Calgary Alberta Mortgage and Real Estate News

The cost of borrowing money to buy a home rose another notch late last week as bond yields jumped amid fears that growing inflation pressures are becoming too strong to ignore.

Canada’s largest bank, the Royal announced its residential mortgage rates would increase between 0.10 and 0.15 percentage points, bringing its five-year closed rate to 7.29 per cent.

“The global economy has a lot more momentum than most people, including central bankers believed,” said Doug Porter, deputy chief economist with BMO Nesbitt Burns.

“It’s beginning to put upward pressure on inflation in a variety of areas.”

Interest rates across North America have become the focal point of money watchers lately, with speculation increasing almost daily that the U.S. Federal Reserve may raise rather than lower rates, even if that doesn’t happen immediately.

Earlier this month, the Bank of Canada warned bluntly it could raise interest rates, with expectations the overnight rate of 4.25 per cent could rise a quarter point next month.

Much of Canada’s mortgage market is tied to prime rates, which are based on the central bank’s overnight rate.

On May 29, Canada’s major banks raised their residential mortgage rates by nearly one third of a point in expectation of a rate hike from the Bank of Canada.

The latest rate hikes come against a backdrop of a Canadian housing market that continues to sizzle.

Average resale prices recently climbed above the $300,000 mark for the first time, while sales values and listings all set fresh records this spring driven by a buying frenzy in the west.

The Canadian dollar dipped
against the U.S. dollar on Monday but was still within striking
distance of its recent high as the market looked ahead to a
mid-week speech by Bank of Canada Governor David Dodge.
 Domestic bond prices, which have been under pressure in
recent months, were stuck lower.
 At 8:40 a.m. (1215 GMT) the Canadian unit was at C$1.0615
to the U.S. dollar, or 94.21 U.S. cents, down from C$1.0602 to
the U.S. dollar, or 94.32 U.S. cents, at Friday close.
 The Canadian dollar has eased slightly since touching a
30-year high early last week, but each drop in the currency has
been met with another wave of buying.
 ”Every indication tells us there should be a correction
lower,” said David Watt, senior currency analyst at RBC Capital
Markets. “But any time it seems the Canadian dollar starts to
sell off it seems to get bumped on and people push it back to
levels it has been trading at for the past several days.”
 The latest example of that resilience came on Friday as the
Canadian dollar bowed down to a weak Canadian jobs report, only
to find buying interest at lower levels which buoyed it to a
higher finish than where it started.
 With no key economic reports due in Canada this week, the
market will turn its attention to Dodge’s speech on Wednesday
to the St. John’s Board of Trade.
 Dodge will speak about demographics and labor, but the
market will listen closely for any comments on the Canadian
dollar’s surge and how that could factor into future policy
decisions.
 The Bank of Canada has hinted at imminent monetary policy
tightening and market expectations are now calling for rate
increases in July and September. Higher interest rates would
raise the yield on Canadian investments.
 ”It really just seems like the market is looking for a key
reason to sort of go one way or the other,” said Watt.
 BONDS STUCK LOWER AFTER DATA
 Canadian bond prices were stuck lower after a pair of
Canadian economic reports did little alter current sentiment.
 New housing prices jumped 0.8 percent in April from March,
the biggest monthly gain since August 2006. Canadian industries
ran at 83.0 percent capacity in the first quarter, the first
increase after four quarterly declines, but still a touch shy
of market expectations.
 Bond prices have fallen sharply in the past month, given a
slew of up beat economic reports that have had the market
anticipating rate hikes in the near term.
 ”I don’t think you can attribute it to any particular
positioning at this point in time because frankly the numbers
out today aren’t Grade A figures in Canada and I think I think
people are still taking a breather from last week,” said Eric
Lascelles, strategist at TD Securities.
 The two-year bond was down 5 Canadian cents at C$98.23 to
yield 4.703 percent, while the 10-year bond slipped 5 Canadian
cents to C$95.37 to yield 4.637 percent.
 The yield spread between the two-year and 10-year bond was
-6.9 basis points, compared with -4.9 basis points at the
previous close.
 The 30-year bond slid 20 Canadian cents to C$118.40 to
yield 4.536 percent. In the United States, the 30-year treasury
yielded 5.241 percent.
 The three-month when-issued T-bill yielded 4.33 percent,
unchanged from the previous close.

