OTTAWA -- The Bank of Canada left its key policy rate unchanged Tuesday at one per cent, while slightly boosting its outlook for economic growth this year and next due to a pickup in U.S. demand and an anticipated strong rebound in business investment.
The central bank now expects the economy to expand 2.4 per cent this year and 2.8 per cent in 2012, which is up modestly from its October forecast of 2.3 per cent and 2.6 per cent, respectively.
Net exports are expected to contribute more to growth than anticipated, the central bank added, although warning the "persistent" strength of the Canadian dollar and poor productivity will hold back momentum in the trade sector. And it flagged the widening of the current account deficit to a recent 20-year high, which analysts have warned is a sign the country may be living beyond its means.
All told, the central bank stuck to its previous view that the economy won't reach full potential until the end of 2012, a reflection that "significant" excess capacity remains in place. Inflation, which the central bank said has been "temporarily" boosted by the introduction of new sales taxes in British Columbia and Ontario, is expected to "converge" to the preferred two per cent target by the end of next year.
The central bank, as expected, kept rates as is, and its statement tried to strike a balance between highlighting recent improvements in the economy and factors that are expected to impede a faster pace of expansion. Further colour is expected when the Bank of Canada releases its updated economic outlook Wednesday.
It acknowledged the global recovery is proceeding "at a somewhat faster pace" than it previously anticipated. Risks remain elevated, the central bank said, while in its recent December decision it indicated risks had increased.
The driver for this improvement is the United States. The central bank said U.S. private-sector demand "has picked up and will be reinforced" by the Federal Reserve's $600-billion US asset-purchase plan and the political deal to extend Bush-era tax cuts by two years.
Furthermore, European growth has been "slightly stronger" than anticipated. However, sovereign debt woes remain "a significant source of uncertainty to the global outlook."
In Canada, the economy is beginning to see a rebalancing of demand, the bank statement said. Government stimulus is winding down, and consumer spending and real estate activity is set to moderate as households deal with record debt levels. (The statement made no mention of the federal government's decision Monday to toughen mortgage-lending rules.) Picking up the slack, instead, will be capital spending by business sector.
"Business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives," the central bank said.
In the Bank of Canada's business outlook survey released last week, 44 per cent firms suggested they expected greater investment in machinery and equipment over the next year, with 41 per cent indicating capital-spending levels would remain the same - levels that economists said remained "quite strong."
A healthy pickup in U.S. growth and continued demand for commodities would boost net exports, the central bank said. Net exports proved to be a major drag on growth in the third quarter of 2010 but is now expected to add to gross domestic product expansion in the October-to-December period.
"However," it added, "the cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada's current account deficit to a 20-year high."
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In the same time period, 88 condos were sold, down by 2 condos from last week. The median price is up $6,000 to $292,500. The average condo was on the market for 72 days. Condo pricing is generally stable, but we are seeing the time to sell a condo rising quickly. As well, the number of condos sold is decreasing. This tell us that we may soon see a softening in condo pricing.
Today the Finance Minister, Jim Flaherty, announced significant changes to the rules for Canadian mortgages. Directly below you will find some clarification of these rules that was provided by Stephen Gagnon of Mortgage Architects. Following that is an article from today’s Globe and Mail.
1) The major modification is the change from 35yr amortizations to a maximum of 30yrs. Last year, 40 year mortgages were eliminated. However, with low interest rates, this will not affect too many people in the short term. As rates go up it will have a certain impact on some borrowers. This takes effect on
2) Borrowers that are looking to refinance their existing mortgages can now only finance up to a maximum of 85% of equity. This is down from a previous cap of 90% of value. Keep in mind that this is for refinancing only. The minimum down payment for a new mortgage still remains at 5%. This change takes affect on
3) The government will no longer allow HELOC's (Home Equity Line of Credit) up to 90%, and this will be effective
If you have any questions, post them here, or give me a call.
Globe and Mail Update
Three changes include reducing maximum amortization period to 30 years from 35 years
Concern over rising consumer debt levels is prompting
Finance Minister Jim Flaherty announced Monday [http://www.fin.gc.ca/n11/11-003-eng.asp] that new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
Secondly,
Thirdly,
Though longer amortization periods reduce monthly payments, they greatly increase the amount of interest paid over the life of the mortgage and make it harder to build up equity.
