Japanese disaster won’t plunge global economy back into recession: economists

By Sunny Freeman

TORONTO – Recent tragic events in Japan follow a string of global catastrophes that could slow economic recovery in the short term, but should not push either the Canadian or global economies back into recession, according to some of Canada’s top economists.

“Obviously horrible things have happened (in Japan) that will take some of the growth out of the economy for the next two quarters,” said Glen Hodgson, chief economist at the Conference Board of Canada.

“Then people need to rebuild infrastructure, rail and housing and that will actually improve growth in the next four to six quarters.”

Hodgson joined two major banks Thursday in projecting that the crisis at Japan’s Fukushima Dai-ichi nuclear plant and last week’s earthquake and tsunami will conspire with a number of other global events — including uprisings in the Middle East and Europe’s sovereign debt crisis — to decelerate the global economic recovery.

“They will have a negative impact … (but) we’re certainly not returning to recession in any place,” Hodgson said.

G7 countries, including Canada were set to meet in a teleconference Thursday night to discuss the economic impact of the disasters in Japan.

Bank of Montreal (TSX:BMO) economists said in a report that they had trimmed their forecast for global growth by a quarter point to 3.75 per cent as a result of recent events.

“Prior to Japan’s earthquake, we had been calling for global GDP growth this year of four per cent,” they wrote.

“Until we see how the (Japanese) nuclear crisis plays out, it’s next to impossible to properly assess the full economic impact, but a rough guess would be that events in Japan could cut this year’s GDP growth by nearly a percentage point.”

As a result, the bank doesn’t expect an increase in the Bank of Canada’s key overnight lending rate until at least this summer.

However, the effect on the Canadian economy will be minimal and short-lived as Canada stands to benefit from higher oil prices and Japan’s rebuilding process, Paul Taylor, chief investment officer at BMO Harris Private Banking, said during a conference call Thursday.

There will be a short-term impact on the financial sector— where Canadian insurer Manulife (TSX:MFC) has taken a beating due to its exposure in Japan — as well as uranium producers, as governments around the world begins to rethink the use of nuclear energy.

However, many Canadian businesses, including lumber producers and engineering and construction firms, will see an increase in business during the rebuilding phase, he added.

“The Canadian economic impact, we expect to be quite limited,” he said, adding that trade between Canada and Japan doesn’t compare with Canada-U.S. trade.

“For us, it’s only the secondary impact of Japan’s effect on U.S. economic activity that were focused on,” he said.

Meanwhile, his colleague, Jack Ablin, chief investment officer at U.S.-based subsidiary Harris Private Bank, said he was knocking down his U.S. growth forecast by a percentage point because of the crisis in Japan.

Japan’s earthquake and nuclear disasters will likely reduce manufacturing output for several months, potentially creating shortages that could disrupt North American producers, such as automakers, that rely on Japan for parts.

General Motors said Thursday that it was suspending production at its Shreveport assembly plant in Louisiana next week due to a parts shortage resulting from the crisis in Japan, but so far its Canadian plants are operating normally, a spokesman said.

CIBC also cut its growth forecast for the U.S. growth by a tenth of a point, to 2.7 per cent, mostly due to the negative impact of oil price hikes and government spending cutbacks.

Among other things, CIBC senior economist Peter Buchanan noted in a report that surging gasoline prices raise questions about whether U.S. consumer spending can continue its increasingly healthy pace.

However, Buchanan believes that oil would have to reach US$160 a barrel to derail the economic recovery, a scenario he does not see playing out. After plunging in recent days, crude jumped $3.44 to settle at US$101.42 a barrel Thursday on the New York Mercantile Exchange.

“Oil has risen dramatically before, only to crash back to earth, and there are still good reasons why history may repeat itself,” Buchanan said.

Inventories in industrial countries were adequate when the Middle Eastern political pot began bubbling and OPEC, while it likes firm prices, has no interest in recession-inducing ones that crush demand.

Since Canada is one of the world’s top dozen net exporters of oil and oil products, higher crude prices are a modest plus for the economy in the near term.

But beyond four to five quarters, the drag on the economies of its major trading partners means the bad more than cancels the good, and the level of GDP is actually lower than it would otherwise have been.

While Canada is not immune to issues facing the global economy, the report forecasts real GDP growth of four per cent for the country in the first quarter of 2011 and Buchanan expects the Bank of Canada to hike its trend-setting overnight rate as early as May. http://ca.news.yahoo.com/canadian-gdp-grow-pace-four-per-cent-first-20110317-061726-639.html

Important bank announcement coming!

One of the major banks announced that as of March 16^th they’re going to make it easier for  people who rely on alternative courses of income to get approved for a mortgage.

This shows us that the banks are feeling more confident in Canadian consumers and seeing that the channels they’re getting business from (ie, mortgage brokers) are doing the due diligence required to ensure these borrowers are of the quality the banks expect.

We expect other banks to follow suit throughout the week.

One thing that will never change is this will be a yo-yo that will continue for decades, but for now it will give the leading lenders a competitive advantage, and maybe some room to promote further change. As always, borrower beware.  

The pendulum has swung to each side over the past three years and keeping on top of it makes all the difference in a borrower’s financial freedom.

As always, if you have any questions, I’m here to help!

Angela Calla, AMP

Dominion Lending Centres-Angela Calla

604-802-3983

acalla@dominionlending.ca

http://www.globaltvbc.com/video/index.html?releasePID=QNa6QANW1CD6cWgDiPWWFh4cG2txGvOo

Enjoy the segment, it’s approx 2 minutes

Angela

OTTAWA – Canada’s economy was surprisingly hot at the end of last year, setting the stage for another fast start in 2011 that bodes well for jobs and other economic indicators.

The economy grew a better than expected 3.3 per cent in the last quarter of 2010, a full point stronger than the Bank of Canada had predicted a little over a month ago and faster than the 2.8 per cent advance posted south of the border.

Adding to the good news, Statistics Canada revised upwards the results of the third quarter to 1.8 per cent from one per cent, enabling the country to finish the year with an overall 3.1 per cent increase in gross domestic product.

And December’s also better than expected 0.5 per cent spurt provided a strong hand-off to Q1 performance this year, economists noted.

“On balance, this report stands up to careful scrutiny in signalling greater than expected breadth of growth in the Canadian economy,” said Derek Holt, vice-president of economics with Scotia Capital.

There were three main ingredients to the strong quarter. Exports surged 17 per cent annualized, helping bring along manufacturing, which surprised on the upside, and consumer spending, which jumped 4.9 per cent.

Bank of Montreal economist Douglas Porter said the strong hand-off points to the first quarter of this year coming in even better, at around 3.5 per cent.

Porter and his forecasting group have now joined the Royal Bank and Merrill Lynch in projecting three-plus growth for all of 2011, well above the Bank of Canada’s 2.4 call.

That might get Bank of Canada governor Mark Carney, whose forecasts now appear overly dour, thinking about interest rate hikes sooner rather than later.

“We had been looking for the bank to wait until their July meeting before restarting the rate-hike process … but if there is a surprise to our rate call, it now looks like the bank would go earlier, rather than wait longer,” Porter said.

The flashing red light confronting Carney is that any rate increases while the U.S. Federal Reserves stays on the sidelines will likely light a fire under the already hot loonie. And that could snuff out the strongest performer in the economy — exports to countries with falling currencies like the United States.

The dollar has traded over par with the greenback for weeks and got another boost by the GDP result Monday, gaining about half a cent to 102.63 US cents in mid-morning trading.

Carney’s reaction to the strong numbers will be known Tuesday morning when he will deliver a short analysis along with his decision on interest rates.

Economists and the markets expect the central bank to keep its trendsetting overnight rate at one per cent, where it has been since last September.

The data was also good news for the federal government as nominal growth — which is most directly tied to tax revenues, particularly on the corporate side — jumped by 7.2 per cent on the wealth effects of high commodity prices.

Pre-tax corporate profits came in at a stratospheric 41 per cent annualized, and even wages and salaries were a strong 5.7 per cent.

But there were downside surprises in the GDP report as well. Inventory buildup fell, not usual during a recovery, and business investment in new machinery and equipment was basically flat, although the previous three quarters had been strong.

 As you’ve likely heard in the news lately, Canadian household debt is at an all time high with an average 150% debt to income ratio.  As a  Mortgage Expert, I can offer solutions. 

When you think you may want a fixed rate, look at our variable protection strategy. It gives  the benefits of taking a variable with the security of a fixed.  It builds in payment certainty, protects against future prime increases, and allows our clients to pay down their mortgage much quicker. 

 With the average variable VS the current fixed, this can save a total $36,543($16,289 interest + $20,254 principal) at the end of the 5yr term(we’ve even built in a .15bp increase in Prime every 6 months) Based on a 300,000.00 mortgage.

 Contact me today to see how we can help you and please share this if you believe someone you care about will benefit.

Angela Calla, AMP

Dominion Lending Centers

604-802-3983

acalla@dominionlending.ca

Why do mortgage rates rise fast, fall slowly?

John Greenwood   Financial Post

Why do mortgage rates rise quickly but fall like molasses?

That’s the question posed by an article in the latest issue of the Bank of Canada Review, and it’s a good one.

The report, by Jason Allen of the central bank’s financial stability department, notes that the big banks that dominate the market tend to adjust interest rates faster when they’re on the way up than they do when rates are falling.

While it come as no surprise to borrowers that such is the case, the article draws an interesting conclusion: That such behaviour by banks and other lenders may have broader implications for Canada’s monetary policy, and that the central bank may want to take this into account when it comes time to plot strategy.

The report comes on the heels of a decision by the federal government to tighten mortgage rules as a way to head off a potential real estate bubble.

All the major lenders in this country tend to offer the same types of mortgage products, credit cards and other services, and in fact Canadians tend to treat their bank as a “one stop shop” where they buy a majority of their financial services, according Mr. Allen.

Leaving aside the issue of whether this is a healthy situation, the author concludes that the mortgage market is “consistent with a model where consumers have different preferences and skills when shopping and bargaining for a mortgage and where lenders maximize profits based on observing these preferences and skills.”

Simply put, borrowers are often complacent and end up paying more than they should.

One of the quirks of the industry in Canada is the prevalence of mortgages with terms of five-years or less, even though the loans amortize over as much as 40 years, according to the article.

Citing a recent study by John Kiff, a senior financial sector expert at the International Monetary Fund, it notes that Americans, by contrast, tend to opt for longer term mortgages than do Canadians, and they have a much broader choice.

The benefit of longer terms is that they provide the borrower with better protection against the risk of rising interest rates. If a loan is amortized over 25 years, the best way for the creditor to ensure he can always make the payments is to take a 25-year term.

Some economists refer to five-year products as “balloon mortgages” because of the possibility that the payments may suddenly shoot up at the end of the term.
Borrowers are also left vulnerable to “roll-over risk,” that the lender may be unwilling to renew the loan at any price.

According to Mr. Kiff, the main reason 10- and 20-year mortgages aren’t more common in Canada is because financial service providers consider them uneconomical.
Whenever banks make home loans they generally protect themselves from the risk that the customer may pay the money back early by including strict repayment penalties. But current regulations put strict limits on such penalties. “So the banks have this wall at five years,” Mr. Kiff said in an interview.

Bottom line: Lenders can’t charge what they feel they need to charge so they don’t offer longer term mortgages at an affordable price.

Mr. Kiff, who previously worked at the Bank of Canada, said Canadians would be better served if there was more choice of longer term mortgages. The IMF recently recommended that the federal government change the rules around mortgages so that lenders are able to provide broader product choice without unnecessary limits on how they charge for products.

What needs to happen is “at least, let the market determine where the rates should be,” he said. “What [mortgage] works best depends on the borrower, on the borrower’s own personal situation.”

http://business.financialpost.com/2011/02/17/why-do-mortgage-rates-rise-fast-fall-slowly/

Here we go, again. The economy is generating more jobs, a handful of banks raise mortgage rates and all of a sudden you’re being advised to lock in your mortgage before the bank doors slam shut. In fact, some say you’d better hurry up and buy a house now before mortgage rates go so high you’re locked out of the housing market forever.

This is not the first time that mortgage rates are on the brink of blooming only to fade a few months later. This has happened more than a handful of times in the last decade. The headlines are often the same. A month or two of increasing mortgage rates, the public is urged to act now, and then a few months later something unforeseen appears on the horizon.

The last occasion was just over a year ago. The posted five-year mortgage rate in March 2010 went from 4.7% to 5.15% in April, and then to 5.3% by May. The recommendations were clear: lock in. But then, by October they were back to 4.5%. The economy sputtered, Greece and Spain hit the headlines and the rest was history.

Don’t get me wrong. Short-term interest rates are abnormally low today and the Bank of Canada has pledged to raise them eventually. But that is a far cry from advocating that you lock in your mortgage – which is actually driven by long-term bond market rates – or heaven forbid using this as an excuse to buy a house you can’t really afford.

Click here to read the full article from The Star.

The commercial real estate market saw an unprecedented recovery last year, with investment growing 48% as the economy improved and investors returned to the market.

Canadian commercial real estate sales volume reached $18.9 billion in 2010, according to CB Richard Ellis, from $12.7 billion in 2009 – though it’s still a long way from the $19.8 billion posted in 2005.

“Once we were a few weeks into 2010, we could feel momentum picking up so that by the year-end, we were about where we expected it to be,” said John O’Bryan, CBRE’s Vice Chairman. “It was really a coast-to-coast recovery – something we haven’t seen before.”

The only market that didn’t see an increase in volume was London, Ontario. Toronto finished the year with $7.4 billion in trades, up from $3.8 billion in 2009 as volume grew by 95%. 

Click here to read more in the Globe and Mail.

The resurgence of the loonie and continued degradation of US home prices are spurring more Canadians to invest in property south of the border. But while this may appear an opportune time to snatch up a retirement home or dream vacation property, experts warn that jumping into these major purchases without doing extensive research is a recipe for disaster. 

The list of things to consider before buying in the United States is long, ranging from estate taxes to property maintenance to insurance. 

“There are lots of things that most people don’t think about,” says Laura Parsons, a mortgage expert with Bank of Montreal. “I know quite a few people who went into the market in the US without a lot of knowledge about what that means.” 

First and foremost, experts caution that speculative investments in US real estate continue to be a roll of the dice. 

Click here to read for the full details in the Globe and Mail.

Think Outside the Bun 

Rob McLister, CMT 

That is Taco Bell’s slogan.  It’s meant to remind us that fast food doesn’t end with hamburgers. Tacos are pretty tasty in their own right.

In the lending world, the closest equivalent to “the bun” is the 5-year fixed mortgage. Like hamburgers are to fast food, the 5-year fixed is to mortgages. It’s been the most popular term in Canada for years.

Yet, despite its prevalence, qualified borrowers owe it to themselves to think outside the 5-year fixed. A little extra risk can sometimes yield a lot more reward.

Fixed 5-year mortgages are especially popular in uncertain/rising rate markets (like today’s). People who can’t afford rate risk, and those who cannot qualify for shorter terms, often choose a 5-year fixed by default.

Even individuals with rock-solid financial resources frequently gravitate to 5-year terms. Much of the time that’s because they don’t want to overthink the safety of a longer-term mortgage. In other cases, it’s because no one has ever shown them how much 5-year fixed terms really cost over the long run. 

No matter how popular 5-year terms are, however, mortgages are not a one-size-fits-all proposition.  For those who can stomach the chance of higher rates at renewal, various compelling alternatives exist. One happens to be the 3-year fixed.

Lenders like Merix Financial, HSBC, and others still have three-year rates in the 3.35% range or better. That’s 59+ basis points below current 5-year pricing.

At those rates, (from a purely mathematical and hypothetical perspective) the 3-year fixed performs better in our internal simulations than any other term, be it a variable or a 1, 2, 4, 5, 7 or 10-year fixed.¹

With major banks forecasting a 2% rate hike in 24 months, 3-year fixed mortgages model even better than variable-rate mortgages (primarily because of the 3-year’s low rate and its 36 months of rate-hike protection).

This doesn’t mean a 3-year will definitely save you more money than any other term. It just means they offer very good value with decent odds of interest savings.

On a $300,000 mortgage with a 25-year amortization, a 3.35% three-year will save you about $5,130 over a 3.94% five-year fixed. That’s over 36 months.

After 36 months, you can move into any other term you want (e.g.,  a 1-year fixed, variable, or another 3-year fixed). As long as your rate at renewal is about 5% or less, you’ll come out ahead of today’s 5-year fixed.

A few other points about 3-year terms:

• You can make your 3-year fixed payment equal to a 5-year fixed payment, thus shrinking your amortization even faster.
• People tend to refinance 5-year terms roughly every 3.5 years on average. Three-year terms let people out without a penalty just before many of them are getting ready to renegotiate their mortgage.

The “optimal term” (if there is such a thing) changes as rates fluctuate and as borrowers’ finances change.

All things considered, however, the three-year fixed is the sweet spot of the mortgage market at this particular point in time.

Housing market will be stable next two years: RBC
A stronger economy will offset the effects of higher mortgage rates and
keep Canadian house prices stable over the next two years, according to
the Royal Bank of Canada.
In a market update that has the bank forecasting price gains of 0.5 per
cent in 2011 and 1.3 per cent in 2012, economist Robert Hogue said that
after two years of “gyrating wildly,” the Going forward, we see nearly
perfectly offsetting forces driving Canada’s housing market,” he said.
“On the upside, the economic recovery will gather strength in 2011,
continuing to boost employment and family incomes. On the downside,
interest rates are expected to rise.”
The Bank of Canada will likely raise interest rates by 100 basis points
this year and another 150 basis points in 2012, he said, making mortgage
payments more expensive for the majority of homeowners. But real gross
domestic product is expected to increase to 3.2 per cent in 2011 from
2.9 per cent in 2010.
“The net effect of these forces is expected to be close to nil, thereby
leaving resale activity largely flat,” he said.
There have been a flurry of forecasts issued in the last week,  as the
market starts the year stronger than expected
Canadian housing market is likely to be a much less interesting place
for the next several years. Capital Economics issued a cautious report
that suggested higher interest rates could drive prices down as much as
25 per cent over the next three years, while the Canadian Real Estate
Association raised its sales forecast for the next two years as it
suggested that a stronger economic recovery and continued low interest
rates would keep the market balanced.
“Even though mortgage rates are expected to rise later this year, they
will still be within short reach of current levels and remain supportive
for housing market activity,” CREA chief economist Gregory Klump said.
“Strengthening economic fundamentals will keep the housing market in
balance, which will keep prices stable.”
Capital Economics economist David Madani said too many optimistic
forecasts are based on too short a time frame to be useful, because many
mortgages won’t reset until rates rise much higher than they are today.
“Let’s balance this discussion a bit and think longer term,” he said in
a recent interview. “As far as housing prices are concerned, we think
they’re overvalued and we don’t see income growth closing that gap.”

By The Canadian Press

OTTAWA – Interest rates are going up, and the federal finance minister says he expects them to rise even more.

The Royal Bank increased several of its posted and special mortgage rates on Tuesday, joining TD Bank and CIBC.

All three banks have increased the posted rate for a five-year closed mortgage by a quarter of a percentage point, to 5.44 per cent.

RBC also raised its special fixed rate offer for a five-year closed mortgage by the same percentage amount, to 4.39 per cent.

Finance Minister Jim Flaherty said he’s not surprised.

“The recent increase by a couple of the banks is exactly what we expected,” Flaherty told reporters in the foyer of the House of Commons.

And more increases should be coming, Flaherty predicted, since lending rates have been hovering close to historic lows.

“We’re likely to see higher interest rates as we go forward because interest rates are still very low.”

Flaherty commented as he denounced a Liberal opposition day motion calling on the Harper government to reverse a planned 1.5-percentage-point corporate tax cut.

http://ca.finance.yahoo.com/news/Flaherty-warns-even-higher-capress-1588973775.html