Bank of Canada Maintains Overnight Rate at 1 Percent

Sometimes it feels good to be surprised, but Tuesday’s anticipated announcement by the Bank of Canada that it is maintaining its target for the overnight rate at 1 percent was a relief.  The global economic recovery is entering a new phase, and the Bank of Canada is now expecting weaker-than-projected recovery across the board, especially in the United States.  Canada is not an exception in this shift in projections since July’s Monetary Policy Report, as the Bank continues to expect the economic recovery here will also be more gradual.

Instead of focusing on household and government expenditures, the composition of demand in Canada is expected to shift towards business investment and net exports.Corresponding to the overnight right maintaining at 1 percent, the Bank Rate is set at 1 ¼ percent and the deposit rate is set at ¾ percent.  Growth rates in Canada are expected to be 3.0 percent in 2010, 2.3 percent in 2011, and 2.6 percent in 2012.  Although a portion of this more subdued profile is a result of the more gradual global recovery, it also takes into account a more subdued expectation for Canadian household spending.  The projections around household spending come from the decline in housing activity, and as a result, the increased focus on household debt considerations.

Inflation in Canada has remained slightly below the July projections of the Bank of Canada, but the expectation is that the economy will return to full capacity by the end of 2012 instead of the previously forecasted beginning of that year.

It was a combination of all of these factors that the decision was reached to maintain the target for the overnight rate at 1 percent.  This new announcement continues to keep considerable monetary stimulus in place to continue to achieve the 2 percent inflation target during a time when Canada is coping with a significant excess of supply.  Given the transition in the global recovery, the weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and Canadian considerations that are expected to slow spending and housing activity in Canada, the Bank would need to carefully consider any further reduction in monetary policy stimulus.

Although this announcement is driven by a weaker global economy, the management of the painful current global reality within the confines of the Canadian economy should create a sigh of relief for the real estate and mortgage industry, as there is not any new pressure being pushed onto the industry after a painful 2nd quarter in 2010.

From Canadian Property Wire

GTA's Affordability Index

It still makes sense to buy a house. Believe it or not, it's still affordable. Here's why!

GTA Market Today

According to Toronto Real Estate Economist Jason Mercer, prices are not unreasonable out there and what people need to look at when buying their house is affordability including mortgage rates.

Greg Nemez, Broker
Hon. B. Comm.
Royal LePage Real Estate Services Ltd. Brokerage
1654 Lakeshore Rd. West
Mississauga, Ontario
L5J 1J3
gnemez@royallepage.ca
www.gregnemez.ca
905-822-6900
905-822-1240

GTA's Fall Real Estate Market

Source - Royal LePage Real Estate Services Ltd.

It  now  appears  that  more  pessimistic  news  will  be  flowing  out  of  the  U.S.  shortly,  as  American   banks  take  action  to  remove  what  many  hope  are  the  final  round  of  sub-­‐prime  foreclosures   from  their  books  before  the  end  of  the  year.    It  has  become  abundantly  clear  that  Canada  is   distinctly  different  from  the  U.S.    Our  national  differences  stem  from  variations  in  our   economies,  our  distinctive  real  estate  markets,  dissimilar  banking  and  lending  practices  in  each   country,  and  the  cultural  differences.    Canada,  once  the  forgotten  cousin  within  the  G20  group   of  countries,  has  recently  catapulted  to  the  forefront  of  these  global  powerhouses.      Once   considered  too  conservative  for  the  global  banking  industry,  the  lending  policies  practiced  by   Canadian  banks  are  now  considered  worthy  of  benchmarking  and  role  model  status  for  other   global  banks.    The  litmus  test  for  Canadian  banks  occurred  when  the  tumultuous  U.S.  sub-­‐prime   mortgage  meltdown  barely  scratched  the  surface  of  the  Canadian  sub-­‐prime  mortgage  market.       Some  of  the  most  significant  differentiators  between  the  Canadian  financial/banking  system   and  the  U.S.  system  include  the  following:  