The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 per cent interest, and the minimum 5 per cent down payment of $17,227, a 35-year mortgage would have monthly payments of $1,441. Shorten the amortization period to 30 years, and the monthly payment increases to $1,555.
At a news conference in
Mr. Flaherty said his concern is not
"We're seeing people borrow to the max, and borrowing to the max at low interest rates," he said. "Most Canadians are not doing that."
Mr. Flaherty predicted the measures will have "some moderating" impact on the housing market.
He said the changes will not take effect immediately because of a requirement to give the industry 60 days notice before making policy changes of this nature.
He said past experience suggests there is no need to fear a rush on 35-year mortgages before the new rules take effect.
In addition to cutting mortgage terms,
Home-equity lines of credit and loans have surged in
The third measure that will reduce how much Canadians can draw on their home equity. Last February the Finance Department announced that it would lower the maximum amount Canadians could withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. It is now reducing that maximum to 85 per cent from 90 per cent.
Observers have been speculating that Finance Minister Jim Flaherty would take steps to tighten mortgage credit in the next federal budget. The timing of the move suggests concerns are growing in government circles about household debt and its impact on the economy.
CIBC chief economist Avery Shenfeld referred to the mortgage changes as part of a larger move by the government to "force Canadians on a debt diet" as household debt levels sit at record levels.
"Policy makers now have that credit buildup in their policy gun sights, and will use higher rates and regulatory changes to bring spending into better line with income, and cool mortgage demand," Mr. Shenfeld wrote in an economic forecast on Monday.
"Canadians aren't on the verge of a U.S.-style default crisis - not at these interest rates, and not with debt having been granted to stronger hands than was the case before
"But maintain this diet of borrowing for five more years and debt obesity would indeed weigh down the household sector's momentum. It's time to start the borrowing diet now, and that means policies aimed at slower debt-financed consumption growth and a cooler housing market."
Bank of Montreal's head of Canadian retail banking supported the government's move, since the bank has been primarily recommending mortgages with a maximum 25-year amortization to build more equity and retire the loan faster, rather than paying more interest.
"The actions announced today by Minister Flaherty are prudent, measured, responsible and timely," Frank Techar, president of personal and commercial banking at
It's not the first time the Conservative government has tinkered with the mortgage market. In 2008, Mr. Flaherty announced
Last February the Finance Department lowered the maximum amount Canadians could withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. Mr. Flaherty also introduced a measure requiring borrowers to qualify for a five-year fixed-rate mortgage, even if they sought a variable mortgage at a lower rate. Until that change, home buyers only had to qualify for the higher of either a three-year fixed-rate or variable-rate mortgage.
The Canadian Association of Mortgage Professionals spoke to the government frequently over the last three months, and was pleased that the changes didn't include any modification to the minimum down payment required to buy a home. And while president Jim Murphy said that he generally approves of the changes to amortization lengths, he hopes the government shows the same willingness to change if the market cools further.
"We understand why he did what he did," Mr. Murphy said. "But we hope when the time comes, he'll revisit that decision. Real estate is very important to the economy, and it's crucial that we find a balance because you don't want to overreact to temporary market conditions."
He said a better choice would have been to keep 35 year amortizations, but force all applicants to qualify with the assumption of a 25 year amortization.
CAAMP, which represents the mortgage brokerage industry, released a study late last year that showed mortgage debt in
There was a jump in the number of Canadians using their mortgages to free up cash, with 18 per cent taking out equity as the cited a need for "debt consolidation or repayment." The average amount borrowed against home equity was $46,000. Given that there are 5.65 million mortgage holders in
"It is estimated that 30 per cent of the takeout was for debt reconsolidation and repayment," the report stated. "Therefore, while the amount of outstanding mortgage debt would have increased by this amount, totals for other types of debt would be correspondingly reduced. About $15-billion was taken out for renovations, $6-billion for education and other spending, $7.5-billion for investments and $4-billion for other purposes."