save 10% down on a home, why would someone think they can handle the carrying costs in addition to saving for maintenance and emergencies? A 10% down rule would drive prices even lower and make housing affordable for more people.
I think we’ve become used to these housing prices and perhaps are accepting it as the norm. And maybe it is. But I’m still holding onto hope that these prices are not sustainable with the average income earner in Saskatoon.
March 8th, 2010 at 2:35 pm
Norm sez: Banks are free to make their own rules on conventional mortgages. One would think that they would take more care when the mortgage dollars aren’t insured.
Alright, fair cop: these changes must apply to a High Ratio Mortgage (less than 20% equity), but there’s no reason why a bank can’t apply them to any mortgage they want.
However, if they do that, then the person will just go down the street to another lender, and the bank that rejects people will lose out on the chance to collect all that juicy interest. Given that the banks were REQUESTING that the government make banking restrictions SPECIFICALLY so that they applied to everyone seems like pretty strong evidence that they’re all playing a game of ‘lowest common denominator’, and that none of them can afford to tighten up lending or underwriting rules unilaterally because they’ll lose business.
The fact that the business they’ll lose might not be business they wanted to have in the first place (i.e. more prone to default) is usually lost on people who seldom look farther than the next quarterly report…
March 8th, 2010 at 2:58 pm
Bookrat,
By that logic everyone gets whatever amount of money they want. Of course, each lender has a minimum standard that needs to be met and those standards change depending on what’s happening in the market.
Some lenders have been qualifying high-ratio buyers with five-year fixed rates for awhile now. Sometimes turning away a high risk client is the surest way to avoid a loss. There is all kinds of evidence around that banks are taking greater care in who they approve, and even what the money is being borrowed against. I heard of a deal falling apart last week over a home inspection and it was the lender who pulled the pin. Another a couple of weeks ago that went south based on condo documentation.
March 8th, 2010 at 3:22 pm
Norm, seniors don’t deserve to benefit at the expense of the entire economy and any senior who is counting on cashing in on an unsustainable bubble for their own benefit is, at best, short-sighted. The best way to help them, along with everyone else, is to avoid such a crash, which means focusing on market sustainability.
It’s tempting to treat a house as a retirement plan, but it’s also lazy. I don’t think seniors selling in this market are going to suffer if it simply levels off; their homes are still worth probably triple, even quadruple what they paid for them. That’s a pretty good return on investment. A US style housing meltdown will really make for a painful retirement.
Sorry that reads like a rebuttal, and I know we agree on 90% of this stuff.
March 8th, 2010 at 3:40 pm
Jeff,
Guess what? We agree on the points you’ve just made as well.
The average price of a Saskatoon home was $160,000 is 2006. What more needs to be said.
March 8th, 2010 at 3:58 pm
” Mortgage calculators, enthusiastic lenders and motivated real estate agents would suggest that you could afford to service debt of $356,109. Now, bump that rate up to 5.39% and suddenly you can only afford $296,279″
That’s huge if it comes through,
seems like a good idea, you should be able to refinance with established borrower
should cut off those who are biting off more than they can chew
amazing, that at $75,000 a year for family, the old rules let you borrow over $350,000, now that sounds like a recipe for disaster!
may bring some common sense back to Saskatoon (and national) prices
…
Hopefully
March 8th, 2010 at 8:55 pm
Home buying interest increasing in Saskatchewan and Manitoba: RBC Survey
“Ninety-one per cent of Saskatchewan and Manitoba respondents believe that buying a home is a good investment according to the 17th Annual RBC Homeownership Survey. Twenty-eight per cent say they are likely to purchase a home in the next two years, which is up slightly from 25 per cent last year.”
March 8th, 2010 at 10:18 pm
Hey Norm!
I found this quote from the above RBC survey a bit odd:
“The RBC survey, conducted by Ipsos Reid, found potential homebuyers in Saskatchewan and Manitoba are allocating the lowest amount across the country for a down payment ($27,335), with this figure representing the highest proportion of their home’s estimated value (15.1 per cent).”
I get that this is just a telephone sampling of people “thinking about buying a home” and that they may not have actually run through the financial transactions thoroughly, but this doesn’t make any sense at all to me. Does this mean they think $182,233 (15% of 27,335) will buy the average house in MB or SK?
March 8th, 2010 at 10:29 pm
Jen,
Your math is right on, for sure. Just a guess but maybe $182,233 is what the surveyed buyers expect to spend on average, not necessarily what they believe average prices to be. Does that make sense?
March 8th, 2010 at 10:53 pm
Yikes. I hope those surveyed buyers are expecting to time-travel back to 2006 for that purchase, then.
March 8th, 2010 at 11:19 pm
Lol. I was thinking it may be heavy on first timers and they might come in 10-15% below average which is $201K in MB and $233K in SK.
March 9th, 2010 at 11:51 am
The RBC survey is dated! The survey took place between January 8 and 13, 2010. The dynamics of the market have changed since then. Changes in mortgage rules would require a new survey to more accurate measure the current market.
I’m tossing the survey in the garbage.
Anyhow, looks more like people are running to exit the market to me.
Nice fresh daily sales vs new listings graph at http://twitpic.com/17kg7b.
March 9th, 2010 at 7:40 pm
Steven, any graph of any economic series needs to include multiple years of data to have any relevance. You have 6 or 7 months, that is not enough. You need more data to take into account seasonal factors.
March 9th, 2010 at 11:07 pm
“You need more data to take into account seasonal factors”. Whatever! Peter, you are free to dispute me and make your case by providing your own graph with more months.
To me, sales look to be trending downward, and new listings are trending upwards since the announcement. In a normal season; which I think is illustrated in the graph from Dec09 to the announcement, sales and new listing trends are somewhat tracing each other in the same direction. The trend tracements of sale and new listings stops and does not continue after the announcement.
Again, if you wish to dispute me. You are free to insanely go back multiple years.
March 9th, 2010 at 11:20 pm
“The RBC survey is dated! The survey took place between January 8 and 13, 2010. The dynamics of the market have changed since then. Changes in mortgage rules would require a new survey to more accurate measure the current market.”
The dynamics have changed in 2 months?!
If everything changes every 2 months with minor rule changes that must mean a lot of people are living on the edge of being able to afford anything.
Maybe the dynamics have changed, but the fundamentals haven’t?
Probably all along for a few years now the fundamentals haven’t been up to matching the perceived local value of a 1950’s style house that wouldn’t have fetched more than $100,000 a few short years ago, but now is $250,000?
March 10th, 2010 at 9:37 am
Yeah, Dawna, perhaps that’s why people surveyed came up with the number of $182,233. So if they know the number has to be doubled, are they still willing to invest??
March 10th, 2010 at 11:54 am
Markets have the personality of a manic depressive person. Fundamentally the person needs food, shelter, and water. However, take away a manic depressive’s calming drugs and rational maintenance of their food, shelter, and water get thrown out the window.
Ya know, boom and bust cycles co-exist with monetary expansion (credit easing) and monetary contraction (credit tightening). Credit easing is like taking a manic’s drugs away, and credit tightening is prescribing the manic drugs. For the past couple years the real estate market has had no proper dose of calming drugs (fundamentals).
Mortgage innovations over the past years has been like an intern trying to find a better drug therapy for the manic’s desired lifestyle at the manic’s expense. Well, now that the intern sees that the doctors were right about the correct fundamental drugs. The intern agrees that due to the manic’s condition, the manic cannot sustain the lifestyle he seeks. The manic needs to be returned to the proper drugs with an increased dosage to get him to the rational state that will allow him to maintain proper levels of food, shelter, and water.
Like it or not, the new rules are an increased dosage of fundamentals. LOL
March 10th, 2010 at 9:51 pm
Steven,
“you are free to dispute me”
I know I’m free to do this, that’s what I just did.
Quite frankly, your numbers were cherry picked to highlight a point. You chose from the start of the fall boom until now. To get a true picture of relative ’seasons’ you would need to include another of the same… season. But to compare spring to fall just isn’t that meaningful.
