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Is there a prime rate cut in our future?

By David Larock

Recently the Bank of Canada (BoC) met and, as expected, left its target overnight rate unchanged. More surprisingly though, the bank also eliminated its oft-repeated warning about near-term rate increases. Here is the exact wording from the announcement:

“While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving a two per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of the imbalances in the housing sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.”

The first notable wording change was the BoC’s “more muted inflation outlook”, which was supported by the December Consumer Price Index (CPI), released by Statistics Canada. The report showed overall inflation of only 0.80 per cent over the most recent 12 months, along with core inflation of 1.10 per cent over the same period. (Reminder: core inflation strips out the more volatile inputs to the CPI like food and energy prices.)

Our inflation rates have fallen steadily over the past year and a half and are among the lowest in the world. If they remain at current levels, the BoC will have to think seriously about lowering its overnight rate, not raising it, to achieve a two-per-cent inflation target over the medium term.

Sound crazy? Let’s look at the other key wording change in the BoC’s latest statement – the “more constructive evolution of the imbalances in the housing sector”.

Our borrowing has slowed sharply of late and household credit is now expanding at a rate of only three per cent, the lowest level seen since 1999. If household credit growth, which BoC Governor Mark Carney has repeatedly called the “greatest threat to our domestic economy”, continues to stabilize, the BoC’s interest-rate policy should align more closely with the actual economic data going forward.

I say this because I have long maintained that the bank’s repeated warnings to Canadians about imminent rate increases have not actually been supported by economic data, domestic or otherwise, for some time. In fact, many analysts have long speculated that the BoC was using its higher-rate warning as a kind of moral suasion to persuade Canadians to slow their borrowing (a tactic that I would argue had little meaningful impact).

Even if you look at the BoC’s own economic forecasts, which were just updated in the latest Monetary Policy Report (MPR), there is plenty to suggest that the next move in the overnight rate could just as easily be down as up:

* The BoC cut its forecast for Canadian GDP growth from 2.40 per cent to two per cent in 2013. (Note: the bank upgraded our GDP growth forecast for 2014 from 2.40 per cent to 2.70 per cent but didn’t support this optimistic revision with a detailed explanation. And it doesn’t jibe with any of the bank’s projections for other countries in 2014, as you will see below). The bank now also expects our output gap (the gap between our actual output and our maximum potential output) to disappear in the second half of 2014, instead of by the end of 2013, as forecasted in the October MPR.

* The BoC cut its forecast for U.S. GDP growth from 2.30 per cent to 2.10 per cent in 2013 and from 3.20 per cent to 3.10 per cent in 2014. The bank now estimates that “fiscal consolidation will exert a significant drag on U.S. economic growth … (and this) will subtract roughly 1.5 percentage points from growth in both 2013 and 2014.”

* The BoC cut its euro-zone GDP growth forecast from 0.40 per cent to -0.30 per cent in 2013 and from one per cent to 0.80 per cent in 2014. The bank now believes that “the economic recovery will be slower than originally thought, in part because fiscal austerity measures and tight credit conditions are taking a greater-than-expected toll on economic activity”.

* The BoC takes note of China’s recent economic rebound but also points out that “other economic activity has slowed further in other major emerging economies.”
* On an overall basis, the report states that while “global tail risks have diminished (meaning the risk of a systemic shock to the global financial system that could be caused by an event like a sovereign debt default), the global outlook is slightly weaker than projected in October”. In other words, the global economic momentum arrow is pointing down across the board.

Variable-rate discounts are available in the prime minus 0.40-per-cent range (which works out to 2.60 per cent using today’s prime rate). While five-year variable rates only offer a small saving over their equivalent five-year fixed rates, the BoC announcements provided further reassurance that this saving should remain in place for the foreseeable future.

The bottom line: I have long argued that the BoC’s warnings about near-term higher rates would not come to fruition and the bank’s latest revisions to its interest-rate guidance confirm this view. With that question now put to rest I don’t think it’s crazy to wonder whether the next move in the overnight rate, when it eventually does come, has as much chance being a decrease as an increase. (And that’s especially true if the BoC’s latest international GDP growth forecasts are on the money.)

David Larock MBA, AMP, PFPC, CSC is a Toronto-based independent mortgage planner and long-time industry insider who specializes in helping clients purchase, refinance or renew their mortgages. He is an active blogger on mortgage related topics and his posts have been distributed in national media and by Realtors and financial planners. 

