Victoria's Mortgage Market

Why I wouldn’t sell my home myself

2011-05-15T15:36:00.000-07:00

By Mark Weisleder | Fri May 13 2011

Since writing about whether you could create a bidding war without an agent, I have received numerous emails from sellers, real estate agents and companies that provide “for sale by owner” services on the pros and cons of selling by yourself.

Allison Philpot sold her home in Ottawa using a For Sale by Owner marketing service. She listed her home for $419,000, and was able to create a bidding war after her first open house. She received a top bid of $429,000, which she accepted.

The buyers seemed like nice people, as they lived in the community. Unfortunately, they later terminated the deal, relying on a condition in the offer, although Allison suspected that they just found a house that they liked better. The second bidder was no longer interested.

She then dealt with another buyer, who was represented by a buyer agent. Allison later admitted that she was out-matched in the negotiations, and eventually sold her home for $405,000. In addition, she agreed to pay the buyer agent a commission of approximately 2 per cent or $8,000. So her net selling price was $397,000.

After the fact, she reasoned that had she used an agent from the start, she would have probably sold for about $430,000, and that even if she paid $20,000 in commission, she would have netted $410,000, or $13,000 more, without any of the aggravation.

Still, Allison states that had she not gone through the experience herself, she would probably have felt that she had overpaid the agent.

The buyer who walked away from the first deal later told Allison that he would never try and buy a property again without an agent, as he found the process way too stressful himself.

I received many emails from real estate agents talking about their additional network of potential buyers that they bring to every sale, as well as their own experience in qualifying potential buyers in advance and protecting sellers from unusual clauses that are sometimes inserted into agreements. Many agents in Vancouver are now setting up marketing events overseas, as more and more foreigners are looking at Canadian real estate as a safe haven to invest. More buyers mean better prices for sellers.

I spoke with Patrick Sullivan, a vice-president for Com Free, a company that provides services to assist home owners selling by themselves. These tools include a guide to assist the seller in determining the sale price, staging the home for sale, conducting open houses and preparing for negotiations. He suggested that there is no real harm in a seller trying to save money selling by themselves. They can sell with an agent later if they are not successful. He also claims that Com Free listings continue to grow and that they have many success stories. However, because they have no contract with the seller, the seller is not obligated to tell them how long it took to sell and what the property sold for, so it is difficult for Com Free to state how their seller compares with sellers who use an agent.

If you plan on doing this by yourself, at a minimum either have your lawyer look at the contract before you sign it, or make the deal conditional on your lawyer’s review and approval of the agreement. In my opinion, no marketing service can properly prepare buyers or sellers to deal with the stress and emotion that will invariably be involved with any real estate negotiation. It is not easy. Every buyer, seller and property are unique and will require a successful strategy to win.

Whatever method you choose to buy or sell your next home, be prepared and fully informed before you start.

Commodities boom fuels rate hikes: BoC

2011-03-28T06:14:00.000-07:00

Financial Post With Files From Reuters · Mar. 28, 2011

In what one analyst described as an "unambiguously bullish message for the Canadian dollar," the governor of the Bank of Canada says the global commodity boom is here to stay and countries should be prepared to deal with it in the time-honoured fashion - with higher interest rates.

While Mark Carney directed his message mainly to Latin American countries which are grappling with a surge in capital and inflation brought on by booming commodity prices, Douglas Porter, deputy chief economist at BMO Capital Markets, said his comments also hold implications for Canada.

"I would say that this speech suggests we should begin preparing for higher rates and an even stronger Canadian dollar, and soon," Mr. Porter said on Sunday. "I thought it was an unambiguously bullish message for the Canadian dollar."

In his speech, Mr. Carney said while supply disruptions and speculative pressures have contributed to higher commodity prices, rapid urbanization in emerging markets is underpinning the commodity boom and that process can be expected to continue for decades.

"Even though history teaches that all booms are finite, this one could go on for some time," Mr. Carney told the annual meeting of the InterAmerican Development Bank in Calgary on Saturday.

Against such a backdrop, countries must be prepared to deal with higher commodity prices over the longer term.

"Everything else being equal, higher commodity prices usually necessitate higher policy interest rates," Mr. Carney said. "The degree of the policy response depends on many factors, including the reasons behind the price increases, the expected persistence of the shock, and whether a country is a net exporter."

Many emerging countries have been dealing with the commodity price shock with various capital controls such as taxes on foreign inflows and avoiding raising interest rates in a bid to keep their currencies from rising and choking off export growth.

In a panel discussion on Saturday, Uruguayan central bank chief Mario Bergara said "monetary policy is not enough."

But Mr. Carney appeared unsettled by the view. "Can I jump in on this? I'm a little nervous where we are headed," Mr. Carney said. "Monetary policy has to deal with inflationary pressures, first and foremost," he said.

He warned that misguided policies in emerging markets for dealing with high inflation and a flood of capital could lead to financial instability and weak global economic growth.

"That's where one can make pretty big mistakes and delay too much, both on the monetary side, or on the pretty fundamental structural reforms," he said.

As he has in the past, Mr. Carney said a flexible exchange rate can help offset the inflationary impact from rising commodity prices and capital flows.

"To the extent that the nominal exchange rate responds, it helps offset the expansionary effect of the increase in investment, and gives price signals to the production sector for labour and capital to shift to the areas of higher return," Mr. Carney said.

That is exactly what has happened in Canada, with the loonie rising above US$1. Inflation in Canada has remained remarkably tame throughout the commodity boom.

Declining to let a currency rise, however can create a vicious circle, which can have far-reaching implications. "When large economies with undervalued exchange rates keep their currencies from appreciating, others feel pressured to follow," the governor said.

"Over time, macro policy becomes contorted: exchange rates more inflexible, monetary policy more hesitant, and economic controls more prevalent. The collective impact of this behaviour risks inflation and asset bubbles in emerging economies and, over time, subpar global growth."

As Canada's rising currency has helped restrain inflation, the Bank of Canada has taken a pause in raising interest rates. Many analysts expect the central bank to begin raising Canadian interest rates in the second half of the year, though they will be watching closely for any change in sentiment in the weeks ahead.

Mr. Porter at BMO said he would be watching for any change of tone at the bank's upcoming monetary policy report on April 13.

Mr. Carney's rate dilemma

2011-02-27T19:01:00.000-08:00

Fears that Libya could send oil soaring to new heights and spark another global downturn had eased by the end of last week, but the unpredictability of upheaval in the region gives Mark Carney yet another reason to keep rates on hold for longer than most expect.

On Tuesday, the Bank of Canada Governor is expected to leave his benchmark interest rate at 1 per cent, where it has been since last September. The real question is whether he’ll drop any hints about when he intends to start tightening again.
More related to this story

Most economists say a strengthening labour market, greater investment by businesses and a resurgent export sector will push the central bank off the sidelines in late May or mid-July, and possibly sooner if the next inflation report from Statistics Canada shows higher energy and food costs seeping into other areas.

But a small group of outliers has been saying for months that Mr. Carney might stay on hold until October or later, a timeline that would mark the second pause of more than a year since the crisis started in 2008. Increasingly, it looks as if they may be right.

True, the accelerating rebound in the U.S. economy – Canada’s No. 1 customer – 'points to faster growth on this side of the border, too. A report from Statistics Canada on Monday will probably show that in the fourth quarter, the annual pace of expansion surpassed the 2.3-per-cent rate Mr. Carney estimated in January. Trade figures from December indicated tax cuts and other steps to boost the U.S. helped Canadian exporters clock their best month in three decades. And in January, employers hired four times as many workers as anticipated, a sign that momentum from late last year carried over into 2011.

However, the 7.8-per cent jobless rate is keeping a lid on wages, which is partly why inflation remains well within Mr. Carney’s comfort zone. The central banker aims to keep annual inflation around 2 per cent and pays closest attention to a measure of price gains that strips out things like gasoline, electricity and most groceries. In January, that so-called annual core rate was 1.4 per cent, a tick slower than the previous month’s pace.