Canadian government debt fell, pushing yields on two-year bonds to the highest since 2001, on concern that accelerating inflation will prompt central banks worldwide to raise interest rates.“Inflation fears are back in investors’ minds,” said Sal Guatieri, a senior economist with BMO Capital Markets in Toronto. “That’s got bond investors quite worried, and that will continue to push yields higher.”

The yield on Canada’s two-year bond rose 8 basis points this week, or 0.08 percentage point, to 4.68 percent. It reached a peak of 4.72, the highest since August 2001. The price of the 3 3/4 security maturing in June 2009 fell 12 cents to C$98.27 in Toronto. Yields move inversely to prices.

Guatieri said the two-year bond yield may climb to 4.90 percent by the end of the year.

New Zealand’s central bank raised its benchmark interest rate a quarter-percentage point on June 7 to a record 8 percent. Investors in the U.S. reduced bets the Federal Reserve will need to lower borrowing costs this year.

Yields in Canada climbed for a third-straight week as investors raised bets that the Bank of Canada will increase borrowing costs more than once to stem inflation. The yield on the December bankers’ acceptance contract rose to 4.92 percent from 4.53 percent a month ago on the Montreal Exchange.

The central bank held its target rate for overnight lending between banks at 4.25 percent on May 29 and said it may raise borrowing costs “in the near term” should inflation stay above its 2 percent target. Policy makers next meet July 10.

`Deteriorated’ Inflation Climate

“The Canadian inflation climate has deteriorated during recent months,” said Yanick Desnoyers, a senior economist with National Bank Financial in Montreal. “It’s time to get ready for a new round of monetary tightening.”

Consumer prices, excluding volatile components such as energy, accelerated in April to the highest level in more than four years, Statistics Canada said last month.

Canada’s economy added 9,300 jobs last month after shedding 5,200 positions in April, Statistics Canada said yesterday. Employers were expected to add 14,300 new jobs in May, according to the median of 24 economists’ forecasts in a Bloomberg survey. The unemployment rate held at 6.1 percent.

Guatieri said the Bank of Canada will raise interest rates as soon as July “because economic data has been very supportive of this move.”

The Canadian dollar was little changed this week, closing at 94.24 U.S. cents in Toronto yesterday. One U.S. dollar bought C$1.061.

Just before the high-tech bubble burst, a colleague hurried into the office declaring excitedly to all within earshot that she was now in the stock market. Having tired of listening to everybody else’s endless chatter about stocks and the profits they were claiming on a daily basis, she decided that it was time for her to be involved.

Oh, Lord, I thought, here comes the elevator boy, harkening back to the legendary tale of the Wall Street financier who got out of the market just before the October 1929 crash after the elevator boy gave him a stock tip. That was a realization the market was riding a speculative bubble.

Some say the financier was Bernard Baruch. Others that it was J.P. Morgan and a shoeshine boy. No matter. Whenever speculative motives enter the investment equation, the risk increases. There’s no question that the climate in today’s stock market differs notably in one respect from the situation at the height of the high-tech mania. These days, there isn’t the feverish day-trading that accompanied the high-tech meltdown.

But there are other concerns. Core inflation is running at 2.5 per cent, and while we dodged a bullet on Tuesday when the Bank of Canada held its key overnight rate steady at 4.25 per cent, a rate hike seems inevitable in the “near term,” those words accompanying the bank’s decision to hold for now.

An anticipated rate cut that we have been living with since last September is now nowhere to be seen and no one expects it to materialize.