Housing sales top $1 billion

By Elliot Ferguson, Kingston Whig-Standard

House sales in Kingston topped $1 billion for the first time in 2012.

House sales in Kingston topped $1 billion for the first time in 2012.

KINGSTON – Annual housing sales in Kingston for the first time topped $1 billion in 2012.

Last year, residential sales in the city totalled $1.012 billion, according to the Kingston and Area Real Estate Association.

The landmark was the result of steady growth in the value and amount of house sales in the area, said KAREA president Tim Barber.

“If you look historically over the past four years, it’s gone up that little bit each year. It’s not that we took this huge jump up to that billion-dollar mark,” Barber said.

Last year, 3,791 residences were sold, a 2.8% increase from the 3,686 houses sold in 2011.

The average sale price of the residences was also up from the previous year to $280,095, a 3.5% increase from the 2011 average of $270,503.

December, traditionally the slowest month of the year for real estate, was particularly quiet with 115 residences selling, down 21% from 146 the previous year. The houses that did sell, sold for an average of 3.8% more than the same month last year.

Last year, fuelled in part by a mild winter, real estate sales in the Kingston area started strongly, Barber said.

That trend slowed in the second half of the year after the federal government introduced new rules governing mortgages. The new rules were meant to cool an overheating of the real estate market in major urban areas.

“It definitely had an effect and Kingston was no different,” Barber said. “There was a slight cooling off to the market in the second half of the year after the new rules came into effect.”

Despite the second-half slowdown, Barber said the Kingston-area market still grew at a healthy pace, and as people become more used to the new rules, sales will return to normal levels in 2013.

“It shows that Kingston really is a nice, balanced market,” Barber said. “It is a good place to own a house right now, and I don’t see any real changes to that in 2013.”

Continued low interest rates and a solid job market will help, he said.

Housing starts dip, prices on rise in Kingston

By Elliot Ferguson, Kingston Whig-Standard

KINGSTON – A drop in detached housing starts in Kingston in October was partly offset by new apartments, semi-detached and row houses building.

Starts for 43 single-detached houses were recorded in October, down from 54 in October 2011.

The drop in detached housing starts was made up for by a 47% increase in the number of multiple unit starts.

The rise in the number of multiple dwellings is a response to Kingston’s low vacancy rate in the rental market.

“There is a shift in the composition,” said Andrew Scott, Canada Mortgage and Housing Corporation market analyst for Kingston. “Housing starts tend to follow household formation.”

According to the CMHC, construction of single-detached housing in October dropped by 20% compared to the same month last year.

The number of total housing starts in Kingston from January to September 2012 is up by 20% from the same period last year, Scott said.

In the first nine months of 2012, 780 housing starts were recorded, compared to 652 during the same time last year.

The data suggest more housing is being purchased by smaller or younger families and individuals, Scott said.

“Kingston is, comparatively, a very stable economy,” Scott said.

That stable economy is reflected in housing sales and prices, which are expected to continue to increase next year, according to a new study by ReMax.

The real estate company predicted by year end that about 3,060 homes will have been sold in Kingston in 2012.

“We don’t have the peaks and valleys that Toronto has,” said ReMax broker of record Bob McKean.

Half of the homes sold in 2012 in Kingston were priced between $200,000 and $300,000, with homes priced more than $400,000 accounting for about 30% of the market.

The ReMax study stated inventory has increased and the company described the Kingston housing market as balanced but leaning slightly in favour of the buyer.

Stricter borrowing rules were offset by low vacancy rates in the city that compelled people to buy rather than rent, the report said.

The average price is expected to climb by 3.5% this year to $280,000 and an additional 4.5% in 2013.

McKean said contrary to what many say, real estate remains a safe haven in uncertain times.

“It’s interesting, because you hear the sky is falling,” McKean said. “For the last 20 years I’ve been hearing real estate is a bad investment but every year the market keeps going up.”

By the end of next year, the average house price is expected to be $292,500.

ReMax expects about 3,200 houses to sell next year.

“Healthy fundamentals continue to prop up housing demand in Kingston and Area — a trend which is expected to continue in the year ahead,” the report stated.

Kingston benefits from low unemployment, around 6.5%, an increasingly diversified economy and its proximity to Toronto, Ottawa and the border with the United States, the report stated.


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