David Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News
We started last week just hoping to dodge a German constitutional bullet but by
the time it was over, markets everywhere were surging after U.S. Fed Chairman
Ben Bernanke (or Ben BernanQE as he is now more cleverly known) backed his
liquidity truck up to the American low-rate punch bowl and filled it to the
rim.
On Wednesday,Germany’s constitutional court ruled that its government does in
fact have the legal authority to participate in the European Stability Mechanism
(ESM) and to join the European Union’s fiscal compact.
Whew. While investors expected a favourable ruling on both fronts, if the
court had ruled the other way, Europe’s bailout programs would have been turned
on their heads and financial markets everywhere would have descended into chaos.
Bullet dodged.
Then on Thursday, Ben Bernanke spoke the words that investors had been
waiting for, and then some.
First, he said the U.S. Fed would now embark on a third round of quantitative
easing whereby it will effectively print new money to purchase $40 billion in
mortgage-backed securities each month, while also continuing Operation Twist
until the end of the year. (Reminder: Operation Twist is a Fed program that
sells short-term Treasuries and uses the proceeds to buy long-term Treasuries in
an effort to drive down long-term borrowing costs). In total, the Fed will
purchase $85 billion worth of assets each month for the remainder of this
year.
Second, just to make sure that the animal spirits of investors would be
sufficiently whipped up, Mr. Bernanke also extended the Fed’s timeline for
raising its near 0% policy rate from late 2014 to mid-2015.
Here were the key points made by the experts I read following the Fed
announcement:
But in spite of the Fed’s willingness to fight until it fires its last
bullet, will these initiatives work as intended? I have my doubts. Here’s
why:
More to the point for my readers, what does this mean for Canadian mortgage
rates?
For fixed-rate borrowers, we may see bond yields rise over the short term as
investors shift out of safe-haven assets like GoC bonds and move to riskier
assets like equities to catch the QE3 rally wave. If the momentum is sustained
then we will see an increase in fixed-mortgage rates (since they are based on
GoC bond yields) but if past is prologue, any effects on yields will be
short-term in nature.
For variable-rate borrowers, I think today’s announcement makes it even more
difficult for Bank of Canada (BoC) Governor Mark Carney to raise the overnight
rate (on which variable-mortgage rates are based) for the foreseeable future.
The Canadian dollar is already above par and if the gap between U.S. and
Canadian interest rates widens further, the Loonie will continue to appreciate
against the Greenback. That would hammer the already struggling Ontario and
Quebec economies, which both have huge manufacturing sectors that depend heavily
on exporting to U.S. markets.
(Dave’s Populist Rant: Excess liquidity and ultra-low borrowing rates
fueled the U.S. credit crisis. While the profits ‘earned’ during the run-up were
privatized, when the credit bubble burst the losses were socialized. The ensuing
housing-market crash destroyed a huge swath of middle-class wealth and put
millions of Americans underwater on their mortgages or forced them out of house
and home altogether. The resulting low rates also reduced and in some cases
eliminated the incomes of retirees who had saved diligently to provide for their
future.
Now, when the Fed uses quantitative easing (money printing by another
name) to push borrowing rates to even lower levels, this disproportionately
benefits the rich who can still qualify for mortgage financing. Wealthy
Americans are now using this almost free money to buy up foreclosed houses and
rent them back to their previous owners while earning a handsome return in the
process. Of course, with so much new demand for rental accommodation, average
U.S. rents are up 9% on a year-over-year basis. Anybody else think the Willy
Lomans of America are getting a raw deal in all of this?)
week, closing at 1.48% on Friday and five-year fixed rates can still be found in
the 3% range.
Variable-rate mortgages may increase in popularity now that it seems more
likely that the overnight rate will remain low for years to come. But they are
still being offered in the prime minus .35% range (2.65% using today’s prime
rate) and as such, I think a one-year fixed rate at 2.49% is a better way to
take advantage of the savings offered at the short end of the yield curve.
The bottom line: While I think any spike in GoC bond yields that is
caused by Ben Bernanke’s latest announcement will be short lived, anyone in the
market for a fixed-rate mortgage should lock in a pre-approval ASAP. Better safe
than sorry.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave