Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News
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Cyprus is a tiny country that accounts for only 0.2% of the euro zone’s economic
output and its finances are broken beyond repair.
Given its small size, the temptation to use Cyprus to set a tough new
precedent for future euro-zone bailout proposals is understandable. This is
especially true for German Chancellor Angela Merkel, who will stand for
re-election in September and who needs to re-establish her austerity-at-all-cost
credentials with German voters after repeatedly compromising on bailout
deadlines for the euro zone’s larger countries.
From that perspective, last weekend’s bailout proposal was just what the
Chancellor Merkel’s political strategists ordered. It came with the toughest
bailout provisions yet, including an unprecedented requirement that Cypriot
deposit accounts with balances of less than 100,000 euros be charged a one-off
tax of 6.50%.
This proverbial pound of flesh was supposed to reassure German voters that no
one in the euro zone’s profligate peripheral countries would be immune from
consequences of over-indebtedness. But the same principal that was designed to
sell well on the German campaign trail also threatens to undermine all of the
euro-zone leader’s confidence-restoring efforts since the financial crisis
began. Ironically, the decision to introduce the threat that small-scale bank
depositors could lose part of their savings in future euro-zone bailouts has
almost certainly raised the cost of future bailouts for the same German voters
that this policy was intended to appease.
Continue reading "How The Cyprus Bailout Talks Have Irreparably Harmed the Euro Zone (Monday Interest Rate Update)" »
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March 18, 2013
Dave Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News, Interest Rate Update
Long time readers of my Updates
will remember that last year I was writing about how our ultra-low mortgage
rates were partly a by-product of rising investor fears of a euro-zone
collapse.
The Bank of Canada (BoC) was loath to raise its overnight
rate in the face of so much global uncertainty and our Government of Canada
(GoC) bonds were in high demand as capital fled into a shrinking
pool of safe-haven sovereign debt. Canadian fixed- and variable-rate borrowers
alike were taken along for the ultra-low rate ride. But then European Central
Bank (ECB) President Mario Draghi stared down Spanish and Italian
bond-market vigilantes with his promise to “do whatever it takes” to save the
euro zone and the crisis retreated from the headlines and appeared to calm from
a boil to a simmer.
While I haven’t written about the euro-zone crisis for a while, it is still
far from over. In fact, thanks to the latest bailout plan for Cyprus, it is back
on the front pages today.
The problem that has been building in the euro zone for some time is that the
German-led austerity initiatives that were supposed to put imperiled euro-zone
countries back on the path to fiscal solvency haven’t worked. So far at least,
government spending cuts and sharply higher taxes have stifled economic growth
and have caused revenues to fall faster than expenditures.
As these already gaping government deficits widen and reduction targets are
missed, the response from the German-led Troika, comprising the European
Commission (EC), the International Monetary Fund (IMF) and the ECB), has been to
impose still more austerity. Meanwhile, the response from voters in the euro
zone’s imperiled peripheral countries has been to throw increasing support
behind nationalistic leaders who run on anti-austerity platforms. I think it
will be this growing friction that fuels the next wave of the euro-zone
crisis.
Continue reading "Monday Morning Interest Rate Update (March 18, 2013) - The Euro-zone Crisis Moves Back to the Front Burner" »
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March 11, 2013
Dave Larock in
Mortgages and Finance,
Home Buying,
Toronto Real Estate News,
Interest Rate Update
Bond-market yields yo-yoed last week, with more subdued comments from the Bank
of Canada (BoC) pushing them down last Wednesday before strong employment
reports from both the U.S. and Canada pushed them higher on Friday.
When the BoC met last week, it kept its overnight rate unchanged at 1.00% as
expected. In its accompanying commentary the Bank softened its interest-rate
guidance once again, saying that “the considerable monetary stimulus currently
in place will likely remain appropriate for some period of time, after which
some modest withdrawal will likely be required”.
Here are my key takeaways from the Bank’s latest statement:
- The BoC offered a more optimistic view of global economic growth, thanks
largely to improving conditions in China, and it attributed the fourth-quarter
slowdown in our domestic economic momentum to a decline in inventories. This is
noteworthy because a slowdown that is caused by a reduction in inventories can
be transitory if businesses subsequently increase their production and replenish
their stockpiles quickly.
- The BoC statement referred to “a more constructive evolution of imbalances
in the housing sector”. This means that the Bank is now less concerned about the
risk of housing and credit bubbles. That is significant because BoC Governor
Mark Carney has repeatedly referred to rising household debt levels as the
greatest threat to our domestic economy.
Continue reading "Monday Morning Interest Rate Update (March 11, 2013) - Bank of Canada More Cautious on Mortgage Rate Rise" »
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March 04, 2013
Dave Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News, Interest Rate Update
Statistics Canada released its latest round of GDP data last Friday and it
provided further confirmation that our economy is hovering at just above stall
speed.
The report showed that our GDP actually declined by 0.2% in December,
bringing our fourth quarter GDP growth to a paltry 0.6% on an annualized basis.
While our economy registered total GDP growth of 1.8% over the full year, our
momentum slowed markedly in the second half.
As we piece together each new data point in our evolving economic picture,
signs of deceleration are everywhere. Our latest GDP, employment and inflation
reports merely confirm, at a macro level, the slowdown that we see in housing
starts, factory shipments, exports, retail sales and so on.
None of this should really come as a surprise. Every major economy in the
world has faced its own growth challenges since the start of the Great
Recession. While we weathered the initial storm better than most, our small,
open economy could not reasonably be expected to operate above trend
indefinitely.
