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Monday, October 28th, 2013

Flaherty won’t intervene in housing market but keeping close tabs


OTTAWA — The Globe and Mail

Last updated Monday, Oct. 28 2013, 1:33 PM EDT

Finance Minister Jim Flaherty says he has no intention of interfering in the housing market “at the time being” but plans to meet with developers to learn more about what could be driving the sector’s recent steam

Following a meeting in Ottawa with private sector economists, Mr. Flaherty said he was urged to take a closer look at the sector.

With commitments to near zero interest rates for the near term, Mr. Flaherty noted that the Bank of Canada has no policy room to respond to the housing market. As a result, any response would have to come from the Department of Finance, though he stressed that the government has no plans to interfere in the market at this time.

“Some of the economists this morning suggested that I have some conversations with some people in the building industry – some more conversations – because of what we’re seeing in certain parts of the country: a re-acceleration of housing prices,” he said.

“I do speak to people regularly in the business and I’m going to do more of it now, because I want to ensure that this isn’t just a temporary bubble. One theory is that we’re pulling forward housing sales by the reality that eventually interest rates will go up and so that some people who perhaps should be waiting a bit are going ahead and buying, but this is speculation and we’re going to have to look into it more. But I have no intention of interfering in the market at the time being.”

New Mortgage Rules Announced

Thursday, June 21st, 2012

OTTAWA – Ottawa is tightening mortgage rules to make it harder for people to buy or borrow on their homes.

Finance Minister Jim Flaherty said Thursday that he will once again cut the maximum amortization period for government insured homes to 25 years from the current 30 years, and will also limit how much homeowners can borrow on the value of their homes to 80 per cent from 85 per cent.

Those are not the only changes the government is making. It will no longer be in the business of insuring homes that are worth more than $1 million — meaning buyers will need to put up at least a 20 per cent down payment or seek private insurance.

As well, it will insist that prospective buyers have the means to afford mortgage payments, property taxes and heating costs on their home. It will do so by setting cost ratios based on household income — a kind of affordability ratio — of 39 per cent for gross debt service and 44 per cent for total debt service.

But the most significant change is reducing the amortization period, the fourth time Flaherty has done so since economic difficulties and tumbling interest rates started becoming a major driver of the housing market. At 25 years, it is now back to where it had been historically before the Harper government began raising the period after taking office in 2006.

The government says the changes mean that about five per cent of Canadians who might be considering buying a new home will likely no longer qualify.

“It’s a question of trying to moderate behaviour and I hope Canadians will reflect before they jump into a market at the high end,” he said.

“It will mean that some people will not buy into the market, it will also mean that some people will buy less into the market, they’ll buy a less expensive home or less expensive condominium. Good. I consider that desirable.”

The latest move is part of a series of initiatives undertaken recently by the federal government to slow the accumulation of debt by Canadian households, which reached a record 152 per cent of income in the fourth quarter of last year.

Later in the day, the Office of the Superintendent of Financial Institutions will be weighing in with new rules on lenders designed to keep marginal borrowers out of the credit market.

Flaherty said the changes will likely impact Canada’s economy, but would not reveal his department’s calculations of the hit on growth in terms of house construction and jobs that the changes may exact.

The moves come as trouble is looming on the horizon for the world economy, and by extension, the Canadian economy. Economic indicators coming out of Europe, China, other emerging countries and the United States have largely pointed to slower than expected growth.

As well, Europe’s debt crisis continues to pose an ever-present danger to the global recovery.

Under these circumstances, economists say Bank of Canada governor Mark Carney is unlikely to be in a position to raise interest rates to slow borrowing in Canada’s housing market, something Flaherty hinted at during his morning news conference.

That leaves any action that can be taken to the government.

“I’m very mindful of the world situation and this is a challenge for us,” Flaherty said. “I’m concerned obviously that we may get a shock from Europe.

“We encouraged, the prime minister did and I did, we encouraged our European colleagues to act with some alacrity, and I hope they do. If they don’t, it’s going to be a very difficult summer.”

Flaherty said his decision to act was a “judgment call” based on observations of the housing market by both himself and his officials, saying his biggest concern is with the condominium situation in Toronto, and to a lesser degree Vancouver, Montreal and Quebec City.

“In Toronto in particular, what I’ve observed and heard about is continuous building without restriction because of persistent demand. This concerns me because it is distorting the market,” he said.

Thursday’s initiatives likely have the full backing of the Bank of Canada. Carney has been warning for several years that some Canadians are getting in over their heads with debt and that they could face problems once interest rates — which sit at historic lows — start rising or if there is a second economic crisis.