Also, recall that at his last decision on Jan. 18, Mr. Carney held firm even while citing a slightly improved forecast for the economy this year and next. Europe’s debt and bank troubles continued to be a “significant” source of uncertainty, he said at the time and could easily still say today. And though things were looking up for the United States, the “cumulative effects” of a currency at par with the greenback and Canadian companies’ tepid progress in improving their productivity would restrain companies’ ability to reap the rewards, he warned.

That was before revolutions in Tunisia and Egypt unleashed the torrent of protest across the region which last week sent oil prices past $100 (U.S.) a barrel for the first time since 2008, when $150-a-barrel crude exacerbated the burgeoning global financial crisis.

By the end of last week, the general consensus seemed to be that while past oil shocks have led to recessions, all will be fine this time around as long as suppliers bigger than Libya, such as Saudi Arabia and Iran, don’t implode, too, and as long as prices don’t surge beyond about $120 for a long stretch. Indeed, as a net exporter of oil, higher prices aren’t necessarily bad for Canada, and of course are great for energy companies in Alberta.

Nonetheless, the potential stumbling blocks for the Canadian economy are many.

Higher oil prices will make it harder for China, India and other rapidly-growing emerging markets to contain inflation without aggressive tightening moves that choke off demand, while also squeezing the ability of consumers in the United States and Europe to spend money on anything other than basics like energy and food.

“The Bank of Canada is in a bind, because it’s stuck in an environment where the strength in the domestic economy signals rates need to go up, but the external side shows there’s still a lot of risks,” Craig Alexander, chief economist at Toronto-Dominion Bank, said in an interview. “There’s risks around sovereign debt in Europe, there’s risks around excessive strength and inflation in emerging markets, there’s risks around the U.S. recovery, and now there’s risks around geopolitics in the Middle East.” Worse, the loonie could climb higher, making it that much harder for manufacturers in central Canada to sell their goods abroad and making their operations more costly, at least for a while.

“As long as the instability doesn’t continue, short-term price spikes are not so much of a concern for businesses, but what is a major concern right now is what the impact will be on customers,” said Jay Myers, president and chief executive officer of Canadian Manufacturers & Exporters. “A lot of the recovery in central Canada has been auto-related, and a lot of the recovery in the auto sector has been driven by consumer purchases (in Canada and the U.S.) of larger vehicles and trucks, so that’s an area that would probably be extremely sensitive to sustained high energy costs.” TD’s Mr. Alexander is in the camp that says the global economy will ride out the oil storm and domestic conditions in Canada will force Mr. Carney to start raising rates beginning with his July 19 decision. Still, Mr. Alexander acknowledged that persistent uncertainty around the world could delay the central bank.

At the very least, it could mean Mr. Carney pulls the trigger in July to gain some of the ground he needs to make up to get rates back to a “neutral” level – 3.5 per cent or 4 per cent – and then goes back to the sidelines in case more trouble flares up outside of Canada.

Indeed, Mr. Carney will be wary of pulling too much stimulus away too quickly while world events, and exporters’ medium-term prospects, remain so unsettled.

“The one thing they don’t want to do is have to reverse course,” Mr. Alexander said.

So, even as Mr. Carney sprinkles his statement Tuesday with evidence that the domestic rebound is gathering steam, he will continue to stress the growing list of external wild cards.

Canada no longer leads recovery standings

2011-01-28T21:40:00.000-08:00

BARRIE McKENNA - The Globe and Mail

January 28, 2011

OTTAWA- It’s been badge of honour for Canada on the world stage: the only major economy to recoup all the jobs lost in the recession.

Prime Minister Stephen Harper, Finance Minister Jim Flaherty and scores of economists all trumpeted the rapid jobs recovery as evidence that Canada beat the world in getting back on its feet after the worst global slump in more than a generation.

Unfortunately, it’s not true.

Revisions released Friday by Statistics Canada show that the country is still roughly 30,000 jobs shy of getting back all the jobs destroyed, based on updated population data from the 2006 census. The revisions underscore the reality that the Canadian economy is still facing a lot of turbulence, and that it’s no longer outperforming the rest of the world.

“At some stage we have to turn the page and move on, and look at where the economy is going in the next couple of years, rather than where it’s been,” Toronto-Dominion Bank economist Pascal Gauthier said.

A few tens of thousands of jobs either side of the pre-recession waterline doesn’t change the overall picture, Mr. Gauthier pointed out. Yes, Canada outperformed many others with its quick snap-back from recession, but lagging exports, competitiveness and productivity may hold it back in the months ahead, he said.

“The revisions tell us there’s still some road ahead in terms of recovery in employment,” Mr. Gauthier said.

Statscan’s initial estimate, based on the 2001 census, showed Canada returned to neutral last August, and continued to gain jobs in the months since. Now, the agency says Canada lost 428,000 jobs between October, 2008, and July, 2009, and has only recovered 398,000. That leaves the country short of where it was, and even farther away from where it needs to be just to keep pace with the growing population.

From an economic standpoint, the revisions aren’t overly significant. The net change over the past two years amounts to 75,000 jobs, or about what a healthy Canadian economy would create in a month, pointed out Scotia Capital economist Derek Holt.

Nonetheless, the revisions are a powerful reminder to policy makers that they should stop relying on the “tired” refrain that Canada is outperforming its rivals in jobs and economic growth, Mr. Holt said. It’s no longer true, and several other economies are now generating a lot more economic momentum than Canada, most notably the United States, he said.

“The political tone to the revisions is more important than their economic significance,” Mr. Holt said. “We can’t lay claim to being the best-performing economy anymore.”

He said past performance is a poor predictor of what will happen next. In a research note this week, Mr. Holt highlighted five reasons why the U.S. economy will do better than Canada’s this year and next, including more fiscal stimulus, greater pent-up consumer demand, suddenly cheap house prices, depleted business inventories and Canada’s lagging export competitiveness.

Canada continues to face challenges in export markets, productivity, competitiveness and unit labour costs. And all of those factors will limit economic growth and job creation in the months ahead, he said.

Ultimately, the jobless rate is better gauge of whether the labour market has returned to pre-recession conditions, TD’s Mr. Gauthier said. And at 7.6 per cent (unchanged since December), it’s still more than a full percentage-point higher than what it was when Canada tumbled into recession at the end of 2008.

There’s also some evidence that the quality of the jobs created since the recession isn’t the same. Toronto-based economist Arthur Donner said high-wage, goods-producing industries are still about 40 per cent below pre-recession levels. Governments have played an outsized role in job creation.

Mr. Gauthier, however, said that the trend in recent job creation isn’t significantly different than in previous recessions in terms of measures, such as the mix of part-time versus full-time hiring.

The next snapshot of how Canada’s labour market is faring comes next Friday, when January’s jobs data are due.

Friday’s revisions also affect job-creation figures for November and December. Statscan now says 30,000 jobs were created in December, up from the estimated 22,000. November saw only 6,000 jobs created, instead of the previous estimate of 15,000.

Real estate market heads into 2011 with stronger than expected momentum

2011-01-14T23:51:00.000-08:00

Sunny Freeman, The Canadian Press

TORONTO - Low interest rates should continue to prop up sales in Canada's resale housing market in early 2011 as the market continues to ride the momentum of a stronger than expected finish to 2010, the Canadian Real Estate Association said Friday.

"Perceptions are that the housing market has stabilized and people are feeling a little more certain about getting into the market," Gregory Klump, CREA’s chief economist, said Friday after the association reported better than expected sales figures for 2010.

"The hand-off to 2011 for sales activity in the fourth quarter suggests that the continuation of low interest rates will further support the housing market,” he said.

Interest rates that have hovered at historical lows longer than predicted, together with improved consumer confidence, helped stabilize the market in the fourth quarter as sales rose 12.1 per cent over third-quarter levels, Klump said.

In December, seasonally adjusted sales edged down 0.6 per cent from November, ending a four-month string of gains. Actual sales were down 14.4 per cent compared with the record-setting sales of December 2009, but were slightly better than the 10-year average for the month.

The national average home price in December was $344,551 — stable compared with October and November and up two per cent from December 2009.

A solid fourth quarter pushed full-year sales higher than CREA had predicted to 447,000 homes sold over CREA's Multiple Listing Service last year.

That was down 3.9 per cent from 2009, a decline that was about one per cent lower than CREA had forecast in November.

Strong fourth-quarter sales also drove the national average home price higher than CREA had earlier predicted. Last year, the annual average home price climbed 5.8 per cent to $339,030, after reaching a peak of $346,881 in May.

In an earlier forecast, CREA had projected sales volume would fall 4.9 per cent in 2010, while annual average home prices were expected to rise by 3.1 per cent across the country, reaching $330,200.

In that forecast, CREA said housing resales would slide a further nine per cent this year due to lacklustre economic and job growth, weak consumer confidence and interest rate hikes that are expected to turn higher in the middle of this year.

The average national price is projected to fall by 1.3 per cent to $326,000 this year, although actual individual prices vary widely depending on type of housing and location.

However, Klump indicated that CREA would revise its 2011 forecast in early February now that fourth-quarter sales data have been released.

And while the momentum going into the first quarter paints a rosier picture of the housing market, Klump said he anticipates sales activity will decline in the second half of the year as mortgages become more expensive to carry.

Douglas Porter, deputy chief economist at the Bank of Montreal, said the housing market appears to have achieved "a perfect soft landing" after sales skyrocketed as the economic recovery took hold.

"The market is relatively well balanced and prices are still meandering ahead," he said.

"We expect no fireworks in 2011, with rates poised to slowly grind higher later in the year, job growth decent but not spectacular, and buyers potentially constrained by concerns over record household debt levels."

December sales rebounded from a trough reached in July when sales were down as much as 30 per cent year-over-year.

The summer market was struck by the impact of two months of interest rate hikes by the Bank of Canada, the introduction of the harmonized sales tax in B.C. and Ontario and new rules governing mortgage qualification.

Canadians rushed into the market in late 2009 and early 2010 to take advantage of historically low interest rates as the central bank's overnight rate sat at 0.25 per cent before beginning a gradual rise to a still-low one per cent.

The Bank of Canada is widely expected to leave the overnight rate unchanged at its next announcement on Tuesday and economists expect the rate to remain at one per cent until the middle of this year.

Offsetting the low cost of borrowing is the relatively high level of consumer debt that Canadians have amassed as well as uncertainty about the strength of the economic recovery and a stubborn unemployment rate.

In December, sales were up in half of local markets, led by Calgary, Winnipeg, and Hamilton.

Sales in Canada's largest urban centres and once white hot real estate markets — Toronto, Vancouver and Montreal — were among the markets that posted small monthly declines.

“Sales may be starting to plateau in some of Canada’s most active and expensive housing markets. Combined with a pickup in new listings and further interest rate increases, the stage is being set for smaller price gains and a further deceleration in the growth of mortgage debt,” Klump said.

The number of new listings in December rose by less than one percentage point. New listings remain 14.2 per cent below the peak reached in April 2010.

No solid basis for the scary speculation

2011-01-03T23:28:00.000-08:00

By JAY BRYAN, The Montreal Gazette December 30, 2010

One of the biggest business stories of 2010 was one that never happened: the disastrous Canadian housing bubble and crash that never came to pass.

Of course, we know this now. Canada's hot housing market has settled down without any serious slump in either prices or sales. It's hard to find a reputable analyst who predicts anything other than mild fluctuations in housing over the coming year or two.

But in the early months of the year, a superficial look at Canada's home values found them rocketing up at an unsustainable pace, making it frighteningly plausible that Canada could be headed into the same kind of disastrous real-estate bubble and meltdown that we saw right across the border.

And a superficial look is just what this issue got. There was never a solid basis for the scary speculation, but it just kept bubbling up. Serious Canadian media, including Toronto's Globe and Mail, made housing-bubble headlines into a staple. Below the headline, there was usually an acknowledgement that there was no evidence of anything more than a hot market, but the scary headlines didn't stop.

Even big American newspapers that usually give Canada about as much coverage as Iceland became interested. The Wall Street Journal ran a front-page story in February under the headline Housing Rebound in Canada Spurs Talk of a New Bubble.

Where was the talk coming from? The most prominently quoted source wasn't an economist or a real-estate expert; it was Garth Turner, a former politician who had been promoting a book predicting a housing collapse.

A month later, the New York Times jumped in. "Some see a Real Estate Bubble Forming in Canada," said the headline. Like the Wall Street Journal piece, it was thin gruel. It didn't cite anybody who actually said there was a bubble, but did find one bank economist who speculated that if home prices kept shooting up rapidly for another year, a bubble would form -although he didn't actually predict that this would happen.

The roots of bubble hysteria are understandable. After the terrible experience of the U.S., it made sense that many would be hypersensitive to any evidence that something equally disastrous could happen here.

What's not so understandable was that journalists working for some of the best newspapers in North America would give credence to such a hare-brained idea without finding any evidence that it was actually happening.

Canadian housing was clearly becoming overpriced early this year, but an overpriced market isn't the same thing as a bubble, as any competent economist is quick to explain. Overpricing is a perfectly normal thing in any market.

As investors become more or less optimistic, the price of an asset -stocks, commodities or real estate -constantly moves up and down. Sometimes it's too high and ripe for a fall -but that's not a bubble. And unlike stocks or commodities, homes are an asset that's resistant to big drops in value. Many owners are perfectly willing to wait if they don't get a satisfactory price.

A bubble, unlike a normal price cycle, is a rare phenomenon that occurs when overoptimism and price excesses last so long and becomes so extreme that a large number of people begin to believe that prices can only go up, never down. When this belief became entrenched in the U.S. six or seven years ago, investors and even ordinary wage-earners turned into speculators, taking out loans they could never repay to load up on condos or tract homes. For a while, they made money, flipping these homes at ever-higher prices. But when the music stopped, they were wiped out and the market was so out of whack that it collapsed.

This kind of speculative bubble was allowed to form in the U.S. housing market through a combination of monetary policy that was too easy for too long and shockingly irresponsible regulation of banks, which enabled people to get mortgages they could never repay and allowed banks to package these bad mortgages into toxic securities that eventually shook the foundations of the banking industry in the U.S.

In Canada, nothing remotely like this happened. True, the rock-bottom interest rates we used to fight the recession did cause a brief boom in housing sales, but that's normal. Housing usually booms in response to very cheap money, which is why the authorities count on it to lead the way out of recessions. This time, with interest rates even lower than would be typical, the boom was exceptionally strong. But we had no U.S.-style bubble and there was never much chance of one, because banking regulation here is conservative.

In Canada, it was never possible to get a mortgage without any proof of income or assets. It was uncommon to get a sub-prime loan. As well, banks never adopted the practice of selling off most of their mortgages, so they had a strong incentive to lend only to those who were likely to repay.

That's why it's not at all surprising that once pent-up demand for homes tapered off and rising prices brought more homes onto the market, the boom cooled off and the market returned to balance, just as many analysts had expected.

Debt picture not so bleak: BMO

2010-12-14T16:19:00.000-08:00

CBC NEWS - Tuesday, December 14, 2010

The cacophony of concern over rising Canadian debt levels is overshadowing other encouraging personal finance data, a prominent economist says.

Statistics Canada released data Monday showing that Canadian household debt has risen to 148 per cent of disposable income. The eye-popping figure is all the more alarming considering it's the first time since the 1990s that Canada's ratio has been higher than that of the U.S.

Alarm bells rang everywhere from the Bank of Canada to the Finance Department on Monday, and Canadians were urged to tighten their belts and prepare for a time of austerity.

But a closer look at the numbers indicates the picture might not be so bleak.

"The continued laser-like focus on debt overshadows the other half of the balance sheet," BMO chief economist Doug Porter said Monday.

Namely, Canadians are borrowing. But they're also saving, and they're worth more than they used to be.

The savings rate has averaged four per cent over the past year and is now below the U.S rate of 5.8 per cent. But Canada's rate is now more than double the level it was at during its all-time low in 2005.

And as Porter notes, Statistics Canada's rate of personal savings as a percentage of disposable income doesn't give the full picture of how much Canadians are actually saving.

The current rate narrowly looks at how much households are saving from current income but ignores unrealized capital gains as well as returns in tax-sheltered vehicles like RRSPs and tax-free savings accounts, Porter said.

A better measure might be to track the change in household financial assets as a share of income. It's much more volatile (prone to 50 per cent swings in both directions within the same year), but for the last five years, it has hovered at roughly double the published savings rate. And it's never gone below the conventional "savings rate" in the last 15 years.
Increasing assets

A closer inspection of the numbers Statistics Canada released Monday shows more reason for optimism.

Yes, the debt-to-income level has gone from around 100 per cent in 1990 to almost 150 per cent today (the orange line on the chart above). But assets — the green line (showing net worth as a percentage of income) — have gone up too: from 417 per cent to 610 per cent over that same period.

In layman's terms, "assets are again growing faster than debt in absolute terms," says Porter.

That suggests that the assets Canadians are buying are padding their net worth more than enough to offset the debt load they take on to buy some of them. And debt as a percentage of net worth (the blue line on the chart above) has remained relatively flat.

"While debt has risen to record heights, so, too, have financial assets due to a rebound in equities and an underlying rise in savings," Porter said.

The sum total of all stocks, bonds, cash, GICs, life insurance and pension assets, minus household debt, is a fairer picture of real savings, Porter says. That figure has recovered from recessionary lows to $2.7 trillion so far this year — which works out to $80,000 per Canadian, or 167 per cent of per capita GDP.

"Taking these factors into account … leads to the conclusion that household finances are not nearly as weakened as the dire headlines would suggest," said Porter.

A bigger house is in the cards -- but not yet

2010-12-12T22:14:00.000-08:00

Andrew Allentuck, Financial Post · Friday, Dec. 10, 2010

In Toronto, a couple we’ll call Tim and Kathleen are busy with their careers.

Tim, 35, is a manager for a large company. Kathleen, 33, is on maternity leave until early 2011 when she will return to her job as a health-care professional. Their first child is nearly one year old. As new parents with a $286,000 mortgage on their $400,000 house, a wish to upgrade to a better house and an idea that they would like to retire in comfort in 30 years, they want to balance their goals and figure out a way to pay for all of them on an income of $7,450 per month. They are diligent savers, socking away $11,000 per year in various registered plans and relying on Tim’s annual bonus, about 20% of his pre-tax salary, to make up deficits.

“We want to move up from our present house, which is worth about $400,000, to a house with a purchase price of about $600,000 and move into a better school district. Can we afford to do all that?” Tim asks.

Family Finance asked Benoit Poliquin, vice-president and financial planner with Pallas Athena Investment Counsel in Ottawa, to work with Tim and Kathleen. The goal: structure a budget to make their plans happen and work out a retirement plan.

The array of choices

“The reality is that the couple is up against difficult choices that the marketing departments of the financial services industry gloss over,” Mr. Poliquin says. “In their 30s, the problem is whether to save aggressively for retirement in three decades or invest in their family and a larger home. They take advantage of Tim’s disability, diabetes, which qualifies for a Registered Disability Savings Plan. Other than that, they are like many other couples in mid-career.”

The five-year plan

Year 1 (2011) For now, the child comes first. Retirement planning has to be deferred. The couple’s $1,500 per year child-care expenses will continue for several years until their child begins kindergarten. Tim and Kathleen can plan to move up in stages if they wish. Stages add selling expenses, moving bills and other transaction costs, but provide breathing room for the family before they get to their dream house.

For now, Tim and Kathleen pay $1,756 per month on a mortgage with a 5.55% interest rate. The mortgage will be paid off by 2027 and will cost $170,000 in cumulative interest. If they add debt and go to a $433,000 house with a $325,000 mortgage, they would have monthly payments of $2,162. That mortgage with a 20-year amortization would be paid off by 2030 and have had total interest of $194,000 in the period, Mr. Poliquin estimates. The $433,000 house is far from their goal of the $600,000 house, but it is feasible with their present income. They should trim spending by the $800 per month they now allocate to restaurants, vacations and entertainment or use some of Tim’s bonus for higher costs.

Year 2 (2012) With Kathleen having been back at work for a year, the family’s liquidity is growing. They should begin to add to savings for the move up to the next house. Their equity in their present house, $114,000, is barely sufficient for the down payment on a $433,000 house after selling, closing and transfer costs. They should build additional cash of at least $10,000 to finance the new mortgage after selling costs and moving bills to go to a new house.

Year 3 (2013) Assuming Tim and Kathleen have been able to save by cutting expenses or using some of Tim’s bonus, they will have adequate savings for a down payment and moving costs for their $433,000 house. They will not need a high-ratio mortgage. They are ready to buy.

Year 4 (2014) A $600,000 house would require a down payment of $150,000 and monthly payments of $2,656 on a 25-year amortization. Total interest on the new mortgage would be $374,000. Assuming that they have added $30,000 in net worth through paydowns of mortgage debt and growth of savings, they can begin to shop for the $600,000 house. With another year of aggressive savings, they will have increased their cash and equity enough to make the down payment. If their monthly disposable income has grown at just 2% per year, then by year five, they will have $750 more per month for mortgage payments and will be within sight of being able to buy the $600,000 house and to service the mortgage, assuming interest rates have not risen beyond 6%. They can begin shopping for new digs.

Year 5 (2015) Buy the new house, build equity, and return to a less pinched style of living.

The long-term view

Kathleen has a defined benefit pension plan. If she works until age 60 and if 2% of her best five years salary is the base for pension calculation, then, assuming that her salary grows at 2% per year and therefore doubles by her retirement date, she would have a future pension of at least 30 years times the common measure of 2% of best five years salary. Her present gross income, $80,400 per year, would be $160,800 at time of retirement. Her 2% calculation base would be $3,216 and her pension at time of leaving work would be $96,480. If inflation were to run at 2% as well in the period, the value of that pension payout would be $48,240 per year in 2010 dollars.

Tim can rely on his own RRSP for retirement. His employer pays a 20% bonus of his present $52,000 annual salary and he contributes that sum, $10,400 to his RRSP.

If he can get 3% return after 2% annual inflation for 25 years, then his present RRSP balance of $51,000 would grow to $497,500. If paid out at the same 3% rate, it would generate a constant stream of income of $14,925. Combined with Kathleen’s defined benefit pension, their base income at the start of their retirement when Tim is 60 would be $63,165.

At Tim’s age 65, they could each draw a potential $11,210 from Canada Pension Plan or take what Ottawa indicates will be a 0.6% per month reduction in age 65 benefits for each month prior to age 65 at which benefits begin. That would reduce their age 60 CPP to 64% of age 65 value or, for each partner, $7,174. If they take this path, they would have total pension income flow of $77,513. That sum would grow with Old Age Security benefits of $6,259 each at age 65. At that time, their total retirement income would be about $90,030 in 2010 dollars. Were they to downsize their house in retirement, they would gain capital for investment.

“The bottom line on this financial projection for the couple is patience,” Mr. Poliquin says. “If they defer the dream house, then build retirement savings, they will have the home and the future they want.”

Financial Post

Nine steps to a better credit score

2010-11-23T23:38:00.000-08:00

DIANNE NICE
Globe and Mail
November 22, 2010

My husband and I are pretty competitive, always trying to one-up each other.

It was to my chagrin, therefore, when I learned that although my credit score is excellent, his is better. I have never missed a bill payment, never carried a balance, so what could be holding me back?

According to author and former financial adviser Kelley Keehn, there are lots of innocent things that can affect your score. For example, most people don’t realize there are two important dates when it comes to paying off certain credit cards: the due date and the statement date. The statement date is when the card issuer reports your balance to the credit bureau, not the due date. So even if you pay your balance in full and on time each month, your credit score may not reflect that.

“Let’s say my due date is Dec. 8 and I have a $10,000 limit. I pay it in full before the 8th and won’t be subject to any interest,” Ms. Keehn says. “But, let’s assume my statement date is Nov. 15 – that’s a very important date as it’s the date the credit card company reports to the credit bureau, not the due date. Let’s assume I make a big purchase on the 14th, say for a reno at my home, not thinking anything of it, and pay for some hardwood costing $9,000. The next day the credit card company would report that I’m 90 per cent extended on my credit card.”

If you’re not sure of your credit rating, you can get a free report from Equifax.ca or Transunion.ca that will include your credit history and current credit outstanding. For a small fee, they will include your credit score as well. A good score is 760 or higher, and anything less needs work to improve it, Ms. Keehn says. (To order a free credit report from Transunion, click here. To order from Equifax, call 1-800-465-7166.)

She advises taking these steps to protect and improve your credit score:

1. Know your score. The score range in Canada is 300 to 900 – the higher the better – and reflects a person’s credit history over the past six years. Only 5 per cent of Canadians have a score of 850 or better. Checking your score periodically can alert you to mistakes as well as credit fraud.

2. Pay your bills on time. Making a credit card payment even one day late will hurt your score. If you’re paying online, send the payment at least three banking days before it’s due to allow enough time for the transaction to be processed. Setting up a small automatic payment to your card issuer each month will ensure you never forget to pay at least the minimum.

3. Never exceed your credit limit. If you’re close to being maxed out, make sure you pay more than the minimum or the interest due could push you over your limit. Going even $5 over your limit could lead to a costly fee from your credit card company and will hurt your score each month it happens.

4. Don’t apply for store credit cards. Even if you’re just after a one-time discount for signing up, these cards, with interest rates as high as 29 per cent, are viewed negatively by the credit bureau and drag down your score.

5. Spread out your spending. The percentage of available credit you’re using each month affects your score, so it’s better to have two charge cards at 50-per-cent capacity each than one that is maxed out.

6. Prioritize your payments. Important as they are, mortgage payments generally are not reported on Canadian credit reports, so it’s more important to make your credit card, loan and lease payments on time.

7. Beware of closing accounts. Even if you’re in a dispute with a lender, make your payments. A missed payment will show up on your credit report, can really hurt your score and is very hard to fix. When closing an account, get it in writing that it was closed with a zero balance.

8. Don’t close unused credit cards. If you have a low-interest card you don’t use, keep it open and use it periodically. Having a zero-balance credit card actually helps to improve a low score.

9. Don’t apply for too much credit at once. Don’t lease a car, sign up for a new cellphone and apply for a loan all in the same month or two. The credit bureau sees this as a sign of financial trouble. Beware, also, of being preapproved by several lenders before you’re ready to buy. Although you can check your own credit rating without penalty, preapprovals from lenders count against your score.

Mortgage insurance market heats up

2010-10-05T08:30:00.000-07:00

Garry Marr, Financial Post · Wednesday, Sept. 22, 2010

Mortgage default insurance is something you have to pay if you can't come up with a 20% down payment on your house.

You pay the premium and the insurance covers the bank in the rare event -- defaults in this country are still below 1% -- you don't make your mortgage payments. But it is a transaction between your bank and your mortgage insurer.

So, why should you care about the mortgage default insurance market and another new entrant into the market?

For starters, more competition is almost never a bad thing. The last time competition heated up in the mortgage insurance market, consumers saw significant reductions in fees.

This time, the $2.5-billion mortgage insurance market landed a major heavyweight in the Ontario Teachers' Pension Plan. Together with partner National Guaranty Holdings Inc., Teachers' took control of American International Group Inc.'s struggling AIG United Guaranty Mortgage Insurance Co. about six months ago.

At one point during the housing boom, there were six mortgage insurers approved for Canada, although not all of them got off the ground. The competition, or at least the threat of it, is credited with driving down premiums.

Crown corporation Canada Mortgage and Housing Corp. controls about 75% of the market. Before competition heated things up, the premium for mortgage default insurance was 3.5% of the value of a home when someone was making the minimum 5% down payment. That premium dropped to 2.75%.

"The premiums certainly did come off when there was all of that competition facing the Canadian market," says Gary Siegle, Calgary-based regional manager for mortgage broker Invis Inc.

He points to other disappearing fees, such as a $235 charge to fill out an application. Restrictions on making your insurance portable are also going away. Longer amortizations, which may or may not be a good thing, are another product of increased competition.

But when the recession came along, taking the housing market with it for a brief period, private mortgage insurers got crunched. The banks only wanted to do business with CMHC, which has 100% of its mortgages backed by the government. Private insurers were only backed to 90% and by the end of the credit crisis there were only two private insurers left in Canada--Genworth and AIG.

With the credit markets calmer and Teachers' now in the market, will the battle for market share heat up again?

Andrew Charles, chief executive of Canada Guaranty, which changed its branding from AIG, is cautious when discussing his plans. "We've made good progress with the major financial institutions," he says.

But don't count on big breaks on mortgages as a result of the new competition from Teachers'. The government has already cracked down on the sector, limiting amortizations to 35 years, banning zero-money-down mortgages and creating tougher qualifying rules for mortgages.

"The Department of Finance has established the sandbox and we are operating within it and that will continue," Mr. Charles says.

Still, another private player in the mortgage insurance market is bound to be good for consumers.

gmarr@nationalpost.com

Ten habits of highly effective real estate investors

2010-09-27T20:22:00.000-07:00

Jean Folger, Forbes · Friday, Sept. 24, 2010

Real estate has long been regarded as a sound investment. Wholesaling and property management of commercial and residential property are just a few of the ways investors can profit from real estate, but it takes a little savvy to become successful in this competitive arena.

While certain universities do offer coursework and programs that specifically benefit real estate investors, such as the Johns Hopkins Carey Business School's Master of Science in Real Estate, a degree is not necessarily a prerequisite to profitable real estate investing. Whether an investor has a degree or not, there are certain characteristics that top real estate investors commonly possess.

Successful real estate investors:

Treat Investments as Businesses

It is important for real estate investors to approach their real estate activities as a business in order to establish and achieve short- and long-term goals. A business plan allows real estate investors to not only identify objectives, but also determine a viable course of action toward their attainment. A business plan also allows investors to visualize the big picture, which helps maintain focus on the goals rather than on any minor setback. Real estate investing can be complicated and demanding, and a solid plan can keep investors organized and on task.

Know Their Markets

Effective real estate investors acquire an in-depth knowledge of their selected market(s). The more an investor understands a particular market, the more qualified he or she will be to make sound business decisions. Keeping abreast of current trends, including any changes in consumer spending habits, mortgage rates and the unemployment rate, to name a few, enables savvy real estate investors to acknowledge current conditions, and plan for the future. Being familiar with specific markets allows investors to predict when trends are going to change, creating potentially beneficial opportunities for the prepared investor.

