David Larock in Mortgages and Finance, Home Buying, Toronto Real Estate News
Last week was a slow one for new economic data so in today’s Update I’m taking a
step back and offering a general overview of how the world looks from my
The beauty (or lack thereof) of the U.S. economic recovery is still in the
eye of each beholder. Some experts are touting the start of a jobs-led recovery
and are writing about signs of housing market recovery. Others believe that U.S.
consumers, long serving as engines of global growth, are waking from their
spending slumbers just in time for the holiday shopping season.
- I see the recent pick-up in U.S. economic activity as an inventory-building
bet by businesses on the future, and a risky one at that.
- I see new jobs that are part time, which makes them transitory in nature,
and average incomes that aren’t keeping pace with inflation.
- I see a housing market devoid of first-time buyers and approximately 30% of
all U.S. home owners with mortgages who are still underwater.
- I see the weakest economic recovery in U.S. history, which has been
engineered by record levels of stimulus and $1 trillion+ deficits, hurtling
toward a fiscal cliff while political gridlock reigns in Washington.
- I see unprecedented U.S. Fed policy that borders on financial alchemy
distorting market fundamentals and fueling past (dot com), present (real estate)
and future (student debt) asset bubbles.
In short, I think the U.S. economy is a very long way from a meaningful and
sustainable recovery and that deflation, not inflation, remains its primary risk
(rising food and fuel prices notwithstanding).
The euro-zone experiment continues to lurch from one disaster to another:
- Greece hasn’t met the terms and conditions tied to its bailout.
That shouldn’t surprise anyone who has studied history because Greece has been
in default roughly 50% of the time over the past 179 years.
- Spanish Prime Minister Rajoy continues to insist that his country will not
need another bailout, something that will be true until it isn’t (see Greek
reassurances along the exact same lines two years ago).
But these sovereign default threats are mere appetizers compared to France’s
- French public debt levels have just passed 90% of GDP at the same time that
the country has either entered, or is about to enter, another recession. That
debt-to-GDP level is considered by many of the experts I read to be an critical
point beyond which incremental debt acts as a significant drag on overall
- French Prime Minster Hollande won election on an anti-austerity platform and
has stayed true to form so far – lowering the retirement age from 62 back to 60,
increasing taxes on the rich (who still have passports and are using them to
predictable effect) and generally continuing on as if his country’s finances
were well in order.
This begs the question: What happens when the second most important country
in the euro-zone experiment goes from bailor to bailee? How does a monetary
union that is fundamentally defined by a Franco-German partnership hold together
if/when France is staring default in the face? If waves upon waves of austerity
programs have turned peaceful Spanish protests into violent ones, what will
French protests look like? Will the guillotine make a comeback?
(China and its rapidly decelerating growth rates are also on my worry list
but that topic will have to wait for another day.)
Canada has fared as well as any country since the start of the Great
Recession. But this is in large part because our economic growth has been fueled
by rising consumer debt, which has now reached the point where Bank of Canada
(BoC) Governor Mark Carney is calling it the biggest single threat to our
- Canada’s relatively clean federal government balance sheet has been a mixed
blessing. While demand for the safety of Government of Canada (GoC) bonds has
pushed yields down to ultra-low levels, the Loonie has appreciated against other
currencies and hurts our exporters, particularly in Ontario and Quebec.
- While our federal debt and deficit levels are manageable, it’s a different
story at the provincial level. Ontario and Quebec in particular are going to
need to substantially reduce their public spending in the near future and that
will put additional strain on each province’s economic momentum.
- Some regional housing markets are probably at or near their peaks and most
people believe that some sort of price correction is overdue. That said, you’ll
get lots of spirited debate about the size and scope of potential corrections.
While I’m nowhere near the ‘sky is falling’ crowd, I do think that our long-term
fundamentals are out-of-whack at the moment and that they will revert back to
the mean over time.
While a small, open economy like Canada’s will always be vulnerable to a
slowing global economic landscape we have several strong points in our favour.
- We have an abundant supply of four things the world cannot live without –
food, fuel, forests and fresh water.
- We have a well-regulated financial sector that is widely seen as the most
stable in the world. It is not perfect by any means, but our problems (criticism
of CMHC’s emili automated valuation system the most recent example) are
relatively minor when compared to those in the U.S. and many countries in
- We are a tolerant and safe country that is attracting immigrants from around
the world in record numbers. High levels of immigration are a boon to our
economy and Canada benefits from being a very desirable place to live.
Before I get to the silver lining in all of this doom-and-gloom in The
Bottom Line below, let’s take a look at what happened with mortgage rates
Five-year GoC bond yields were up 4 basis points for the week, closing at
1.37% on Friday. Five-year fixed-mortgage rates are available in the 3% range
and smaller lenders who offer far better contract terms and conditions than the
Big Five are now very competitive. That’s good news for informed borrowers who
are willing to think beyond their branch.
Variable-rate mortgages are still not compelling in my opinion (my best
variable is still prime minus 0.4%, which is 2.60% using today’s prime rate). It
would probably take Mars hitting Earth for Governor Carney to lower the BoC’s
overnight rate any further, which means that variable rates come with more risk
of increasing than potential for decreasing at this point. As such, I continue
to advise borrowers who are looking to save money at the short end of the yield
curve to consider a one-year fixed rate as an alternative. (My best one-year
fixed rate is 2.49% today and I am recommending it as my Mortgage
Deal of the Week.)
The bottom line: GoC bond yields are at ultra-low levels because
investors still believe that our government bonds offer safety at a time of
great uncertainty. For many of the reasons listed above, I believe the global
uncertainty theme has plenty of room left to run, and since our mortgage rates
are priced off of GoC bond yields, that should keep them at rock-bottom levels
for the foreseeable future.
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