Recently, the Bank of Canada estimated that the number of households in arrears could almost triple to 1.3 per cent if the unemployment rate were to rise by three per cent, about the same as occurred in the 2008-09 slump.

But the central bank has resisted raising interest rates — which would discourage borrowing — fearing such a move would damage a weak economy and raise the value of the loonie.

Instead, Carney has suggested that the best approach would be to specifically target the real estate market through changes to mortgage rules.

Not all economists have been calling for a clampdown.

In a report Wednesday, CIBC deputy chief economist Benjamin Tal noted that consumers are tapped out and that credit growth is slowing despite historically low interest rates meant to encourage borrowing and stimulate the economy. As well, home prices and sales have been trending lower in recent months, with a few exceptions, in particular the still hot condo market in Toronto and to a lesser extent Vancouver.

Given the weak economy, Tal predicted the Bank of Canada may need to keep low interest rates in place until 2014.

But some analysts have also warned that moving too quickly to pour cold water on an already cooling housing market may deprive the economy of one of the few areas of strength.

Bank of Canada to delay rate hikes to 2012: TD Bank

Tuesday, June 14th, 2011

By Ka Yan Ng

TORONTO (Reuters) – Toronto-Dominion Bank became the first primary dealer to push its forecast for the next Bank of Canada rate hike into 2012, warning the economy has not fully emerged from the shadow of the financial crisis.

TD, Canada’s second-biggest lender, said on Tuesday it expects that the Bank of Canada will next raise its key policy rate by a quarter-point in January to 1.25 percent.

It’s the bank’s second revised call in as many months. TD last month shifted its long-held forecast of a July interest rate hike to September.

“All the reasons for them to hold off in September apply just as equally to remaining on hold through the balance of the year,” said David Tulk, chief Canada macro strategist.

“If you look at the balance of risk, it’s still is tilted firmly to the downside.”

The pace of Canada’s economic expansion is widely expected to slow this year following robust 3.9 percent annualized growth in the first quarter. Weakening U.S. growth, Japan’s earthquake and Europe’s ongoing sovereign debt woes have all hurt the Canadian outlook.

The Bank of Canada last year became the first central bank among the Group of Seven rich economies to tighten monetary policy after the financial crisis. But it has kept its benchmark policy rate at 1 percent since last September, following three successive increases.

TD’s revised call puts it more in line with current pricing of overnight index swaps, which trade based on expectations for central bank policy. The swaps market has not fully priced in the prospect of a rate hike at any of the bank’s remaining four policy-setting dates this year.

A May 31 Reuters survey of Canada’s 12 primary dealers — the institutions that deal directly with the central bank as it carries out monetary policy — showed half forecast the Bank of Canada’s first 2011 rate hike will happen in September. The other half were split on July and October.

TD expects rates will rise by 25-basis-point increments next year and bring the Bank of Canada’s target for the overnight rate to 2 percent by the middle of 2012.

It then expects the central bank to move to the sidelines to reassess the outlook. TD see the key rate at 3 percent in 2013.

The bank expects the U.S. Federal Reserve will begin hiking in January 2012 as well, but take a pause when it reaches a fed funds target rate at 1 percent from the current 0.25 percent.

(Editing by Jeffrey Hodgson)

Bank of Canada holds rates, signals extended pause

Tuesday, January 18th, 2011

By Louise Egan and David Ljunggren

OTTAWA (Reuters) – The Bank of Canada held its key interest rate steady on Tuesday and signaled it may keep rates on hold for longer than markets had expected even though it nudged its economic growth forecasts higher.

The central bank held its overnight lending target at 1 percent for the third straight time after leading the Group of Seven advanced economies last year by raising rates three times between June and September.

“Any further reduction in monetary policy stimulus would need to be carefully considered,” it said in a statement that repeated the language used in its two previous rate decisions.

Canada’s economy snapped back to life in late 2009 after a shallow recession but the initial galloping pace of growth has since slowed to a crawl, leaving policymakers wary of withdrawing extraordinary stimulus measures too soon.

While nobody expected the bank to make another rate move as early as this month, some market players had bet on a more hawkish statement on rates to reflect the spillover effects of recently announced U.S. tax cuts and the U.S. Federal Reserve’s bond-buying program.

The bank did upgrade its economic outlook slightly, but it didn’t change its medium-term forecast for a balanced economy by the end of 2012.

It stressed that the high-flying Canadian dollar was hampering recovery in the export sector, the backbone of the Canadian economy, and that Europe’s debt woes remain a black cloud over the global economy.