Maintain High Ethical Standards

Realtors are bound to act according to a code of ethics and standards of practice policy, and real estate agents are held to each state's real estate commission rules and standards. Real estate investors, however, unless they are associated with membership-based organizations, are not usually required to maintain a particular degree of ethics in their business practices, as long as they operate within the boundaries of the law. Even though it would be easy to take advantage of this situation, most successful real estate investors, and especially those who remain in the business for the long haul, maintain high ethical standards. Since real estate investing involves actively working with people, an investor's reputation is likely to be far-reaching. In the case of an investor lacking in ethics, the consequences can be damaging. Effective real estate investors know it is better to conduct fair business, rather than seeing what they can get away with.

Develop a Focus or Niche

Because there are so many ways to invest in real estate, it is important for investors to develop a focus in order to gain the depth of knowledge essential to becoming successful. This involves learning everything about a certain type of investment, whether it is wholesaling or commercial real estate, and becoming confident in that arena. Taking the time to develop this level of understanding is integral to the long-term success of the investor. Once a particular market is mastered, the investor can move on to additional areas using the same in-depth approach. Savvy investors know that it is better to do one thing well than five things poorly.

Strive to be Good Customer Service Representatives

Referrals generate a sizable portion of a real estate investor's business, so it is critical that investors treat others with respect. This includes business partners, associates, clients, renters and anyone with whom the investor has a business relationship. Effective real estate investors are good customer service representatives by paying attention to detail, listening and responding to complaints and concerns, and representing their business in a positive and professional manner.

Stay Educated

As with any business, it is imperative to stay up to date with the laws, regulations, terminology and trends that form the basis of the real estate investor's business. Keeping current does require additional work, but it can be viewed as an investment in the future of the business. Investors who fall behind risk not only losing momentum in their businesses, but also legal ramifications if laws are ignored or broken. When it pertains to the law, ignorance is no excuse. Successful real estate investors take the time and make the effort to stay educated, adapting to any regulatory changes or economic trends.

Understand the Risks

Those choosing to invest in the stock or futures markets are inundated with myriad warnings regarding the inherent risks involved in investing. Numerous agencies, such as the Commodity Futures Trading Commission, require disclaimers to warn potential market participants about the possibility of loss of capital. While much of this is legalese, it has made it clear to people that investing in the stock or futures markets is risky--meaning one can lose a lot of money. Greenhorn real estate investors, however, are more likely to be saturated with advertisements claiming just the opposite: that it is easy to make money in real estate. Prudent real estate investors understand the risks associated with the business--not only in terms of real estate deals, but also the legal implications --and adjust their businesses to reduce any risks.

Invest in a Reputable Accountant

Taxes make up a significant portion of a real estate investor's yearly expenses. Understanding current tax laws can be complicated and take time away from the business at hand. Sharp real estate investors retain the services of a qualified, reputable accountant to handle the business' books. The costs associated with the accountant can be negligible when compared with the savings a professional can bring to the business.

Find Help When They Need It

Real estate investing is complicated and requires a great deal of expertise to engage profitably in the business. Learning the business and the legal procedures is challenging to someone attempting to do things on their own. Effective real estate investors often attribute part of their success to others, whether a mentor, lawyer, accountant or supportive friend. Rather than risk time and money solving a difficult problem on their own, successful real estate investors know it is worth the additional costs (in terms of money and ego) to find help when they need it and embrace other peoples' expertise.

Build a Network

A network can provide important support and create opportunities to a new or experienced real estate investor. This group of associates can be composed of a well-chosen mentor, business partners, clients or a nonprofit organization with interests in real estate. A network allows investors to challenge and support one another, and can aid significantly in advancing one's career through shared knowledge and new opportunities. Because much of real estate investing relies on experiential-based learning, rather than on reading a book, for instance, savvy real estate investors understand the importance of building a network.

Conclusion

Despite abundant advertisements claiming that real estate investing is an easy way to wealth, it is in fact a challenging business requiring expertise, planning and focus. In addition, because the business revolves around people, investors benefit in the long run by operating with integrity and by showing respect to associates and clients. Tough it may be relatively simple to enjoy short-lived profits, developing a viable real estate investing business that can last for the long-term requires additional skill and effort. Whether focusing on apartment buildings or commercial property, highly effective real estate investors share these 10 essential habits.

Odds of rate hike shrinking

2010-08-20T23:43:00.000-07:00

Paul Vieira, Financial Post · Friday, Aug. 20, 2010

OTTAWA — Markets scaled back in earnest Friday expectations for interest rate hikes in Canada for the remainder of the year as inflation data for July proved to be soft despite the introduction of new sales taxes in two big provinces.

Both headline inflation and the core rate — which strips out volatile-priced items and the impact of tax increases — were below analysts’ expectations. Annual headline inflation in July was 1.8%, but weaker than the 1.9% consensus expectation. Further, the core rate, which came it at 1.6%, slowed for a second consecutive month, something economists say would definitely attract attention at the Bank of Canada.

“Like a candy, Canada’s [inflation data] in July was crunchy on the outside but soft at the core,” said Krishen Rangasamy, economist at CIBC World Markets. “The mild inflation report should give the Bank of Canada some comfort in toning down its language about its tightening bias as it contemplates taking a long pause after a September rate hike.”

The soft consumer price data, coupled with weak U.S. economic data in the past few days, led traders to reduce the odds of a Bank of Canada rate hike on Sept. 8, when the central bank’s governing council next discloses interest-rate policy.

In money-market trading Friday, investors have priced in a roughly 40% chance the central bank raises rates next month. Meanwhile, the Canadian dollar lost over US1¢, as currency looked elsewhere for higher short-term returns, and the yield on the two-year Government of Canada bond hit a six-month low.

Nevertheless, most Canada securities dealers polled by Reuters believe there is enough momentum in the domestic economy to justify another Bank of Canada rate hike next month. But dealers are divided as to what happens after September, with five of the 10 dealers surveyed suggesting the central bank would stay on the sidelines for the remainder of the year.

As for the inflation data, prices in July did rise in seven of eight broad categories, Statistics Canada reported, but that was powered by the implementation of a harmonized sales tax in Ontario and British Columbia, analysts say. On a key discretionary item, clothing and footwear, prices dropped 1% month-over-month, and on a three-month annualized basis clothes and shoes costs have fallen 10%.

“Given that Canada just had one of the bigger price ‘events’ for quite a few years, the HST, and overall inflation remained below 2%, is quite remarkable,” said Douglas Porter, deputy chief economist at BMO Capital Markets.

The Bank of Canada sets its key interest rate in order to achieve 2% inflation.

In its last economic outlook, the Bank of Canada projected the introduction of the HST would lead to a temporary rise of 0.6 percentage points in year-over-year consumer prices, up until June of next year. The central bank’s forecast suggested cost savings to business as a result of the harmonized tax would eventually be passed on to consumers, thereby capping the HST’s impact to 0.3 percentage points.

This is why there was such much focus this time on core inflation, which stripped out the impact of the HST and other commodities.

Brian Bethune, chief Canadian economist at IHS Global Insight, said August inflation is likely to turn out to be soft as well, with commodity prices dropping -- crude oil hit a six-week low Friday -- and the elevated Canadian dollar keeping a lid on import prices.

“Over the next few months I don’t see any issue in terms of inflation being out there,” said Mr. Bethune, who said the Bank of Canada should hold off on a rate hike.

Maybe your mortgage needs a check-up

2010-08-06T22:42:00.000-07:00

Andy Holloway, Financial Post

While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.

Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or newfound money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.

“A lot of people don’t like to face up to it but, doing an annual financial check-up is a very smart thing to do,” says Peter Aceto, CEO and president of Toronto-based ING Direct Canada. “Managing your financial lifestyle is just as important as managing your diet and exercise.”

Aceto says people often just wait for a renewal letter before they look at their mortgage, and even then they’ll likely send the contract back without considering if it is meeting their current needs because they feel changing providers or the terms is futile. But they should put just as much thought into a renewal or a review as they did when they signed the initial deal.

Kelvin Mangaroo, founder of RateSupermarket.ca, which compares mortgage rates and brokers across the country, agrees. “Canadian consumers tend to become complacent about their mortgage payments and they could be saving a lot of money.” He says home owners should annually review three main things: their current and expected future risk profile and net income as well as rates.