Canada  does  not  have  mortgage  interest  deductibility  for  income  tax;  therefore,   Canadians  want  to  pay  down  their  mortgages  as  quickly  as  possible,  which  is  not  the   case  in  the  U.S.   Canadian  banks  distribute  their  assets  and  liabilities  across  Canada,  spreading  the  risks   and  rewards  across  the  country,  mitigating  against  local  real  estate  market  fluctuations   or  outright  collapses.    In  the  U.S.  banking  industry,  there  are  restrictions  on  interstate   trade  and  banking.    The  grandest  example  of  this  difference  occurred  during  the  Great   Depression,  when  over  10,000  U.S.  banks  failed,  while  Canada  did  not  have  any  bank   failures.         In  Canadian  provinces,  with  the  possible  exception  of  Alberta,  mortgages  are  fully   recoverable,  if  the  financial  means  are  present.    Any  shortfall  resulting  from  a  bank  sale   is  still  the  responsibility  of  the  homeowner,  who  (in  most  situations)  remains  fully   accountable  for  the  debt.   Mortgage  insurance  is  compulsory  for  all  federally  regulated  financial  institutions  in   Canada  when  the  loan-­‐to-­‐value  ratios  exceed  80%,  which  is  not  the  case  in  the  U.S.   In  Canada,  approximately  30%  of  mortgages  are  securitized,  so  most  lenders  have   ongoing  exposures  to  the  mortgages  they  originate,  thus  providing  an  incentive  for   more  prudent  lending  practices.    In  the  U.S.  the  majority  of  mortgages  are  securitized   and  sold  to  third  parties,  who  are  much  quicker  to  write  off  debt,  in  the  event  of  default.  

 Canadian  real  estate  markets  are  very  different  on  both  the  local,  provincial  and  national  levels.   For  an  extended  period  of  time,  the  media  has  prophesized  that  Canada  would  eventually   follow  in  the  tracks  of  our  neighbourhoods  to  the south. The medias longstanding  predictions   have  not  come  to  fruition  for  the  following  reasons:  

From  the  mid-­‐2006,  at  the  peak,  housing  prices  in  the  U.S.,  have  subsequently  fallen  by   approximately  30%  through  to  February  2009  (Case-­‐Shiller  Composite  Index).    While  in   the  Canadian  market,  from  the  mid-­‐2008  peak,  prices  have  fallen  by  only  7.4%  through   to  February  2009  (Teranet/National  Bank  of  Canada  Composite  Index).   Buyers  are  still  in  abundant  supply,  which  is  representative  of  a  balanced  fall  market.   The  Greater  Toronto  area  The Greater Toronto area is still one of Canada’s primary destinations for new migrants. According  to  the  Ministry  of  Finance,  the  Greater  Toronto  Area  is  projected  to  be  the   fastest  growing  region  of  the  province,  with  its  population  increasing  by  3  million  or   49.5%  to  the  year  2036.   With  Canadian  interest  rates  remaining  at  historic  lows,  more  buyers  are  able  to  enter   the  real  estate  market fuelling the ‘move-up’ market. Even  though  the  Toronto  Real  Estate  Board  reported  a  22%  drop  in  sales  in  August  2010   compared  to  sales  in  August  2009,  the  average  price  of  homes  in  the  GTA  actually   increased  6%  from  the  previous  year.    The  cyclical  summer  slowdown  was  further   enhanced  due  to  the  introduction  of  the  Harmonized  Sales  Tax  on  July  1st,  which  skewed   the  typical  sales  cycle.  

Although  no  one  has  an  economic  model  or  a  crystal  ball  that  accurately  predicts  where  the   economy  is  going,  our  research  and  data  show  that  the  Greater  Toronto  real  estate  market  is   still  a  thriving  market  place.  Notwithstanding  an  unforeseen  global  event,  taking  into  account   the  typical  seasonal  cycles,  in  addition  to  a  gradual  increase  in  interest  rates  over  the  coming   years,  the  Greater  Toronto  area  should  continue  to  have  a  reasonably  balanced  real  estate   market  as  its  prominence  as  a  world  class  global  destination  increases.  

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