Many analysts think the bank is unlikely to push Canadian rates much above their U.S. equivalents because this could send the Canadian dollar to fresh multiyear highs. And Monday’s government decision to curb high household debt by tightening mortgage rules for a second time in less than a year could also let the bank delay a fresh rate hike further.

Those looking for hints about the timing of the next rate hike were disappointed.

“This reaffirms our view that the bank is on a prolonged pause and reinforces our forecast that the next hike isn’t coming until October,” said Derek Holt, economist at Scotia Capital.

“I think (the tone) is consistent with the tone of their speeches and the last rate statement, but it’s a bit more dovish than some in the market might have expected,” he said.

Mark Chandler, head of fixed income and currency strategy at RBC Capital Markets, called it a “very, very cautious outlook”.

“At least for now they don’t see any real benefit in laying cards on the table in terms of expected rate increases,” Chandler said.

Forecasters in a Reuters poll last week unanimously predicted no change in rates on Tuesday, but a majority saw at least one rate hike by the end of May this year and three expected a tightening on March 1.

Overnight index swaps, which trade based on expectations for the key central bank rate, showed investors see an 83.23 percent probability rates will stay on hold March 1, compared with 72.85 percent before the statement.

The Canadian dollar weakened to C$0.9931 against the U.S. dollar, or $1.0069, from C$0.9867 just before the announcement.

Money market rates and bond yields were lower after the rate announcement. The yield on the rate sensitive two-year Canadian government bond was 1.755 percent, down from 1.792 percent just before the statement.


The central bank sees the Canadian economy growing by 2.4 percent in 2011 and by 2.8 percent in 2012. Last October it put 2011 growth at 2.3 percent and 2012 growth at 2.6 percent.

It expects business investment to continue to rebound sharply, helping offset the impact of softer consumer spending and a cooling housing market. Net exports will also contribute more to growth in coming quarters despite the strong Canadian dollar, thanks to signs of fresh vigor in the U.S. economy.

But at the same time it toughened its language on the harmful effects of the strong Canadian dollar on the recovery, as some market players had anticipated.

“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,” it said.

The Canadian dollar appreciated 5.7 percent against the U.S. dollar last year and nearly 16 percent in 2009.

The bank’s quarterly Monetary Policy Report, due for release on Wednesday at 10:30 a.m. (1530 GMT), will provide more details on the outlook.

(Additional reporting by Leah Schnurr; Writing by Louise Egan; editing by Peter Galloway)

Flaherty details new mortgage rules

Monday, January 17th, 2011

OTTAWA/TORONTO— Globe and Mail Update
Published Monday, Jan. 17, 2011 8:12AM EST
Last updated Monday, Jan. 17, 2011 11:00AM EST

Concern over rising consumer debt levels is prompting Ottawa to make three new changes to Canada’s mortgage rules.

Finance Minister Jim Flaherty announced Monday 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, Ottawa will lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.

Thirdly, Ottawa will withdraw government insurance backing on lines of credit secured by homes.

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 Ottawa, Mr. Flaherty said the measures will encourage Canadians to save more through home ownership. He said they will also reduce the exposure of Canadians to financial risks.

Mr. Flaherty said his concern is not Canada’s mortgage default rate – which is less than 1 per cent. Rather his concern is those who are borrowing as much as possible.

“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 imediately 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, Ottawa is taking action to reduce the rapid rise in home equity lines of credit, or HELOCs. The government will do this by clamping down on the insurance that Canada Mortgage and Housing Corp. offers to the lines of credit.

Home-equity lines of credit and loans have surged in Canada, rising at almost twice the pace of mortgages over the past decade to account now for 12 per cent of overall household debt.

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 America’s crisis, when subprime mortgages and credit cards were given out like candy,” he said.

“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 BMO, said in a statement issued by the bank. “For many months, BMO has been encouraging Canadians to lower their total cost of household debt by paying down short-term higher interest debt and considering the benefits of a mortgage with a 25-year maximum amortization to help them save interest costs and pay down their mortgage faster.”

It’s not the first time the Conservative government has tinkered with the mortgage market. In 2008, Mr. Flaherty announced Ottawa would no longer back 40-year amortizations, with a goal of cooling down a hot real estate market and preventing the emergence of a housing bubble in Canada. At that time, the government said it would also back only mortgages where the buyer has put down at least 5 per cent, effectively eliminating zero-down mortgages.

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 Canada surpassed $1-trillion for the first time in 2010. About 22 per cent of all new mortgages had amortization rates longer than 25 years, up from 18 per cent the year before.

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 Canada, CAAMP estimated the borrowing at $41-billion, about the same as last year.