The worst of the scenarios comes from Toronto-Dominion Bank economists, who forecast that Bank of Canada Governor David Dodge will raise the key rate by 25 basis points in July and by another 25 basis points in September to bring the overnight rate to 4.75 per cent.

“Given the fact that core inflation has consistently been at or above the target of two per cent for the past 11 months, the odds of higher rates are tilted toward the upside now,” TD senior economist David Tulk told me.

The Bank of Canada’s concession that “some increase in the target for the overnight rate may be required in the near-term to bring inflation back to target,” confirms this.

The message for mortgage hunters or those making a purchase that requires credit is to lock in now, because interest rates are heading upward.

The benchmark S&P/TSX composite may have priced-in some of those increases, but that hasn’t tempered the chances of a pullback.

Short-selling — the practice of borrowing a stock and selling it in anticipation that it will fall, and then buying it back at a lower price, a dangerous practice, at best, because historically stocks go up — is at its highest level ever.

The short interest on the NYSE is 11.76 billion shares, which represents 3.1 per cent of all outstanding shares.

In Canada, short-selling activity is highest in the IT sector, where 6.5 per cent of all outstanding shares have been shorted, notes National Bank Financial market strategist Pierre Lapointe.

The IT companies and the percentage of their outstanding shares shorted are Celestica (12.8 per cent), CGI Group (9.7), Cognos (9.4), and Research in Motion (6.7).

The most heavily shorted stock in all sectors is Norbord (13.8 per cent), followed by CanWest Global Communications (13.4), Northern Orion Resources (12.9), Cott Corp. (12.4), Saskatchewan Wheat Pool (11.2), Gildan Activewear (10.9), Abitibi-Consolidated (10.4) and Angiotech Pharmaceuticals (10).

“Given the adverse market conditions that short-sellers face, we regard these short-sold companies as red flags,” says Lapointe. “Even the raging bull market hasn’t stopped many investors from betting that these stocks will fall. Short-sellers clearly see something negative that merits investigating.”

Barring a severe decline today, most investors will have recorded remarkable returns during May. The S&P/TSX has so far gained 665 points for a return of 4.9 per cent. The Dow Jones Industrial Average is up 4.3 per cent and the S&P 500 index 3.2 per cent.

It is worth noting that Canada’s inflation now exceeds U.S. core inflation for the first time in three years and the possibility that the Federal Reserve will ease its Fed Fund rate, although slim, is still greater than the chances of it happening here.

The only saving grace for Canada is that the anti-inflation lobby is running full steam in Washington where the word is that core inflation at two per cent is not good enough. The Fed wants it down to 1.5 per cent and that could mean higher interest rates for Americans and a tighter spread, now at a full percentage point, between the two central banks.

A spread wider than that would catapult the dollar even closer to parity and cause all sorts of trouble for Canada’s manufacturing sector, export industries and equity markets.

The Bank of Canada on Tuesday maintained its target for the overnight rate at 4.25%, but suggested that future rate hikes might be needed to contain inflation.

In an accompanying statement, the central bank said information received since the April Monetary Policy Report indicates that economic growth and inflation in Canada in the first part of this year have been “stronger” than the bank was expecting.

The bank judges that “there is an increased risk that future inflation will persist above the 2% inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target,” according to the statement.

“With this statement, the [Bank of Canada] has signaled it is prepared to hike interest rates by [a quarter percentage point] at its next meeting on July 10,” said Michael Woolfolk, senior currency strategist at The Bank of New York.

Woolfolk said the Canadian dollar could “easily reach 1.05″ against the U.S. dollar in the second half of this year.