For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Aside from comparing rates, Ratesupermarket.ca has a few other online tools that can help consumers figure if a change is a good thing, such as a mortgage calculator and a mortgage penalty calculator that will show how much you can expect to pay to break your existing mortgage. You can also sign up for e-mail alerts that tell you when rates change.

Rates are an obvious thing to pay attention to. If they’re going up, make sure you can make the higher monthly payment that may come at renewal time, or lock into a fixed rate if you’re on a variable. If rates are dropping below your existing rate, you might want to refinance or renew early.

“You’re making a commitment to be mortgage free in 25 years so you should have a longer term view of what interest rates will look like over that period, says Aceto. “Make sure you’re comfortable with them and comfortable making those payments.”

Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years, according to Aceto.

Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.

Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”

Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage. “Rolling that into your mortgage can significantly save on interest costs and that will help you get out of debt sooner,” says Feisal Panjwani, a Surrey, B.C.-based broker with Feisal & Associates under the Invis Inc. umbrella.

A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.

But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes. “Making changes to your mortgage before you go into a new venture or before you retire would allow you to qualify much easier rather than waiting for your mortgage to come up for renewal,” says Panjwani.

Bank of Canada increases overnight rate target by 1/4 point to 3/4 per cent

2010-07-20T06:26:00.000-07:00

Bank of Canada increases overnight rate target to 3/4 per cent

OTTAWA – The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

The global economic recovery is proceeding but is not yet self-sustaining. Greater emphasis on balance sheet repair by households, banks, and governments in a number of advanced economies is expected to temper the pace of global growth relative to the Bank's outlook in its April Monetary Policy Report (MPR). While the policy response to the European sovereign debt crisis has reduced the risk of an adverse outcome and increased the prospect of sustainable long term growth, it is expected to slow the global recovery over the projection horizon. In the United States, private demand is picking up but remains uneven.

Economic activity in Canada is unfolding largely as expected, led by government and consumer spending. Housing activity is declining markedly from high levels, consistent with the Bank's view that policy stimulus resulted in household expenditures being brought forward into late 2009 and early 2010. While employment growth has resumed, business investment appears to be held back by global uncertainties and has yet to recover from its sharp contraction during the recession.

The Bank expects the economic recovery in Canada to be more gradual than it had projected in its April MPR, with growth of 3.5 per cent in 2010, 2.9 per cent in 2011, and 2.2 per cent in 2012. This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

Inflation in Canada has been broadly in line with the Bank's April projection. While the Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April, the underlying dynamics for inflation are little changed. Both total CPI and core inflation are expected to remain near 2 per cent throughout the projection period. The Bank will look through the transitory effects on inflation of changes to provincial indirect taxes.

Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

The Canadian economy is roaring forward

2010-07-12T08:20:00.000-07:00

Latest employment figures are very good news for Charest and Harper

The Canadian economy created nearly 100,000 jobs last month - 93,000 to be precise, dropping the unemployment rate to 7.9 per cent, the first time jobless numbers have been below eight per cent since the beginning of last year.

Those are blowout numbers. The consensus forecast by economists was a much more modest 20,000 new jobs.

By comparison, the U.S. economy shed 125,000 jobs last month and unemployment remains dangerously close to double digits at 9.5 per cent. There are no bragging rights for Canada in these numbers, as we are a trading nation exporting one-third of everything we produce, three-quarters of that to the United States.

Still, ca va bien.

Since last July, the economy has created 430,000 new jobs, most of them in Ontario and Quebec. Ontario added a whopping 60,000 new jobs last month, while Quebec created another 30,000. In the last year, the Ontario economy has added 187,000 new jobs, while Quebec has created 117,000.

And here's the new normal -Quebec's unemployment rate of 7.8 per cent remains just below the national average, while Ontario is still above it at 8.3 per cent.

There was a time, in the 1980s and 1990s, when the Quebec unemployment rate coming out of a recession would be anywhere from two to four points above the national average. But the Quebec economy has since diversified into high technology spaces such as aerospace and pharmaceuticals, as well as services, which are less prone to recession than iconic manufacturing sectors.

Quebec construction signs claim federal-provincial stimulus programs are creating 100,000 new jobs, and the StatsCan numbers prove it.

Jean Charest is coming off a very rough session of the legislature, in which he's taken a pounding on ethics and governance issues. But as he retools his message over the summer, he can take comfort in the fact that the fundamentals of the Quebec economy are surprisingly strong.

The Quebec Liberals are seen as the party of economic managers, and Charest should play to his strengths. Let's put it this way: Robert Bourassa once ran on a slogan of creating 100,000 jobs in four years. Under Charest, Quebec has created that many jobs, and 17,000 more, in only a year. Oui, ca va bien.

Notwithstanding the buoyant job creation numbers, inflation remains very much under control at 1.6 per cent, below the Bank of Canada's target rate of two per cent. Inside that number, wage inflation is only 1.7 per cent.

This means that Bank of Canada Governor Mark Carney has the margin of manoeuvre to keep the bank rate at .50 per cent, up only 25 basis points from its historic low of .25 per cent, when the objective was to pump as much liquidity as possible into the economy by way of cheap money.

While some suggest Carney might raise 25 basis points to 0.75 per cent at the bank's next setting later this month, he has to be looking over his shoulder at U.S. Federal Reserve Chairman Ben Bernanke, who is in no hurry to raise the U.S. bank rate of between zero and .25 per cent.

Another increase in the Canadian bank rate, putting it at least 50 basis points above the U.S. rate, would only exert more upward pressure on the loonie, which on yesterday's job numbers soared over 100 basis points to 97 cents.

On at least two occasions in the last year, Carney has tried to talk down the Canadian dollar, with only temporary success. In the face of already weak demand in the U.S., virtual exchange rate parity is obviously not a good thing for Canadian exports. However, as Finance Minister Jim Flaherty has privately acknowledged, "it is the price of success."

For one thing, our dollar has become a petro-currency. For another, Canada has come out of the recession in better shape than any of our G7 partners, in terms of both job creation and fiscal frameworks, not to mention the soundness of the Canadian banking system, ranked best in the world by the World Economic Forum.

For example, the current deficit of $47 billion for the last fiscal year is already below the $54 billion forecast in the budget, on its way to $27 billion this year as Ottawa winds up the emergency stimulus program.

These new numbers mean more personal, corporate and GST tax receipts for the feds, and that in turns means the current deficit could be even lower.

This could be the moment for an old Liberal campaign slogan: The land is strong.

www.lianmacdonald.ca

© Copyright (c) The Montreal Gazette

Deflation can be a good thing

2010-07-05T20:42:00.000-07:00

Daniel Gross, Slate.com · Monday, Jul. 5, 2010

The talk about the economy in recent weeks has been somewhat deflating. There's the ongoing crisis in Europe, disappointing jobs numbers, a falling stock market—and the prospect of deflation itself. Deflation—the evil twin of inflation—rears his ugly head with great infrequency. He hasn't been seen around these parts for nearly 80 years, and there's no committee that convenes to declare his return, as the National Bureau of Economic Research's Recession Dating Committee does for economic contractions.

Economists generally agree that deflation is a widespread fall in prices, as measured by the consumer price index (CPI). "I don't know if there is a textbook definition, but I would want to see a full year of falling consumer prices before I announced that deflation was in process," said Brad DeLong, professor of economics at the University of California at Berkeley. The CPI, up 2 percent in the past 12 months, fell in both April (-0.1 percent) and May (-0.2 percent) and has been basically flat for the first five months of 2010.

What's so bad about deflation? After all, it's a pleasant surprise when prices of many items fall. Generations of Econ 101 students and central banks have been schooled to think that inflation is the great boogeyman, since it erodes the value of savings. And for much of our lifetimes, moderate inflation has been the norm.