“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.”

With files from Boyd Erman, Tara Perkins and Steve Ladurantaye

BoC repeats cautious tone on future rate hikes

Tuesday, October 26th, 2010

By REUTERS, , Updated: October 26, 2010 3:54 PM

BoC repeats cautious tone on future rate hikes

OTTAWA (Reuters) – The Bank of Canada repeated on Tuesday it would have to carefully consider any further rate hikes, given the uneven global recovery, a weak U.S. outlook and expected curbs on Canadian growth.

“At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered,” Bank of Canada Governor Mark Carney said in the prepared text of his opening remarks to a parliamentary committee in Ottawa.

Carney and Senior Deputy Governor Tiff Macklem were appearing before the House of Commons Standing Committee on Finance.

Last week, the Bank of Canada held its benchmark interest rate steady at 1.0 percent, and said in its Monetary Policy Report that there was still considerable monetary stimulus in place.

(Reporting by Louise Egan and Jeffrey Hodgson in Ottawa and Ka Yan Ng and John McCrank in Toronto; writing by Jennifer Kwan; editing by Rob Wilson)

Bank of Canada cautious over future rate hikes

Thursday, October 21st, 2010

Bank of Canada cautious over future rate hikes

Bank of Canada cautious over future rate hikes

By David Ljunggren

OTTAWA (Reuters) – The Bank of Canada said on Wednesday it would have to consider any further rate hikes carefully, given the patchy global recovery, a weak U.S. outlook and expected curbs on Canadian growth.

The central bank, which held its benchmark rate steady at 1.0 percent on Tuesday after three consecutive increases, said in its latest Monetary Policy Report that there was still considerable monetary stimulus in place.

“At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered,” it said.

The language on factors affecting future rate hikes was identical to that in the rate statement issued on Tuesday.

The market is split over when the bank will next raise rates. Five of Canada’s 12 primary dealers expect the bank to have raised rates at least once by March of next year, while one major research firm feels the next hike will not be until the end of 2011.

The central bank, which says the Canadian recovery will be weaker than it forecast in July, cut its forecast for annualized growth in the third quarter of 2010 to a tepid 1.6 percent from the 2.8 percent it had predicted in July.

It also cut quarterly forecasts for the subsequent four quarters, predicting greater-than-expected growth would only start in the fourth quarter of 2011. The economy was running below capacity and should return to full capacity by the end of 2012.

The bank said total and core inflation should rise to 2.0 percent by the end of 2012, and risks to the outlook were roughly balanced.

The three main upward risks are higher commodity prices; greater than expected improvements in U.S. housing and labor markets and stronger household spending in Canada.

The three main downward risks are a combination of a persistently strong Canadian dollar combined with disappointing productivity; intensified global deflationary forces; and a sudden weakening in the Canadian housing sector.

The bank, which has repeatedly expressed concern about increasing levels of Canadian household debt, said private consumption was unlikely to be bolstered by gains in housing prices going forward.

The central bank raised its assumption for the Canadian dollar to 98 U.S. cents from 96 U.S. cents in July.

(Reporting by David Ljunggren, editing by John McCrank and Janet Guttsman)

Bank of Canada hikes rate again

Tuesday, July 20th, 2010

By CBC News,, Updated: July 20, 2010 10:59 AM

The Bank of Canada raised its benchmark interest rate by 25 basis points Tuesday, the second straight time it has done so after keeping rates at unprecedented lows for more than a year.

In its latest policy decision, the bank opted to move its overnight lending rate to 0.75 per cent. The bank had previously raised its benchmark rate to 0.5 per cent in June after having kept rates at emergency lows since April 2009 in an attempt to stimulate the economy and spur lending.

In raising the rate, the bank moved to lightly hit the brakes on a Canadian economy that has shown signs of significant strength in recent months.

But the bank made it clear in its policy statement that it sees Canada’s economy recovering more gradually than it did in its previous outlook in April. It now projects GDP growth of 3.5 per cent in 2010, 2.9 per cent in 2011 and 2.2 per cent in 2012.

The bank also made it clear that future rate hikes are not guaranteed.

“Any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the bank said in its statement.

Further rate hikes can’t be ruled out, BMO economist Michael Gregory noted.

“The bank’s forward-looking language does not preclude further rate hikes,” he said.

“[But] the bank now has more wiggle room to raise rates … if they want to. And we think they will.”

The next scheduled date for announcing the overnight rate target is Sept. 8. (Copyright: (C) Canadian Broadcasting Corporation,

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Sunday, May 2nd, 2010

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