The Canadian dollar, also known as the loonie, rallied on the news, last trading up 0.7% at C$1.0721 vs. the greenback.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/4 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 1/2 per cent.Information received since the April Monetary Policy Report (MPR) indicates that economic growth and inflation in Canada in the first part of this year have been stronger than the Bank was expecting. In April, both total CPI inflation, at 2.2 per cent, and core inflation, at 2.5 per cent, were above expectations. On the basis of available information, the Canadian economy is likely to have grown at an annual rate of about 3 1/2 per cent in the first quarter of this year - a full percentage point higher than was estimated in the MPR. The Bank now judges that there is somewhat greater excess demand in the economy than was thought to be the case in April. U.S. economic activity has come in largely as expected and continuing robust growth outside North America has maintained the global demand for, and high prices of, many commodities produced in Canada. Against this overall backdrop, the Canadian dollar has risen appreciably above the range assumed in the Bank’s April projection.

On balance, the Bank judges that there is an increased risk that future inflation will persist above the 2 per cent inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.

An updated analysis of the Bank’s outlook for growth and inflation, including economic and financial developments, trends, and risks, will be set out in the Monetary Policy Report Update, to be published on 12 July 2007.

Information note:
The Bank of Canada’s next scheduled date for announcing the overnight rate target is 10 July 2007.

After leaving its key interest rate unchanged for the last year, the Bank of Canada could be about to signal that higher rates are on the way, some analysts are forecasting.

The central bank will release its next interest rate policy announcement at 9 a.m. ET Tuesday.

While no one is expecting a rate hike on Tuesday, some rate watchers say the central bank and its governor, David Dodge, could lay the groundwork for the overnight lending rate to jump as early as the following meeting on July 10.

The key overnight rate has been stuck at 4.25 per cent since May 2006. Any change in this interest rate triggers an immediate change in rates charged for variable mortgages and many demand loans and lines of credit.

TD Economics, for one, thinks the next rate hike could be as early as July, with another hike to follow in September. “The inflation backdrop has become troubling enough, in our view, to fully justify the bank finally moving off the sidelines,” said TD Securities chief economist Marc Lévesque in a commentary.

BMO Capital Markets agrees that the Bank of Canada will move off the sidelines, but not before the fall. “We judge that that Canadian dollar appreciation … and the prospects for continued slow growth will likely keep Dodge & Co. on the sidelines, at least through the summer,” wrote BMO senior economist Michael Gregory.

But he said his firm was “pulling forward our forecast for a first [central bank] rate hike into late 2007 from early 2008.”

RBC Economics also expects a later 2007 rate hike.

“With the core inflation rate well above the two per cent target and the domestic economy gaining steam, the odds of a significant slowing in price pressures are waning, making a very strong case for a policy interest rate increase later this year,” says RBC senior economist Dawn Desjardins.

Markets gird for rate increase
The markets are now fully pricing in at least one rate hike before the end of the year. Mortgage rates have already begun to head up as bond yields have risen in anticipation of higher rates. 

The mere prospect of higher interest rates has helped to boost the Canadian dollar to a 30-year high near the 93-cent US level.

The C.D. Howe Institute asked its nine-member monetary policy council to weigh in on what they think the Bank of Canada should do, as opposed to what they think the bank will do.

Their verdict? The majority think the central bank should raise its key overnight rate right away from the current 4.25 per cent to 4.50 per cent. “Both headline and core inflation are running ahead of the bank’s target,” the council said in a statement.

The core inflation rate — which excludes volatile items such as gasoline and fresh fruit and vegetables — surged to a four-year high of 2.5 per cent in April.

Canada Mortgage and Housing Corporation (CMHC) announced today that it will improve its mortgage loan insurance approval system, through a product enhancement called Self-Employed Simplified, to help more self-employed borrowers realize their dream of homeownership.“Self-Employed Simplified, will make it easier for certain self-employed borrowers to obtain mortgage loan insurance and, as a result, benefit from competitive interest rates,” said Pierre Serré, CMHC’s Vice-President, Insurance Product and Business Development. “This product enhancement will help self-employed borrowers and commissioned salespersons to obtain a CMHC-insured mortgage, much like borrowers who receive a salary or hourly wage from an employer.”