Well, it turns out there's good deflation and bad deflation. Bad deflation is the kind we had in the Great Depression. "The last time we really had significant deflation in the U.S. was in the 1930s," notes Michael Bordo, professor of economics at Rutgers University and co-author of a paper on good and bad deflation in U.S. history. "Between 1929 and 1933, prices fell on average by 15 percent." This deflation was driven by a decline in output, demand, and credit—too little money and wages chasing too many goods and workers. The Depression-era cratering of wages and prices was disastrous because it rendered companies and consumers less able to pay their debts.

But there have been periods of good deflation, in which prices fall even as the economy booms. In the 1920s, known to this day as the Roaring '20s because of the decade's economic vibrancy, prices fell about 1 percent per year. Between 1870 and 1896, prices fell consistently amid rapid economic growth—with plenty of booms and busts along the way. The reason: Innovations like the railroad, telegraph, electricity, and the assembly line helped farmers, entrepreneurs, and manufacturers produce and ship their goods more cheaply and efficiently.

Making a value judgment about deflation depends in part on which side of the balance sheet you sit and on what's going on in the broader economy. Borrowers with fixed-rate loans—like the government, many businesses, and homeowners—will cheer for inflation and worry about deflation. When wages and prices grow modestly each year, it's easier to stay current with existing debt. And when there's lots of unused economic capacity—shuttered factories, large numbers of unemployed people—a little inflation can be just what the doctor ordered. Continually falling prices act as a disincentive to investment and risk-taking.

Moreover, many economists and most central bankers believe the ideal rate of inflation is slightly above zero. "Experience shows that a rate of inflation around 2 or 3 percent helps the economy to perform at full potential with maximum sustainable employment," said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics. In fact, the Federal Reserve, the nation's chief inflation fighter, actually wants prices to rise. One of the Fed's mandates is to provide "price stability," which means a consistent, reliable annual inflation rate. Without saying it in so many words, the Fed designs monetary policy with a target inflation rate of between 1.5 percent and 2 percent per year.

The next reading of the CPI comes out in mid-July. A negative number will mark the third straight decline and will surely inflate the volume of talk about deflation. (As the historical data show, we haven't seen four straight monthly declines in the CPI since the 1930s.) But when considering the risks of deflation, we shouldn't look at the CPI in isolation. The phenomenon of prices falling modestly at a time when the economy as a whole is growing at a 3 percent click, as it is today, isn't much to worry about. "The combination of slow growth or stagnation and deflation is the thing that's scary," says Michael Bordo. In other words, look out for stagflation.

Slate.com

Harmonized Sales Tax

2009-08-02T20:48:00.000-07:00

Chances are, if you live in B.C. or Ontario, you'll have heard the plan to "harmonize" these provinces' sales tax with the federal Goods & Service Tax.

Discussion about anything to do with taxes is usually controversial and can lead to heated debate, therefore I will try to present some information on what this means for home buyers in the most unbiased way possible.

First off, what is the HST? The HST was an option the federal government gave the provinces after the GST first came into effect on January 1, 1991. It simply combined the provincial sales tax with the federal GST and set a single rate.

Unfortunately from a consumer's perspective, the current PST in British Columbia & Ontario is exempt from several items, whereas the GST is not. Once the HST comes into affect, the provinces lose their ability to determine which products and services get exemptions.

Newly constructed real estate is one of those current PST exemptions. As it stands now, a purchaser of a brand new $500,000 home will pay $25,000 on top of the purchase price in GST, and $0 on PST. After July 1, 2010, the same purchaser on a $500,000 home will pay $60,000 on top of the purchase price in HST.

The main argument in favour of the new HST is that that as it stands now, though a purchaser of a brand new $500,000 home pays no PST, they are in fact paying PST that is hidden into the $500,000. The reasoning being that throughout the building and manufacturing process (think of the supply chain necessary for building a brand new car), PST gets charged at each step of the way on the raw materials. The final good we see as consumers is PST exempt, but there is no way to know how much of the $500,000 is made up purely in PST that the businesses had to incur.

What will change? Business will now be able to claim the HST throughout the supply chain as they input their value into the product, and only the final good will be charged the HST. The theory of those in favour of switching to this taxation model is that it will reduce the costs of goods and services, as well as other overhead expenses, so our $500,000 example should become cheaper. For purposes of illustration, let's say the price under the new scheme will be $465,000. Add the 12% HST and we arrive at a price of $520,800. This example demonstrates what supporters of the HST hope happens. (Note: There are different rebates available for purchasers of new construction at different price points. Generally, any new homes over $450,000 do not qualify. For more information, go to Canada Revenue Agency or speak to a tax planner qualified to give tax advice.)

Now this is where it gets complicated! How can we assume the cost of new construction will fall? Under a perfect market (many different players, ease of entry and exit, and information for the players to make rational decisions) competition would drive prices down if developers are indeed saving money. This presents us with some questions. How free is the market? Is there sufficient competition between the developers?

The same argument was made with the GST in 1991, since it would replace the manufacturer's sales tax, which was hidden from consumers, prices would fall and consumers would save. The result was not as noticeable as some had hoped, although many will agree that the economy of the 1990s in Canada was very strong as our exports surged. A study by the CD Howe Institute concluded that after Nova Scotia, New Brunswick, and Newfoundland & Labrador implemented the HST, investment rose, and consumer prices fell.

Can we count on similar results in British Columbia & Ontario, particularly in the new construction portion of the real estate market that will be affected by this change?

This is one of those major structural changes in the taxation structure where we won't know the results until long after they have been implemented.

Robert Boyd
Mortgage Expert
Dominion Lending Centres - Harbour View Mortgages Corp.
Office: 250-477-7555 Cell: 250-507-2693 Fax: 250-477-7550
E-mail: rboyd@dominionlending.ca Web: www.robertboyd.ca

Why Fixed Rates are Rising

2009-06-04T14:27:00.000-07:00

The mortgage industry has seen many lenders raise their fixed rates during the past week. As the interest rates on these types of mortgages fluctuate with the bond market, investors are indicating that recent global efforts to end the financial crisis will have to be paid for one way or another.

The huge stimulus packages initiated by governments around the world, as well as large budgetary deficits, have staved off deflation during the downturn. Deflation, the opposite of inflation, was a major concern for central banks during the worst part of the economic downturn. Monetary policy-makers did their part by lowering rates in an attempt to stimulate the economy and free up liquidity in the credit markets. Many central banks also resorted to quantitative easing, which in layman's terms is the equivalent of printing currency.

With the end of the recession in sight, Canadians can expect the fixed rates to begin their climb from historical lows. The variable rate, which is a product of the prime rate (2.25%), would normally be raised by the Bank of Canada to counter inflation. But to ensure stability and prevent a lock-up of the credit markets, the Bank has indicated they will keep prime at its current level into the first half of 2010.

Those with variable rate mortgages are therefore presented with two options:

Keep their low rates and low payments for the next year, or
Lock in to a fixed rate mortgage

The current economic situation dictates that this should be a no-brainer for most borrowers. Since the fixed rates have likely hit their bottom, the prudent mortgagor would lock in now.

However, if a recent job loss or pay cut has affected any earners in the household, it might be best to hold off, as locking in from a variable rate will raise payments. In this situation, there is no right answer, however you may end up paying more in the long run if rates rise significantly.

Now is the time to refinance if your current fixed rate mortgage has a higher interest rate and you have been waiting for rates to drop. The savings can sometimes significantly outweigh the penalty.

Check with your mortgage broker to find out what options are best suited for your needs in this unique economic climate, you may be surprised!

Robert Boyd
Mortgage Expert
Dominion Lending Centres - Harbour View Mortgages Corp.
Office: 250-477-7555 Cell: 250-507-2693 Fax: 250-477-7550
E-mail: rboyd@dominionlending.ca Web: www.robertboyd.ca