If you ran a graph of the stock market from march 2009 when it bottomed out until now you could draw the conclusion that the stock market has to be the greatest investment ever, I mean it pretty much does nothing but go up! However, if you pulled the graph back to start of 2008 you would have a completely different perception. What you have done is the equivalent of drawing a graph from march 2009 until today.
Not to say your data is incorrect, I’m sure it is accurate. It just doesn’t have enough context to aid in analyzing a decision that involves several hundred thousand dollars.
March 11th, 2010 at 2:45 pm
They think the average house is $180,000? LOL
Did they interview high school kids? LOL
They are all going to be living in their parents basements!
Wait, I live in my parents basement!
House prices are depressing, I think I’m going to leave!
I didn’t want to work in a potash mine or at fast food anyway!
March 11th, 2010 at 3:50 pm
house prices are out of control…
…it is almost like someone is manipulating the market with artificially low interest rates in order to spur economic growth…oh wait…that is exactly what is happening!
Bubble here we come!
March 11th, 2010 at 6:03 pm
L.oki,
Let me guess; you got laid off?
Nice to see you.
March 11th, 2010 at 6:21 pm
Tyzon & Cindy,
This RBC study doesn’t suggest that these people think the average price is $182K, rather that they plan on investing $182K on average. Keep in mind that we’re also talking about a provincial study. The average selling price of a home between the two provinces is about $217K, and first-timers normally spend below the average.
March 11th, 2010 at 9:02 pm
This is not on topic but some kudos for Norm. Royal LePage Canada have announced their top 10 donors to the Royal LePage Shelter Foundation and guess who is number 3 in Canada – Saskatoon’s own Norm Fisher! Congratulations Norm!! Great work for a great cause.
For more information on the Shelter Foundation click here: http://www.royallepage.ca/CMSTemplates/AboutUs/ShelterFoundation/ShelterTemplateL.aspx?id=1780
March 12th, 2010 at 6:57 am
Hey Bill,
Thanks for the props.
The Shelter Foundation is a terrific organization that does amazing work across Canada to support women and children who are fleeing abusive situations. It’s near and dear to my heart because I happen to know and love some women who have been subjected to abuse at some point in their lives. Guess what. You likely do as well. Sadly, we all do, because abuse against women is still all too common.
The Shelter Foundation has raised over $10 million dollars for shelters and violence prevention programs since its inception with momentum really building in recent years. It’s unique in that every penny of administrative costs are absorbed by Royal LePage, so every dime of every contribution we make finds its way directly into a shelter to do its work. Better yet, the foundation provides an opportunity for donors to direct their dollars to specific shelters. Consequently, every dollar raised or donated in Saskatoon is put to work in Saskatoon at either Interval House or the YWCA Crisis Shelter.
I am always reluctant to raise our involvement with the Shelter Foundation. I’m sure you can appreciate the conundrum in attempting to promote a worthy cause through ones business without coming off as braggadocious, or worse, to appear to be exploiting such terrible circumstances. At the same time, there is a growing passion inside of me to accelerate our efforts and do more, so I know I need to find ways in which I can comfortably discuss the foundation and the work that we’re doing to support it here in Saskatoon. Thank you for opening that door for me today.
March 12th, 2010 at 9:45 am
IF you think THAT’S outdated….I came across a neibourhood profile on Wikipedia of Lawson Heights that stated (from 2005) that the average household income was $49,000 and the average house price was $93,000.
Although it is wikipedia I almost spit out my coke.
March 12th, 2010 at 11:39 am
Norm you are a great guy hosting a great website,
.
Average house price $93000, that was probably census data from year 2000 and cited by someone in 2005???
March 12th, 2010 at 12:21 pm
“On February 16, Finance Minister Jim Flaherty announced new rules that affect mortgage lenders and borrowers starting on April 19 of this year.”
The first three weeks of April should be brisk at financial institutions, with everyone rushing out to get pre-approved before the cutoff date. The latter part of April and the month of May is shaping up to be a gong show for housing bids, as people face off against each other with their respective debt service ceilings. Then we’ll see another rush in June – right before interest rates get hiked. I think if you were planning to sell this year, you’ve got a 3-5 month window of peak opportunity (Mar-July).
