Will Interest Rates Rise or Will They Fall?

Over the past few weeks interest rates, specifically longer term (5 year term) fixed rates, have risen on average 0.25%. Not a massive leap, and not the beginning of the end of low rates by any stretch.

Understanding the Basics

Fixed interest rates are predicated on the bond market. Where the bond market goes is where longer term (4yr – 10yr term) fixed rates follow.

Over the past few weeks the bond market has seen new life, and thus rates have risen slightly. This is partly due to speculation around the new federal government's expensive commitments to inject many billions of dollars into the economy. These will be good for business, and in turn should further fuel a recovery in the bond market, making investors happier.

For those seeking longer-term fixed-rate mortgages there will be less happiness, although to be fair, for some time yet interest rates are likely to remain quite close to the record lows we have enjoyed. An increase from 2.59% to 2.79% is hardly cause for alarm.

Variable-rate mortgages, and to some extent 1, 2 and 3yr fixed-rate mortgages, are predicated on the Bank of Canada’s Prime rate, which saw two 0.25% cuts earlier this year. It's currently at 2.70% with lenders, who passed only a 0.15% reduction on to the mortgage market.

(Side Note: When the Bank of Canada increases rates by 0.25% again, will lenders increase their Prime by only the 0.15% they cut, or will we get two partial cuts, but the full lump on an increase? Time will tell.)

The Bank of Canada has repeatedly said that what happens in the real estate market is not a significant part of their decision-making process; instead movement in the Prime lending rate is more of a large lever designed to guide the nation's economy as a whole. The manic goings-on in two cities' housing markets (Vancouver and Toronto) do not play a material role and are instead, to some extent, a by-product, not a basis for decisions.

Most notable were recent comments by our new Minister of Finance, Mr. Bill Morneau, in his Fall Fiscal Update which referenced a ‘stalling economy’ and a reduction in expected economic growth from 2% to perhaps 1.2%. These are clear indications that the Bank of Canada is unlikely to increase Prime any time soon.

Consider that the idea of the Liberals' commitment to infrastructure spending is an attempt to step on the gas pedal and power up the economy. Then, equally, consider that a Bank of Canada increase to Prime would be akin to stepping on the brake pedal of the economy. It seems reasonable to expect some degree of volatility in the bond market and thus longer-term fixed rates — and equally reasonable to expect stability when it comes to Prime — and thus stability for variable-rate mortgages and shorter-term fixed-rate offerings.

Low rates are here for some time to come, albeit in a different form than we have grown accustomed to.

Paying your mortgage down faster

The best way to prepare for potentially higher rates is to have a lower mortgage balance come renewal time. If you truly want to take advantage of today’s low rates, there are many ways to pay down your mortgage sooner to save you thousands of dollars in interest payments.

Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 15% or 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money. Few of us have such lump sums, mind you.

A more reasonable and highly effective approach is to increase the frequency of your mortgage payments by opting for accelerated bi-weekly payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but are guaranteed to save you a significant amount of money over the term of your mortgage.

Even just adding extra, e.g. $25.00, $50.00 or if you can $100.00, to your mortgage payment each passing year will have a powerful cumulative effect over the term of your mortgage. As always, if you have any questions about refinancing, reducing debt or paying down your mortgage quicker, I’m here to help!

Creating Sustainable Neighbourhoods

A neighbourhood with sustainable features is one that meets your needs while protecting the environment and leaving an affordable legacy. This type of neighbourhood offers homes that are located near shops, schools, recreation, work and other daily destinations. Like a village, these places are a pleasant, convenient and safe walk, cycle or bus ride from home. This helps you reduce driving costs and enjoy the health benefits of walking and cycling. Land and services, like roads, are used efficiently. Old or new, they also feature a choice of homes that you can afford.

Did you know…?

·         The Heart and Stroke Foundation of Canada recommends at least 30 minutes of exercise every day, like walking or biking, to reduce the risk of obesity, heart disease and stroke. Where homes are within walking distance of stores and other services, people are 2.4 times more likely to meet the 30-minute minimum than those in homes that are not within a convenient or pleasant walk to stores/services.

·         The average annual cost to own and operate a car in Canada is $9,000+. If you can eliminate the need for a second car, drive less or avoid having a car at all, that’s money in your pocket.

·         A two-storey detached home loses 20% more heat than a semi-detached one, and 50% more than a middle home in a row of townhouses of the same size with the same heating system, insulation and windows.