In recognition of the growing proportion of self-employed people in today’s workforce, CMHC has developed tools that help assess the risk associated with borrowers who have difficulty obtaining third-party validation of their income using traditional forms of documentation. Increasingly sophisticated risking models will enable the Corporation to launch this product enhancement effective March 30, 2007.

CMHC Self-Employed Simplified is designed for borrowers who have a minimum of two years in the same type of work and a proven track of responsibly managing their debt. CMHC Self-Employed Simplified will insure mortgages on one- or two-unit homeowner properties and will also be available for refinance transactions, for mortgages up to 90 per cent of a home’s value.

CMHC Self-Employed Simplified

Self-employed people represent a growing proportion of the Canadian workforce. CMHC’s Self-Employed Simplified product enhancement responds to this reality by making it easier for more self-employed borrowers to obtain CMHC mortgage loan insurance, and as a result to benefit from competitive interest rates.

CMHC already has mortgage loan insurance products for self-employed borrowers and commissioned salespersons who can provide traditional documentation to substantiate their income. These products will continue to be available.

CMHC Self-Employed Simplified will help more self-employed borrowers realize their dream of homeownership by making mortgage loan insurance available for borrowers who have difficulty obtaining third-party validation of their income through traditional forms of documentation. However, it will be limited to self-employed borrowers who have a proven track record of managing their debt, and who have worked a minimum of two years in the same type of work, either as an employee or self-employed.

CMHC System Enhancements

CMHC Self-Employed Simplified is possible due to enhancements to CMHC’s emili mortgage insurance approval system. These enhancements will include the use of new predictive models that assess the reasonableness of the income declared by the self-employed borrower. They will also allow for better assessment of mortgage default risk associated with self-employed borrowers who cannot provide traditional forms of documentation to substantiate their income.

The use of these models will help CMHC to insure these mortgage loans in a responsible and prudent manner.

Premium Levels

The CMHC Self-Employed Simplified mortgage insurance premium will vary from 0.8 per cent of the mortgage loan amount for loans with at least a 35 per cent down payment, to six per cent for loans with a 5 per cent down payment.  These levels reflect the absence of traditional forms of documentation to support the current income of the self-employed borrower.

While CMHC Self-Employed Simplified premiums are higher than those paid by borrowers with traditional forms of documentation, it is important to recognize that this product enhancement also allows borrowers to benefit from lower interest rates than would otherwise be the case. 

Canadian employers added the most jobs in eight months in January and almost seven times what economists forecast, further damping speculation that the central bank will reduce interest rates this year.January’s 88,900 new jobs represent the fifth-straight monthly gain, Statistics Canada said today in Ottawa. The unemployment rate rose to 6.2 percent from December’s 6.1 percent, which matched a 31-year low from May and June.

The figures bear out Bank of Canada predictions that economic growth will rebound after slowing to the least since 2003 in the third quarter. The Canadian dollar soared and bonds weakened on speculation Governor David Dodge will keep borrowing costs unchanged for much of the year, or even increase them.

“It’s good news” for policy makers, said Doug Porter, an economist with BMO Capital Markets in Toronto. “They have a nice combination of full employment and slow wage growth.” Porter predicted in a note to clients that the Bank of Canada’s next move will be a tightening, sometime in 2008.

Average hourly wages rose 2.2 percent from a year earlier, slower than December’s 2.6 percent rate, the agency said.

Economists in a Jan. 31-Feb. 8 Bloomberg News survey forecast a reduction in the main interest rate, from the current 4.25 percent, during the fourth quarter. The next decision is March 6.

In a separate Bloomberg survey, economists forecast 13,500 new jobs for January and a 6.1 percent jobless rate, based on the median of 24 and 26 estimates.

Dollar and Futures

The Canadian dollar rose to 85.32 U.S. cents at 4:17 p.m. in Toronto, the biggest gain in more than seven months, from 84.45 cents before the report. The currency, which touched its lowest since November 2005 yesterday, fell 7 percent since it rose to a 28-year high on May 31, reaching 91.44 U.S. cents.

The yield on the banker’s acceptance contract due in December rose 9 basis points to 4.27 percent on the Montreal Exchange, indicating more investors are betting the central bank won’t cut interest rates before then.

The jobless rate increased because 110,000 people joined the labor force, which was the largest monthly gain since 1981 and a reflection of Canadians’ optimism, Carolyn Kwan, a Scotia Capital Inc. economist in Toronto, wrote to clients.

Still, today’s data illustrate a disconnect between employment and growth that has puzzled central bankers, Porter said. Even as the economy added an average of 47,500 new jobs each month since September, it failed to grow at a commensurate pace, suggesting Statistics Canada isn’t measuring growth properly or that worker productivity has plummeted, he said.

Discrepancy

Dodge and Deputy Governor David Longworth have said the discrepancy is confusing, and the statistics agency said Feb. 1 it’s setting up a task force to investigate the numbers.

“It is possible that one of the employment or gross domestic product is being mismeasured, which should show up with revisions, or productivity growth has indeed fallen apart,” Kwan wrote. “In the end, it will take some time before our own conundrum is cleared.”

Canadian Finance Minister Jim Flaherty also cautioned against reading too much into today’s numbers.

“I always take monthly figures with a grain of salt,” Flaherty told reporters in Rome, on his way to a Group of Seven meeting in Essen, Germany. “They don’t depict trends.”

Job Details

Employers in the information, culture and recreation sector hired 29,200 people in January, boosting their payrolls by 4 percent. Also leading the surge were professional, scientific and technical services, with 27,600 new positions, and hotels and restaurants, with 23,800.

The net job gain was almost evenly distributed between full-time and part-time employment, with companies creating 45,900 full-time positions and 42,900 part-time jobs. Employers had already hired a total of 148,900 workers between September and December.

Home Depot Inc.’s Canada operation, which has more than 27,000 employees in the country, said today it will hire another 7,000 to cope with its busiest sales period, which is from March to June. The company will hire part-time, full-time and seasonal workers, according to a statement.

Ubisoft Entertainment SA, Europe’s second-largest video games maker, said in a statement that it will spend as much as C$454 million ($386 million) in Canada over the next six years to hire game developers and create a digital-movie studio.

Natural-resource companies led the gain in the goods- producing sector. Commodity-related companies added 9,600 employees, and manufacturers hired 3,600 people.

Factories, which have contended with higher production costs and a strong currency that makes their goods more expensive abroad, have fired 11,400 people in the past year.

Western Provinces

British Columbia, Canada’s westernmost province, led the overall gain in January, with 31,700 new jobs.

Alberta, the western province where an oil boom has caused labor shortages, added 24,000 jobs. The province’s employment was unchanged at 3.3 percent, as 23,300 joined the workforce.

From January 2006, employers have added 399,200 jobs, or 2.4 percent of their workforce, the statistics agency said.

Canada should cut taxes on investment and personal income, instead of further reducing a national sales tax, and continue paring the federal debt, the International Monetary Fund said.“We welcome the government’s commitment to using interest savings from debt reduction to lower personal income taxes and to reducing effective marginal tax rates on investment, which would provide larger efficiency gains than further cuts to the goods and services tax,” the Washington-based IMF said today in an annual consultation report it prepared in December.

Prime Minister Stephen Harper’s Conservative Party was elected in January 2006 in part on a promise to lower the goods and services tax to 5 percent from 7 percent. The government cut the tax to 6 percent in July. Harper promised in a Feb. 6 speech to introduce legislation to fund tax cuts with the money the government saves on interest as it pays down the debt.

Canada’s economic growth will slow to 2.5 percent this year from 2.8 percent in 2006, the report said. The Bank of Canada’s decision to leave its key interest rate at 4.25 percent “appears appropriate moving forward,” the report said. The central bank had raised rates at seven consecutive meetings ending in May.