March 12th, 2010 at 12:57 pm
From Jen’s Twitter stream, CMHC’s memo clarifying how the “qualifying rate” will work. As best I can tell it’s pretty much as Rob suggested it would be is his post which I referenced in the main body of this post.
“For loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate, and the contract interest rate. For loans with a fixed rate term of five years or morw, the qualifying rate is the contract interest rate.”
I suppose this makes the five-year fixed the most popular mortgage term as we move forward.
If II opt for the three-year fixed term which is available today at 4.15% (RBC), the lender will determine if I can afford the payments using the current five-year fixed rate of 5.25%. If I opt for the five-year fixed they may qualify me using the special discounted rate currently offered on that product of 4.15%. Same scenario regardless of where I shop including a broker. Seems like a sound policy to me.
March 12th, 2010 at 1:02 pm
Jason
I don’t know… if Brian (post #4 above) is right and if, as some other articles posted here have argued, interest rates don’t get hiked until next summer we may not see any rush.
March 12th, 2010 at 1:55 pm
Jeremy, just to clarify, the implied “rushes” were with respect to mortgage applications prior to the April 19 cutoff and the tentative rate hike in July. As for sales, I think this will be highly dependent on availability – both in terms of units on the market and pre-qualified buyers – both of which are going to change radically after April 19 (probably more sellers rushing to market at the same time we see less people able to qualify). If we see a rate hike in July (and there are no indications that we won’t), say hello to a Canadian housing bubble.
March 12th, 2010 at 4:33 pm
I think an important variable being overlooked is the value of our dollar. It was expected to reach parity with the USD by this summer. Some economists are now saying that it could be a lot sooner. If that happens, inflation sets in because everything we import becomes more expensive and our exports become more expensive for other countries to purchase. In order to control inflation, the BOC has to raise interest rates. Now, if that happens, worldwide money markets will invest more in CDN dollars because of the return which inturn inflates the value of our dollar even more.
As rates go up, traders bail out of the bond market because the value of what they are holding goes down because new bonds offer a higher yield. That costs the bank more to fund so they have no choice but to raise mortgage rates(fixed long term rates that the gov’t is making new mortgages qualify with).
At least that’s how I understand it….If I’m wrong, I’m sure someone will be happy to correct me. Anyways, depending on what happens with our dollar in the next month or 2, some people may get caught by surprise with an earlier than anticipated rate increase.
March 12th, 2010 at 4:46 pm
What really constitutes a housing bubble? Is all of Canada in a housing bubble, or just certain parts? I think most would agree that we at least overvalued here, but have we crossed that bubble line?
Jason, what size of rate hike do you think will happen?
March 12th, 2010 at 4:51 pm
If our dollar goes up, things we import get cheaper. Inflation happens when the money and credit supply increase. Prices are only a sympton of inflation not the cause.
March 12th, 2010 at 6:49 pm
Thanks Doug. I stand corrected as imports would be cheaper. I still believe if our dollar grows too much, we’ll see rates rise sooner than we expected.
March 12th, 2010 at 10:58 pm
Unfortunately I think Doug is right. Strong Canadian dollar doesn’t give BOC much leeway to raise rates, especially if other countries are holding their rates down. With 10% unemployment in the US there is just no option for rate increases right now, similar situation in Europe. So you had it otherwise right westcan, if we raise rates our dollar goes up even more which hurts our economy but actually causes deflation because of cheaper imports and shut down in export industries.
I actually saw a blurb that the BOC or maybe it’s the federal government, might interfere directly in the currency market by SELLING our currency to try to decrease it’s value so that they can leave interest rates. So think about it, they lower interest rates and that causes a housing bubble, solution change mortgage rules because the economy needs the lower rates, that still isn’t enough so further tighten mortgage qualifications. Lower interest rates are still not enough to weaken currency which is hammering our economy, can’t lower interest rates anymore, solution, sell our own currency. Does anybody really know what they’re doing because I sure can’t figure it out. This won’t end well.
March 13th, 2010 at 2:05 am
Doug, if they raise rates I think they’ll make it substantial enough such that they may not have to raise them again in the short term. Maybe 50 points.