• Trees shading your house can make it feel cooler in the summer. Healthy trees also increase your property value. They intercept rainwater, improve air quality, and make streets and public spaces more comfortable and attractive.
• Asphalt surfaces, like parking lots, can make urban areas hotter than the surrounding countryside in the summer. With less asphalt surface, neighbourhoods are more attractive and land-efficient. In mixed-use neighbourhoods, fewer parking spots are needed because places with high daytime needs, like offices, are close enough to share parking with places that need more parking at night, like homes and restaurants.
• Cars are a major source of smog in urban areas, so driving less helps everyone’s health, particularly children, the elderly and people at risk for cardio-respiratory problems.
• Half of the greenhouse gases from energy use by individual Canadians come from passenger road transportation, like cars. In the Toronto area, greenhouse gases from weekday passenger travel generated by people living in mixed-use, pedestrian and transit-friendly neighbourhoods near the urban core are about 1/3 of those by people living in dispersed, strictly residential neighbourhoods on the urban fringe.

Canadian and US Employment

Employment in Canada declined by 36,000 jobs in November, largely as the result of losses in part-time work. The national unemployment rate edged 0.1 points higher to 7.1 per cent.  Total hours worked, which is strongly correlated with economic growth, is up 1.1 per cent over the past 12 months while total employment is up 0.7 per cent over that time period.

In BC, employment fell by 1,400 jobs following strong gains in October. The provincial unemployment rate declined 0.1 points to 6.2 per cent . Year-to-date, employment in BC is up 1.2 per cent but has risen at a rate of 2.5 per cent over the past three months.

In the US, payrolls expanded by a robust 211,000 jobs while estimates of job growth in previous months were revised higher by 35,000 jobs. The US unemployment rate was unchanged at 5 per cent.

Copyright BCREA – Reprinted with permission 

Bank of Canada Interest Rate Decision

The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that inflation is in line with its outlook with total CPI inflation near the bottom of the Bank's 1 to 3 per cent target range while core inflation remains close to 2 per cent.  On growth, the Bank cited ongoing and complex adjustments in the Canadian economy to low commodity prices, but expects growth to move above potential (usually estimated to be about 2 per cent) in 2016. 

 Absent a substantial recovery in global commodity prices, the Canadian economy will more than likely grow near its long-term trend rate over the next two years. That rate of growth will keep inflation relatively anchored at or below its 2 per cent target.  A baseline scenario of economic growth above 2 per cent, paired with low inflation and steady job growth should keep the Bank of Canada sidelined over the medium run. However, several quarters of steady growth following the oil price shock of late 2014 may convince policymakers that the economy is no longer in need of the monetary stimulus injected into the economy via two rate cuts in early 2015. If so, the Bank may shift back to a tightening bias with a potential rate increase late next year or in early 2017.

Copyright BCREA- reprinted with permission 

Canadian Economic Growth (Q3'2015)

The Canadian economy rebounded from a first half contraction, growing 2.3 per cent in the third quarter in spite of a slowdown in the month of September. Economic growth was led by a 2.3 per cent gain in exports of goods and services, more than four times the rate of export growth recorded in the second quarter. Household consumption rose 0.8 per cent and residential investment grew 0.6 per cent. Business investment in machinery and non-residential structures continued to feel the effects of low commodity prices, falling 1.1 per cent and 1.7 per cent respectively. Growth for all of 2015 will likely register a paltry 1.2 per cent with stronger second half growth offsetting consecutive negative quarters in the first half of the year.

The outlook for growth in 2016 remains weighed down by low oil prices and the associated struggles in Canada’s energy producing provinces. Higher oil prices would provide a welcome boost to economic growth, but increasing prices are contingent on more robust global demand which may not materialize. In addition, the economy may have to adjust to a slight increase in mortgage rates which could temper the pace of residential construction and home sales. Offsetting these downside risks is that the low Canadian dollar should continue to provide a boost to the trade and manufacturing sector. Overall, we forecast growth in the Canadian economy will pick-up next year to 2.4 per cent.

Copyright BCREA – Reprinted with permission 

Canadian Retail Sales

After rising for four consecutive months, Canadian retail sales fell 0.5 per cent in September. Adjusted for the effects of changing prices, in particular declining gasoline prices, the volume of sales was actually up 0.1 per cent.  In BC, retail sales were up 0.2 per cent on a monthly basis and 6 per cent compared to September 2014. Year-to-date, retail sales in the province are up 7 per cent over last year. 

Given today's data release, Canadian real GDP is currently tracking at about 2.5 per cent in the third quarter, while the BC economy is on pace to grow 2.8 per cent for all of 2015. 