We initially used ultra-low interest rates to boost consumer spending and
this provided an effective buffer against falling export demand. But this
solution also led to sharply increasing household debt levels and real estate
prices, and was never intended to be a permanent fix.
As the Great Recession dragged on, the Bank of Canada (BoC) and the federal
government grew increasingly concerned about the risk of credit and housing
bubbles (rightly so in my opinion). In response, Federal Finance Minister Jim
Flaherty repeatedly took steps to slow household borrowing. The recent data show
that these steps are finally working – household debt levels are rising at their
slowest rate in more than a decade. But this development begs an important new
question: If consumer spending isn’t going to drive our economic growth in 2013,
what will?
Continue reading "Monday Morning Interest Rate Update (March 4, 2013): What Slower GDP Growth Means for Mortgage Rates" »
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February 25, 2013
Dave Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News, Interest Rate Update
Canada’s Consumer Price Index (CPI) has shown another drop in overall
inflation, to 0.5% in January. Over the same period, the U.S. CPI came in flat,
at 1.6%, for the most recent twelve months.
The latest U.S. and Canadian CPI data bolster my belief that the Bank of
Canada (BoC) is more likely to lower, rather than raise, its overnight rate as
its next move to maintain its medium-term inflation target of 2%.
That said, while I continue to believe that inflation will remain benign for
the foreseeable future, eventually, inevitably, it will rise in accordance with
the intentions of the U.S. Fed (more on that in a minute).
First, let’s look at how large deficits and high levels of government debt
have impacted our mortgage rates to date.
Much of the developed world is now mired in a mutually reinforcing cycle
where high government debt and deficits act as a drag on growth, which lowers
business and consumer confidence and with it, consumer demand. Low demand causes
disinflation and in such an environment, central banks lower their policy rates
to ward off the threat of deflation. They do this primarily to stimulate
spending and investment but also to lower the interest cost of financing their
governments’ deficits. If policy rates reach 0%, central banks like the U.S.
Federal Reserve then resort to unconventional methods, like quantitative easing,
to inject further liquidity into their economies. This allows all debt levels to
increase still further. It’s like a drug dose to an addict - it helps in the
short term but just makes the long term more difficult.
At a very basic level, bloated government debt and deficit levels have fueled
today’s low-interest-rate environment. Here’s how this feedback loop works:
Continue
reading "Monday Morning Interest Rate Update (February 25, 2013) – How
Will the U.S. Fix its Debt Problem and What Will it Mean for Canadian
Mortgage Rates?" »
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February 19, 2013
Dave Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News
Today’s economic data imply that our mortgage rates will stay low for the
foreseeable future. So much so that even the ‘end-of-low-rates-is-nigh’
forecasters at the Bank of Canada (BoC) have finally come around to the
lower-for-longer rate view.
Cue my contrarian itch, which reminds me of Bob Ferrell’s rule number nine
from his famous Ten
Market Rules to Remember: “When all the experts and forecasters agree –
something else is going to happen.”
Mr. Ferrell’s rule reminds me that markets have a long history of surprising
us and while the odds of rates staying low for some time yet are stacked in our
favour, make no mistake, the seeds that will eventually push rates higher
(perhaps dramatically so) are being sown in abundance.Bluntly
put, there is no historical precedent for what central banks are doing today.
Not even close. We are knee-deep into a period where these banks have become the
financial markets’ marginal buyers of sovereign debt, artificially suppressing
government bond yields and grotesquely distorting free-market forces.
This money-printing-by-another-name is politically expedient because it
allows over-indebted governments to continue running huge deficits and expanding
crippling debt levels that have, in many cases, been some seventy years in the
making. Consider the following:
Continue reading "Tuesday Morning Interest Rate Update (February 19, 2013) – The Distant Risk of Higher Mortgage Rates" »
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Toronto Real Estate Statistics
Realosophy's Most Viewed Neighbourhoods
Long time readers of my Updates
will remember that last year I was writing about how our ultra-low mortgage
rates were partly a by-product of rising investor fears of a euro-zone
collapse.
The Bank of Canada (BoC) was loath to raise its overnight
rate in the face of so much global uncertainty and our Government of Canada
(GoC) bonds were in high demand as capital fled into a shrinking
pool of safe-haven sovereign debt. Canadian fixed- and variable-rate borrowers
alike were taken along for the ultra-low rate ride. But then European Central
Bank (ECB) President Mario Draghi stared down Spanish and Italian
bond-market vigilantes with his promise to “do whatever it takes” to save the
euro zone and the crisis retreated from the headlines and appeared to calm from
a boil to a simmer.
While I haven’t written about the euro-zone crisis for a while, it is still
far from over. In fact, thanks to the latest bailout plan for Cyprus, it is back
on the front pages today.
The problem that has been building in the euro zone for some time is that the
German-led austerity initiatives that were supposed to put imperiled euro-zone
countries back on the path to fiscal solvency haven’t worked. So far at least,
government spending cuts and sharply higher taxes have stifled economic growth
and have caused revenues to fall faster than expenditures.
As these already gaping government deficits widen and reduction targets are
missed, the response from the German-led Troika, comprising the European
Commission (EC), the International Monetary Fund (IMF) and the ECB), has been to
impose still more austerity. Meanwhile, the response from voters in the euro
zone’s imperiled peripheral countries has been to throw increasing support
behind nationalistic leaders who run on anti-austerity platforms. I think it
will be this growing friction that fuels the next wave of the euro-zone
crisis.