Copyright BCREA - reprinted with permission 

Robust Housing Demand Continues in October

The British Columbia Real Estate Association (BCREA) reports that a total of 8,725 residential unit sales were recorded by the Multiple Listing Service® (MLS®) in October, up 14.1 per cent from the same month last year. Total sales dollar volume was $5.8 billion, up 32.3 per cent compared to the previous year. The average MLS® residential price in the province rose to $667,480, up 16 per cent from October 2014.

“Consumer demand continued at a heightened pace in October,” said Brendon Ogmundson, BCREA Economist. “Market conditions have diverged significantly in the province as very low supply and a near

record pace of home sales in the metro Vancouver area is offsetting resource sector driven weakness in northern markets.“

There was a four month supply of residential inventory province wide in October, with markets in the Lower Mainland and Victoria closer to three months of supply. A balanced market typically exhibits a five to eight month supply of homes for sale.

The year-to-date, BC residential sales dollar volume increased 33.6 per cent to $55.3 billion, when compared with the same period in 2014. Residential unit sales climbed by 20.4 per cent to 87,895 units, while the average MLS® residential price was up 11 per cent to $628,909.

Copyright BCREA – reprinted with permission 

Canadian Manufacturing Sales

Canadian manufacturing sales declined 1.5 per cent in September, the second consecutive monthly decline.  Lower sales were the result of ongoing weakness in the energy sector as well as falling demand in the motor-vehicle industry.  Overall, sales were lower in 13 of 21 Canadian manufacturing sub-sectors, representing about 80% of Canadian manufacturing output.

In BC, where the manufacturing sector employs roughly 170,000 people, sales rose 0.2 per cent on a monthly basis but were down 0.6 per cent compared to September 2014.  BC manufacturing sales are being led by growth in shipments of wood products to the United States as well as strong demand for BC made machinery and equipment. Those sectors are helping to offset current weakness in commodity prices to produce growth of 3 per cent in manufacturing sales year-to-date. 

Copyright BCREA - reprinted with permission 

Housing Demand to Ease but Remain Elevated in 2016

BCREA 2015 Fourth Quarter Housing Forecast

Vancouver, BC – November 10, 2015. The British Columbia Real Estate Association (BCREA) released its 2015 Fourth Quarter Housing Forecast Update today.

Multiple Listing Service® (MLS®) residential sales in the province are projected to surpass 100,000 units this year. This level of home sales will be the third strongest on record and mark the first year since 2007 that BC home sales exceed the ten year average.

After climbing 15 per cent in 2014 and nearly 20 per cent this year, BC MLS® residential sales are forecast to decline 7 per cent to 93,700 units in 2016. “Less latent pent-up demand and gradual upward momentum of mortgage interest rates is expected to ease housing demand next year,” said Cameron Muir, BCREA Chief Economist.

“The inventory of homes for sale is now at its lowest level in nearly eight years,” added Muir. “Sellers’ market conditions are prevailing in many communities and causing home prices to be pushed higher.” The average MLS® residential price in the province is projected to increase 10.2 per cent to $626,000 this year and forecast to slow to a 2.2 per cent increase at $639,700.

Total housing starts in the province are projected to reach over 30,000 units this year, the highest level of production since 2008. Capacity constraints and an edging back of consumer demand is largely behind a forecast decline of BC housing starts, albeit just to 28,800 units in 2016.

Copyright BCREA – reprinted with permission 

Best Rate Mortgages

This edition of the Weekly Rate Minder has the latest, best rates for Canadian mortgages. At Dominion Lending Centres, we work on your behalf to find the mortgage that suits your needs. Best of all — our service is free.* It's the selected lender that pays us and YOU get the best rate. *(O.A.C., E.&O.E.) • Our Best National Rates • Explore Mortgage Scenarios with Helpful Calculators on http://www.derekdiener.com

Terms Bank Rates Our Rates 6 Month 3.14% 3.10% 1 YEAR 2.89% 2.29% 2 YEARS 2.84% 2.19% 3 YEARS 3.39% 2.34% 4 YEARS 3.89% 2.49% 5 YEARS 4.64% 2.59% 7 YEARS 5.30% 3.39% 10 YEARS 6.10% 3.84% Rates are subject to change without notice. *OAC E&OE

Prime Rate is 2.70%  Variable rate mortgages from as low as Prime minus 0.55%  Please note that rates shown above are subject to change without notice. The rates shown are  posted rates and the actual rate you receive may be different, depending upon your personal financial situation. “Some conditions may apply. Rates may vary from Province to Province. Rates subject to change without notice. *O.A.C. E.& O.E.” Check with your Dominion Lending Centres Mortgage Professional for full details and to determine what rate will be available for you. *O.A.C., E.& O.E.